Asset owners across the world are increasingly choosing to internalise more of their investing strategies, in large part to save on fees paid to fund managers, according to a set of experts.
At PRI in Person, the 10th annual event of the United Nations Principles for Responsible Investment, speakers including Hiromichi Mizuno, chief investment officer (CIO) of the Government Pension Investment Fund this week discussed the issues facing asset owners as they consider sustainable investing strategies.
Angelien Kemna, chief risk and finance officer at Dutch pension fund APG Group, said the company had internalised much of its investing several years ago. It uses mainly internal quantitative management strategies and only appoints external managers for areas where they can be a “capacity enabler”.
Like external managers, internal investment staff do not always perform as well as expected, she noted, but by focusing on risk, return, the impact on costs and sustainability, APG is reducing its costs.
“There are various reasons to add [quant investing] to the portfolio, and it makes sense as external managers are much more expensive,” Kemna said. “It’s hard to move the needle on the portfolio, so we have cut out small [external fund managers].”
One fund manager AsianInvestor spoke to on the sides of the conference agreed that APG and other Dutch pensions had focused on quant-based investing, primarily to cut fee costs. “I can understand why they’re doing it, but I think they’ve taken it [focusing on fee-cutting] too far,” he argued.
GPIF's Mizuno was less concerned about internalising investing, pointing out that under the fund's remit he was barred from in-house investment in equities.
“I’m not sure I could build an internal team as good as external money managers,” he said. “Therefore I focus on how to reduce the conflict of costs between us and asset managers, such as how to work on agency issues to optimise our system and make us a world-class fund of funds or manager of managers.”
Other pension funds in Asia Pacific are choosing to do so, however. Korea's Government Employees Pension Services (GEPS) has set up an in-house equities team that looks set to invest increasingly in overseas stocks, Richard Park Chun-suk, head of investment strategy, told AsianInvestor in June. He said this was partly because GEPS' team had gained overseas investing experience, but said cost was the secondary factor, with external managers being more expensive than internal ones.
And Australian superannuation fund Cbus has explained to AsianInvestor why it aims to more than double the amount of assets it manages in-house. Cost-cutting is not the main driver, though it is a factor, said Kristian Fok, executive director of investment strategy.
Paul Smith, chief executive of CFA Institute, argued that the dynamic of more pension funds choosing to actively bring investment strategy in-house was just another permutation of the industry, but a telling one.
“When I first came in [to the funds industry] everything [in terms of investment management] was internalised, then it was outsourced, and now it’s being internalised again,” he noted. “It’s due to an industry failing to align itself with its end clients.”
Smith said this extreme was likely to shift once more. “I’m sure the asset management industry will work out that overpricing its services won’t work, because many of these pension funds are owned by the public and these fund managers are trying to serve both their shareholders and their investors. It’s the dirty little secret of our industry.”
Speaking to AsianInvestor after the panel, Smith said the operators of the fund managers were aware of the problem of conflicts of interest, but that so far they had not been able to deal with it.
“Either they will [voluntarily lower their fees to avoid eroding demand for their services], or they’ll be forced to do so by regulators,” he added. “But that could lead to the pendulum swinging too far [into over-zealous regulation of the fund managers] and new problems.”
Jakob Nilsson, head of business development for Asia-Pacific at Hermes Investment Management, who had observed the panel, agreed with Smith. “I think it will change, and it’s understandable now that some asset owners want to reduce their costs, particularly when there are many fund managers that charge fees but fail to outperform."
Nilsson said active managers might best justify charging fees by focusing on and then outperforming in specific areas, such as emerging markets companies.
“I find it hard to see how managers that focus on companies in MSCI’s US large-cap index can easily outperform, and can understand asset owners choosing more passive strategies there,” he added. “You need to focus on niches where you can demonstrate you add tangible value.”