AustralianSuper has achieved costs of only 9 basis points on its internally run domestic equities portfolio, two years after it first launched.
In a presentation on internal management at AIST ASI on the Gold Coast, Peter Curtis, head of investment operations at the $90 billion fund, told how this figure would decrease once the global equity and domestic small cap teams were fully funded and were sharing the costs of the trading infrastructure built for Australian equities.
He said that while this figure was satisfyingly low, it was not the biggest benefit from internal management.
The preferential status the internal domestic equity team gained from accessing limited revenue raising from domestic companies and in talking to ASX200 boards were all cited as new drivers of returns and managing risk.
The software introduced for internal trading had also created the ability to clear futures held by external managers, as well as looking after surplus cash held by such managers.
The downside of internalisation, said Curtis, had been the general strain on governance and HR of hiring staff to perform a completely new function with new systems.
Curtis was asked by a delegate if AustralianSuper had considered creating a separate trading company for the internal team. He replied that this had been rejected as creating an extra agency risk the fund did not want.
Earlier on the same session discussing internal management, David Hartley, chief investment officer of Sunsuper, had spoken in favour of creating a separate company to run internal management for the key purpose of retaining its most talented staff.
Hartley made the case that a separate company- he referred to Hermes, set up by UK pension fund BT as a good example of this – could have its own board, which could create its own performance culture to better retain staff. He spoke at length of the risk of talented internal team members being poached, recalling a colleague he worked with for the New South Wales Treasury who had left for an external manager which had offered three times their current salary. He said super funds culture of limiting costs could work against such forces.
“If your main goal is to control costs, mediocrity is what you will get,” he said.
He added that a private company structure would be easier for a super fund to sell or walk away from, and would effectively serve as a private equity investment.
A very different rationale on internal management was given by Richard Brandweiner, chief investment officer of First State Super. He emphasised the importance of competencies that were best run by the asset owner because it had sight and understanding of the whole portfolio and its goals.
He listed these competencies as active asset allocation, using systematic beta to tailor portfolios and making strategic investments for the portfolio in equities, property or infrastructure.
“It is not about alpha it is about tailoring a portfolio to give the best outcome,” said Brandweiner. He added that in asset allocation frequently the right thing to do was nothing, but an outsourced external provider would be unlikely to do this to justify its fee and its relationship.