Should asset owners manage their investments themselves, or engage external investment managers to do it for them?
In the institutional pension fund world, we have seen a cyclical demonstration of the answer to this question. In the 1990’s I began my pensions and investment career at Hermes, the in-house manager for the BT and Post Office pension schemes. At the time many large UK pension schemes had their own in-house teams and there was plenty of analysis supporting this strategy as generating better long-term investment returns.
But in the decades since the clear trend has been to shift assets to external management, either through the awarding of multiple individual asset class mandates, or more recently, the fiduciary/OCIO outsourcing of entire portfolios.
In distinct contrast, outside of the UK, the opposite has been happening. Australian Supers and Canadian Public Plans are leading examples of large schemes progressively bringing investment management in-house.
The cycle may be turning in UK with NEST having established its own FCA authorised investment subsidiary1, PPF considering a similar move2, and the scope that exists for LGPS asset pools to do more internal management – perhaps as an integral part of their organisational development as the consolidation and AuM growth agenda being pushed by the UK Government plays out.
Avida International interviewed some of the largest and most successful pension investment organisations globally to understand their motivations and experiences in this area.
The messages were clear:
In-sourcing is a major strategic decision, which needs universal stakeholder support up-front and throughout implementation. The decision should also be driven by a clear sense of purpose around which assets can be internally managed to provide the best additional value for members. Not all asset classes are equally suitable for in-house management and each individual schemes need to work out what asset classes they can beneficially scale.
In-sourcing Private Markets is a typical approach to secure the benefits of lower costs, increased duration of asset ownership, better governance and stronger ESG alignment.
The most effective external to internal transitions are also phased processes. This is not something which happens in a single point big-bang. “Careful planning is required to determine the timing and sequencing …to ensure optimal results”. Typically, in the private markets area internal due diligence, risk management and IT support skills are built over many years with a progressive move from fund of funds to primary fund investing then co-investments and finally direct asset origination and ownership.
There was also a clear acknowledgement that insourcing is not a panacea. It comes with some obvious disadvantages which must be appreciated and actively managed. Chief amongst these is the need to build and retain an in-house team with the right skill sets to deliver long-term investment performance. This is not cheap or easy in a war for talent against existing commercial investment managers. There are up- front costs before longer-term, sustainable benefits can be secured, and the inevitable external scrutiny and comment on remuneration packages.
With a strategic management approach, the right scale, stakeholder commitment and governance processes, the insourcing of investment management activities can add significant quantitative and qualitative value for pension scheme members. Lower costs, better performance, stronger governance and increased ESG alignment can all be secured by asset owners actually doing more asset ownership!
References
- Nest Invest receives FCA authorisation | Nest Pensions
- Departmental Review of the Pension Protection Fund (PPF) - GOV.UK (www.gov.uk)
Discover more on effective in- and out-sourcing by reading our full report:
