As the consolidation of Australia’s superannuation industry accelerates and assets under management balloon, an increasing number of funds may look to bring their investments in-house.

Speaking at Investment Magazine’s Equities Summit in Sydney, Willis Towers Watson’s Jessica Melville said internalisation was particularly topical as assets get bigger and regulatory scrutiny focuses on super funds being the “best of breed.” Frontier Advisors James Gunn said there was a need by funds to build “scalable solutions” as they get to a particular size.

“Scale is an obvious one that speaks to internalisation,” said Melville, who heads up the strategic advisory and investments division at Willis Towers Watson.  “At a certain size, it’s almost a no brainer to consider internalisation of some sort.”

Neither Melville nor Gunn, a senior consultant at Frontier Advisors, specified what that size should be.

AustralianSuper has been gradually increasing the amount of assets they manage in-house to now make up 40 percent of the portfolio as the country’s largest pension fund seeks to lower costs and access better deals.  In May they were reported to have cut three active equity managers overseeing at least $7.7 billion. And First State Super, which is in the midst of merging with VicSuper to become a $120 billion fund, is also looking at at a similar hybrid model.

“Within Aussie equities by the time you combine the required number of managers for some funds that have very strong growth outlooks you (can) get such redundancies in your positions,” Gunn told panellists at the summit.

He also noted that among his asset owner clients, internalisation had helped build their intellectual property so they were better at informing their capital market teams or their own external manager selection processes. “There is a few other aspects and benefits that go beyond the need for scale and cost and the other common narratives,” he said.

Melville said internalisation was not just about finding the six best stock pickers, but it was also about building the required infrastructure and figuring out how to motivate and incentivise the new team. She said there was ongoing “tension” between super funds and asset managers as the “bargaining power” shifted to asset owners who want to lower fees.

Speaking on the same panel, Robeco’s Machiel Zwanenburg said he had started to see the “opposite effect” in the Netherlands after a decade of pension funds bringing investment in-house.

“That is in part due to the compression of fees where it makes attractive to externalise the money,” the Dutch fund manager said. “But it’s also linked to the increased ability to tailor and customise mandates, especially on the sustainability side where we are quite advanced.”

Sarah Jones worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
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