Our survey received responses from chief investment officers representing $223 billion of assets. The main trends from 2014 cover internalisation and asset allocation shifts.
Forecast changes to equity allocations
The fund that has switched its emphasis to global equities to domestic equities is common and best exemplified by AustralianSuper, which in the year to June 2014 reported that its 29 per cent international equity ownership and 32 per cent domestic equity ownership at the end of June 2013 had flipped, domestic equities falling three percentage points and international equities rising three percentage points. This would appear to be the limit of the change as the survey only reported one chief investment officer who saw their global equity allocations rising in the next three years, the rest foresaw no changes to their allocation. The impact of the last year would appear to have fast-forwarded last year’s prediction that global equities would rise by 1.2 percentage points in three year’s time. Similarly, where last year domestic equities were predicted to fall by 2.9 percentage points in three years’ time, the prediction this time round for the future was that there would be little if any change.
The extent of passive investing
Only four CIOs reported their funds as using no passive management at all for equities. The highest numbers were 50 per cent as reported by one chief investment officer, but the norm was around 25-30 per cent. Just over half the survey do not manage domestic fixed income on a domestic basis. Two respondents do it on a 100 per cent passive basis and the rest do it somewhere between 10-50 per cent passive.
Chief investment officers were first asked what the single most important reasons for wanting to insource. They picked the ability to cut costs and the ability to gain more control as an investor. The question was then flipped and CIOs were then asked what the most important factors were for outsourcing investments. Just over half stated the superior investment capabilities of fund managers, a further 20 per cent cited superior performance which could be seen as code for superior capabilities, likewise 13.3 per cent cited the superior scale of fund managers compared to their own internal arrangements.
For the record three of the CIOs answering the survey already insource Australian equities, one having 100 per cent managed internally, another 50 per cent and another 20 per cent. Only one insourced global equity, around half managed either infrastructure or property in-house. In the next three years, one CIO saw a proportion of domestic equity being insourced, while three saw property being insourced.
This still leaves the majority of respondents predicting no major change in their policy on insourcing. So we asked this part of the survey what their reasons were for not implementing more insourcing.
“Our scale does not make it practical at this point,” was a standard summary from CIOs who were asked to sum up in words why they were not insourcing any more than they currently did. While some explicitly stated that this was likely to change as they grew larger – (one said in three years’ time), for others the tone of the response also hinted that if not for constraints such costs, staffing and compliance they would be doing it.
One CIO who has given the matter some thought, turned the question back on itself and questioned the logic of insourcing public market assets.
“There is no real point in doing so for passive management so the implication is that it needs to be active. If it’s very active and very successful, then it is not likely to be sustainable. And if it’s unsuccessful then there will be a whole lot of pain.”
The CIO reasoned: “The robust and sustainable objective for internal management of public markets has to be for mediocrity. There are plenty of ways to get mediocrity that are more cost effective than internal management.”
Others who cited their caution of the trend towards internalisation, commented that they respect the capabilities of external managers, that they “would rather remain unattached to the investment decision” and they were “achieving their investment objective without the need for it”.
Chief investment officers name the availability of risk management tools, followed by the ability to leverage external managers for sourcing ideas as the factors that helped them most in insourcing.
For the second year in a row investment leadership was by far the most popular fund manager quality, according to CIOs. Investment performance changed place with thought leadership, but the big riser was portfolio construction advice, seen as the fourth most important manager quality in 2014, this ranked sixth in 2013, reflecting the growing trend towards self-reliance by super funds as they grew in size.
Consultants role in investment decision making falling
Approximately a third of CIOs use consultants for manager research alone and not for any part of investment decision making, while close to two thirds take both routes and a couple of very large funds do not employ consultants at all. When CIOs were asked how this would look in three years’ time, the numbers of consultants just used for manager research rose to 40 per cent.
This trend towards a lesser reliance on consultants, or perhaps a changing relationship was echoed in the projections CIOs gave of the size of their portfolio teams.
The total number in the portfolio management teams of those who took part in the survey was 44.5, while the number projected in four years
time was 91. This seems a huge jump and this would go some way to explaining the lesser reliance on consultants.