German institutions do better to manage assets themselves – study
GERMANY - Domestic institutional investors managing more than half their assets internally perform better than those that mainly outsource, according to a survey conducted by the consultancy Complementa and the Bavarian Centre of Finance.
According to the study, institutions managing more than 50% of their assets internally achieved better performance in 2007 (5.15%) than those with less than 50% in house (3.95%).
Those with monthly rather than weekly investment meetings showed a better performance by 0.5%. However, those with quarterly meetings fared 1.9% worse.
Risk management, diversification and the re-structuring of internal governance are also major challenges. Almost half of the institutions surveyed (47%) - in particular pension funds and insurance companies - identifed asset diversification as a priority.
The survey, which included 38 institutional investors including foundations, Pensionskassen, Pensionsfonds and CTAs, was conducted between July and November last year. The results will be used to compile a governance handbook.
Close to 80% named target-orientated risk management, and 53% the creation of effective reporting and risk management tools, as a major challenge.
The authors also noted a possible conflict of interest in many institutions, as in 45% of cases those responsible for risk management were also involved in the selection of third party asset managers or custodians.
"Here it is questionable whether the principle of separation of selection and control functions is adhered to, especially when the controller is choosing the one he is later controlling", the study said.
Most institutions surveyed - primarily insurers but less so Pensionsfonds and CTAs - said they intended to amend their internal structures in terms of competence and responsibilities, including the documentation of decision making.
Complementa and the BFZ were "surprised" to find that 85% of the participants said they were content with the transparency of their investments. Administration costs also only play a minor role in the governance area.
The authors of the study found that 20% of participants did not have their main targets documented and only 29% had documented criteria for the selection of third parties.