Hostplus’ expansion of its investment team is so the $20 billion super fund can do more things simultaneously, rather than an attempt to internally manage assets.

The reason for this is that at the current size, internalising people and systems to manage assets (including Bloomberg terminals, trading desks, compliance systems and risk systems) would have an “astronomical” impact on MER (management expense ratio), said Sam Sicilia, chief investment officer at Hostplus.

“While it’s true that some may be able to do it internally cheaper, and arguably with the same skill level because you source your internal team from the external market, even though that’s true, it also relies on the external market standing still on fees,” Sicilia said.

“The reality is that once one or two funds start to terminate managers because they can do it internally cheaper, the managers will drop their fees.

“Therefore, funds like Hostplus may never need to go down that path. So even though we are building a team, the reason we are building a team is to allow us to do more things simultaneously.”

In Sicilia’s assessment, reducing fees was the only strong argument for internalising investments. However, he did see some points in other arguments such as a greater control of investment decisions or gaining access.

On the point of greater controls, Sicilia gave the example that if a super fund already had an overexposure to ports, they may not want to participate in the acquisition of any more, but if they were with a fund manager they may not have a choice.

“I get that, I really do, but it hardly applies to most asset classes, it only applies to things like infrastructure,” he says.

“But I don’t think that level of control is true in property or certainly in the listed markets. You don’t need it. There is enough diversity already in the portfolio, so that the next asset you put in there won’t tamper with your diversification too much.”

While the port example was given to illustrate a point, Sicilia fundamentally believes that opportunities to participate in infrastructure should always be seriously considered.

(Continued below)

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On the point of access, Sicilia said he understood that there were areas super funds wanted to put money into that were capacity constrained, such as small caps.

If a super fund was large, for example $100 billion, then a 30 per cent allocation to Australian equities would give $30 billion, and if 10 per cent of that was allocated to small it would give $3 billion, “which is a lot of money for small caps”.

“But there are lots of funds that are internalising people and processes and they are nowhere near $100 billion in size, so I don’t think that argument about access and capacity constrained is really one that is widespread,” Sicilia said.

“And even if it is, it would only apply to things like small caps. It hardly ever applies across the board.”

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