AustralianSuper, the country’s largest super fund, aims to bring 50% of its total assets in house by June 2021, said Mark Delaney, the fund’s chief investment officer.
The system, which is projected to grow its funds under management to A$300bn (€183bn) in the next five years, was internally managing 31% of its total portfolio in the 2017-18 financial year. It has increased it to 40% for 2018-19, which amounts to a total of A$70bn of its A$175bn in total assets.
Delaney told IPE that, in the 2019 financial year, its internalisation programme delivered more than A$160m in savings to members.
“One of the key contributors to the recent increase in internal management is the ongoing transition of the active Australian equities portfolio to the internal investment team.
“Across the entire $89bn listed equities portfolio, almost half is now managed internally,” Delaney said.
“This is a significant milestone and reflects the confidence we have in our internal investment teams and processes to deliver positive long-term returns for members.”
The A$80bn UniSuper has led the trend in in-house investment management. It began building up teams of professionals to undertake investments at the turn of the decade.
Today, the industry fund has close to 70% of its investments managed internally.
“We manage strategies across the full spectrum of asset classes in house, including Australian equities, global equities, fixed interest and property.” said John Pearce, UniSuper’s CIO.
Pearce told IPE the key motivators for internalisation were cost-control and to keep its own management fee for its 450,000 members. “We are regularly recognised as one of the lowest cost superannuation funds,” he said.
But Pearce added that the fund did not have a specific target, and would continue to operate a hybrid model. “It is in the best interest of members that some highly-specialised strategies or country specific strategies will be managed by external managers.”
Nearly A$20bn (or 20%) of funds under management are now managed in-house at First State Super.
“We operate a hybrid model, and so we tend to have both external and internal management across a number of asset classes including Australian equities, infrastructure, property, credit, cash and fixed interests,” said cio Damian Graham.
“We have also started a pilot internal strategy for International equities.”
Internalising asset management to save costs
Graham told IPE that First State Super was a relative newcomer to internalisation, and that he expected the approach would save ”tens of millions” this financial year.
The A$54bn Cbus Super had increased its internally managed funds to 14.2% at the end of June 30 2019, and over the next three years expects to increase it to 31%.
As the fund completes planned changes to some of its asset class strategies, Cbus Super anticipates a further cumulative cost reduction of A$80-90m over the next three financial years.
Kim Bowater, director of consulting at Frontier Advisors, said: “There is definitely a trend to internalisation among larger Australian super funds.”
She said generally internalisation works more efficiently and effectively with funds managing upwards of A$50bn. But some smaller funds have also executed in-house investment management for specific strategies successfully.”
The types of investments internalised vary and components of external management are likely to persist. For example, some strategies that require specialist resources, such as emerging market debt, would likely continue to be outsourced, Bowater said.
The key additional challenges from internalisation, she said, are getting the governance and operational aspects right.
“Regardless of whether investment is managed internally or externally, funds bring in advisers from outside to review their investment.
“Our experience is that funds find an independent perspective valuable,” Bowater said.
But she noted that the internalisation trend was not necessarily a ”one-way street” as funds learned from their experiences and if they encounter problems, they could well reverse their strategy.
Certainly, not all funds, big or small, have embraced internalisation.
The A$44bn Hostplus, consistently voted the best performing industry fund, has chosen to stick to external fund managers, which are competing to provide the best services at lower fees.