Who should manage your money? Many of our readers have successfully managed their own portfolios for years and remain happy to continue doing so. We sought your opinions on the value of doing it yourself as opposed to outsourcing.
It is not just the big schemes, such as the €215bn Dutch public sector giant ABP and the UK’s €50bn BT scheme, that have established investment departments to oversee the asset management of their funds. Both have established and respected investment departments. BT owns and runs its own independent investment management company, Hermes, which now offers its services to other schemes and institutions.
But both of these funds investment companies bring advantages in understanding how to make pensions assets grow sufficiently to meet their obligations. But this principle may also lie behind the fact that many small- and medium-sized schemes are also running their own asset management departments.
This month, Off The Record asked pension schemes around Europe to tell us if and why they run their own in-house asset management departments.
The results make interesting reading, especially given the fact that the split between those that do and those that do not run their own company is pretty even, with 48% investing some assets themselves and 52% outsourcing everything to external managers.
Those who do manage assets in-house had more information to impart as to the benefits of establishing internal fund management teams. The degree to which they outsource their assets and retain others in-house varies, as do the reasons why.
Very few respondents have in-house fund management teams running just a small amount of their overall portfolios. Two of these, with 4% and 1% respectively, said the main reason was efficiency and a benchmark for investment managers. Both are happy with their internal commitments, with one looking to expand its market coverage.
Another, a Danish fund, runs 10% in-house but says this is simply because it is normal practice in Denmark. It is actually looking to outsource some of this allocation, which includes a broad range of asset classes, to external managers as it is finding it difficult to find skilled professionals to run them internally.
Just over a quarter of the respondents run between a fifth and third of their assets themselves. The number of personnel they employ in the investment management departments varies between one and 20, as do the reasons they keep some assets in-house.
A few run just their alternative investments in-house, with real estate, private equity and derivatives leading the pack. But their reasons differ considerably. One has been running an alternative portfolio since it was founded 60 years ago, while another only set up its internal alternatives team to beat its dynamic benchmark and add value two years ago.
One very established fund said it had been running its fixed income portfolio internally for many years. This now represents a sizeable €500m, and implies that it has solid expertise in bond management. It has every intention to carry this long tradition.
Next comes a selection of funds that have seen their internal fund management grow to oversee between 50-60% of their assets. Apparent here is the streamlined nature their internal investment teams enjoy, as 80% of this group employ no more than 10 employees in their departments. Indeed, the remaining 20% have no more than 20 employees. This matches the previous group which allocates no more than a third in-house.
But how surprising is this? Many of the assets the 80% run in-house are fixed income and passively-managed equities, suggesting they may not need lots of highly skilled personnel to play the markets actively to outperform benchmarks and add alpha. Yet the gamble is working; all claim their in-house teams add value while saving on fees and administration costs. And all intend to continue, if not add, to their internal capacity.
Finally, almost of quarter of the 48% of respondents managing money themselves, revealed they had 70-100% of their assets under house control. You could easily believe this is because they are mature funds and no longer need to take big risks, but only one of these has most of its assets (85%) in bonds. It said it switched to bonds in 2005. This could be maturity but the date suggests changes to accounting practices or solvency rules may be the reason.
The majority simply appeared fed up with the high costs associated with external managers. Once they had the expertise in-house - results from existing internal mandates consistently outperformed their benchmarks and from external managers - they switched to a more streamlined internal fund management operation that offered high levels of performance and monitoring across a diverse selection of asset classes, including alternatives.
Lastly, we gave pension funds the opportunity to comment on the model where funds running in-house fund management departments offer their services to fellow pension schemes, such as in the case with ABP’s APG asset management subsidiary, Siemens Financial Services or BT’s Hermes operation.
This appeared to whet the appetite for many, as just over half said it seemed a good way to add value.
One scheme even bemoaned the fact that its executive board would not entertain the idea, as it believes the specialist knowledge can only be found in the investment markets. Try telling that to Hermes or APG. Indeed, one respondent runs all its assets in-house because of “poor experience with external managers”.
Those that felt bringing in other pension schemes’ investment departments to help run their own assets would not add value were not exactly negative about the outlook for in-house fund management, as many felt they could set up their own fund management anyway.
A sign of things to come?
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