Asset owners set to insource more amid growing turmoil

In the case of AustralianSuper, an $112 billion retirement fund, strong inflows are adding to the pressure to accelerate investment team growth.
Asset owners set to insource more amid growing turmoil

Widespread moves by institutional investors to de-risk their portfolios look timely as global economic growth slows and the pessimism deepens over a near-term resolution to either the US-China trade war or the Brexit negotiations.

As part of this, some asset owners in developed markets appear increasingly eager to increase the amount of investments they conduct in-house

Among them is the Wellcome Trust, a British medical research charity with £20 billion ($24.4 billion) under management.

“In a lower-growth, more volatile environment, what you don’t want to be doing is paying more fees and having less control of what people [such as external managers] are doing,” Peter Pereira Gray, chief executive of investments at the Wellcome Trust, said at a recent investment industry event in London.

Peter Pereira Gray,
Wellcome Trust

It's a feeling shared in our part of the world by AustralianSuper, Australia's biggest superannuation fund with A$165 billion ($112 billion) under management.

The institution manages around 50% of its assets in-house now, Carl Astorri, head of asset allocation and research, said during the same panel discussion at the FT Investment Summit on September 24.

AustralianSuper has been steadily building its in-house capabilities. Doing so has given it more control over its investments and reduced its costs, which in combination has meant better performance overall, Astorri said.

And lately it has had to accelerate that insourcing process more quickly than initially planned due to bigger-than-anticipated asset inflows, with AustralianSuper's AUM up around A$15 billion in the year to June 30.

“It’s relatively easy to put that money to work in the public markets but it’s harder and it takes longer in the private markets,” Astorri said. “So we’re having to ramp up in those areas [private markets] more quickly than we thought we were going to, and build out our network of global offices more quickly than we had before.”

AustralianSuper’s London office, which currently has eight people, will in a year’s time have 30, he added, plus a sister New York branch.

Wellcome Trust, meanwhile, is seeking the best of both worlds: more in-house capabilities and greater efficiency. It has been moving to “upgrade” its in-house capabilities substantially without actually increasing the number of people on the team, thereby saving money, Pereira Gray said.

The trust has been steadily making less use of external firms and now manages more than half of its portfolio in-house, up from 10% around 15 years ago, he added. 

“It seems to be very sensible to have more money [managed by] fewer people,” he noted, “and you have a much stronger, deeper, trusting relationship with those people at times like this.”

Kevin Bespolka, CPPIB


Even Canada Pension Plan Investment Board, which manages at least 80% of its C$410 billion ($308 billion) in public retirement assets internally, plans to continue raising that proportion, said Kevin Bespolka, head of macro strategies, on the same panel.

And numerous other large institutions are moving to do the same – such as the Alaska Permanent Fund Corporation, California State Teachers' Retirement System, Malaysia's Employees Provident Fund, Canada's Investment Management Corporation of Ontario and The Teacher Retirement System of Texas.  

It is of course more difficult for smaller asset owners to build substantial investment capabilities in-house, but that is still something some of them would like to do.

Sandra Robertson, CEO and chief investment officer of Oxford University’s £4 billion endowment fund, felt it made sense to build up one’s in-house team.

“If you have the internal resources you should use them,” she said during the same panel. “We’re not set up for that but we are very concentrated in the managers we use.” 

The endowment has about 50 relationships across its portfolio, Robertson added.

If anything, the winnowing down of asset owners' manager rosters looks set to continue.

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