Size, governance matter when mulling internalisation
When considering whether to internalise investment management, superannuation funds need to have firm control of governance and accountability, and the size of the fund matters.
In a panel discussion at the Fiduciary Investors Symposium in Healesville, Victoria, in November, AustralianSuper co-head of macro and portfolio construction, Alistair Barker, Tasplan Super CIO Ian Lundy and Equip Super executive officer, investment strategy, Troy Rieck discussed the strategies behind their funds’ levels of internal management.
Rieck started off by pointing out that over the last two years, Equip has outsourced 99 per cent of the $1 billion that it previously managed inhouse. At the same time, the $15 billion fund has selected active managers over passive, or enhanced passive, strategies.
“The motivation behind that is pretty simple – we want to focus on the top-down issues – asset allocation, portfolio construction, risk management,” Rieck said. “I think the next five to 10 years are going to be more about your beta than your alpha. That requires time, energy and resources, and I think that’s a fiduciary function.”
AustralianSuper, the nation’s largest super fund ($123 billion in assets under management), which is moving towards bringing half of its funds under management inhouse, nevertheless has philosophical points of agreement with Rieck’s view, Barker said.
“We believe the top down is really critical and ensuring that is the focus of our governance and our management with the senior executives in our investment committee is critical,” Barker said. “We didn’t start internalisation until we were about $60-70 billion. That gives you a bit of an idea about when it was appropriate to start and why. It wasn’t driven by an ideological view that we should do it ourselves; rather, our size and scale were making it difficult using solely external managers. It was a question of capacity as much as it was about cost.”
Tasplan, a relatively small fund ($8.8 billion in assets under management) has a degree of internal investment management, mainly cash management, a commercial mortgage portfolio and some direct property, and the fund owns half of Hobart Airport.
Lundy pointed out that inhouse management teams are expensive and thus need to be justified by scale. On the flipside, he also said the assets managed inhouse would be difficult for Tasplan to access with an external manager.
Building an internal investment team requires capabilities in human capital management, including setting appropriate incentives; for example, AustralianSuper had to restructure is incentives program to ensure that staff were aligned with overall fund outcomes.
Internalisation also creates different accountability demands. Lundy said Tasplan’s internal teams report to the investment committee at each meeting, and the fund has adopted other measures to enhance accountability for its commercial mortgage portfolio.
“For the mortgage portfolio, we have gone one step further,” Lundy said. “We have a separate entity that does that, which we own 100 per cent. We have an independent on the credit committee there, so we have taken that to the next step in terms of accountability and raising the governance standard.”
Equip’s Rieck commented that governing your own internal team and reporting to the investment committee was a tough job. “You’re wearing two hats and that’s uncomfortable,” he said.