Despite the shift by sovereign wealth funds and pension plans towards more insourcing of portfolio management and direct investment via in-house teams, some asset owners are happy to buck that trend.
Australia’s LGIA Super, the A$13 billion ($8.4 billion) retirement fund for Queensland government employees, is one such institution.
“We are a fully outsourced investor and we’re not looking to internalise anything,” said chief investment officer Troy Rieck, who is overseeing various portfolio changes, including moving to a new asset mix.
“My rationale for that is pretty simple. I’ve watched a lot of my colleagues in the industry internalise, and that actually makes my job easier because they’re scaring [external] fund managers about fees," he told AsianInvestor in an interview. "That allows us to buy in talent at a lower overall price.”
I’ve watched a lot of my colleagues in the industry internalise, and that actually makes my job easier because they’re scaring fund managers about fees.
Rieck – who has also worked for Melbourne-based Equipsuper, Queensland government-owned investment firm QIC and Sydney’s Suncorp, among others – offered more detail to explain his preference for going out-of-house.
“First, it gives you clarity of purpose and there are no conflicts of interest. It’s genuinely hard to develop an internal management process and govern it yourself.
“Second, it’s a scale argument,” Rieck added. “A $100 billion fund can look seriously at hiring the professionals required for internal investment management, including middle- and back-office capabilities, which are sometimes just as important as the front office. I don’t have that scale.
“Third, anyone who has worked at a place with internal management – and I’ve worked at three – knows that it’s genuinely hard to fire the process or, even worse, fire the people. It’s much easier to have an external relationship with a service provider.”
In fact, it’s becoming even easier, he notes, as the trend towards internalising portfolio management has made it easier to run an external programme at a lower cost.
“Your typical manager – particularly from the US and Europe – doesn’t want to listen to the fact that Australian funds don’t want to pay the fees they want to charge,” Rieck said. ”When they turn up on doorsteps here and people turn them away, they start to get the message.”
In Australia, funds like AustralianSuper and First State Super have been bringing more investment in-house, aping the likes of some pension plans in Canada, California and Texas and sovereign wealth funds around the globe. The aim is to gain more control over assets, reduce the fees they pay and, ultimately, increase returns.
"FEWER, BETTER FRIENDS"
LGIA Super may not want to go down the insourcing route, but Rieck does feel another trend makes sense: reducing the number of asset managers on the fund’s roster. “We want fewer, better friends,” he said.
“Traditionally, institutional investors have over-diversified by hiring too many managers. That only reduces one sort of risk – the CIO’s career risk. But it’s much better for the fund that I take more career risk and thus more manager [concentration] risk.”
Hence if LGIA Super’s equities portfolio is run by 12 managers, Rieck reckons that the number is more likely to be four to six managers in three years’ time.
“If you find the right partnerships, there are often two or three things that the manager does well enough that you can put mandates together,” he added. “And the manager can price for the relationship and for scale.
“Sometimes you can structure performance fees across several mandates,” said Rieck. “That improves the economics for my members.”
The approach seems to be working. “A small number of proactive managers are approaching us with better fee deals,” he noted.
Rieck says that he likes investment teams that have “skin in the game” – that is, the individual executives put their own money into the strategies – and performance-based fees.
“We want those fees set with appropriate economics, we want them to demonstrate alignment with member outcomes, and they need to be properly benchmarked,” he added.
“If a quality growth manager turns up and wants a performance-based fee for a strategy benchmarked against the MSCI All Country World Index, that doesn’t cut the mustard for me.”