The optimal structure of an investment team is dictated by the mix of assets the fund invests in, how much of the investment operation is run in-house versus being outsourced, and how quickly the business is expected to grow.
The actual mix of those characteristics can lead to as much as a fourfold difference in staffing requirements, the Fiduciary Investors Symposium in Healesville, Victoria, last month heard.
Toronto-based researcher Mike Heale, chief executive of CEM Business Benchmarking, said the firm’s analysis of investment teams had revealed that as a rule of thumb “private market assets require about four times the number of staff FTE as the same-style public market assets”.
“Internal active assets require about four times the number of FTE as external, passively managed assets,” Heale said.
“And there’s very weak economies of scale and in private markets as funds grow. There are reasonable economies of scale in the public markets.”
How many staff is enough?
Heale said CEM defined front-office staff as those who are either internal staff making buy and sell decisions on individual securities, or who are involved in choosing external managers. For each front-office employee a fund needs “just a little bit over one person in support activities for each person in the front office, in conjunction with a fixed amount that’s quite different across funds around the world”.
“And that fixed amount, or base amount, is…three, 30 or 300,” Heale said. “The way to think about it is three is an almost entirely outsourced model of governance and support activities; 30 is what we would call targeted in-sourcing; and 300 is mostly in-sourced”.
Heale said CEM has only about a dozen funds in the world in its database, including the so-called the Maple Eight, that fit the all-insourced template – and those funds are so structured largely for historical reasons.
Heale said these rules of thumb help funds identify the sort of recruitment efforts that might be needed to support planned expansion, according to how they plan to do it.
“To bring this to life a little bit, I’ll give you one extreme example,” he said.
“Take $10 billion of AUM. If that’s in external passive equity, you need one person in there in the front office, basically, to set that up, monitor it and run it. You need to account for two people because you knew you’ll have one person in the back-office support supporting that.
“Take that same $10 billion and put it in internal private equity – which is not common, I [accept that], but I’m choosing an extreme example – and you would need 24 people in the front office on average to manage that block of $10 billion of internal private equity. You’d need 26 more people in the back office to support those people. You’ve got a difference between two and 50. That’s an example of the most extreme it can be by asset mix.”
Cbus chief investment officer Brett Chatfield said even when a fund is clear on its style and the asset class is it wants to invest in – and whether it wants to build in-house capabilities or outsource management – it’s still a difficult market in which to find and retain the right people.
“Clearly, it’s been a tough environment to attract and retain because there’s a lot of hiring going on, particularly across the mega funds, the larger funds, hiring huge amounts of people,” he said.
Chatfield said competition from asset managers opening shops in Australia had contributed to a tight labour market in the past 12 to 18 months, although “that is starting to change a little bit as we’re seeing more people wanting to come back from offshore to Australia now; that’s much more of an open sort of channel now”.
“But I think for us keeping the right people and attracting the people that we want in the team is the critical thing to it at the end of the day investments is a people business,” he said. “It’s having the right people in the right seats. And it has been a challenging environment for hiring.”
Merging cultures
Mergers create a different sort of challenge. Mercer chief investment officer, Pacific, Kylie Willment said BT Super and Mercer had separate but established investment teams, and assets under management of about $35 billion and $30 billion respectively, so they were broadly equivalent in both size and sophistication.
“We also acquired Advance Asset Management, because that was essentially the suite of funds that BT super was primarily invested in. But within that Advance suite of funds, there was also about another $10 billion of non-BT Super assets there; and on the Mercer side in our broader investments assets under management, we had about $15 billion of non-super assets. Put that all together, you had something like $45 billion and $45 billion-ish coming together.
“And on the superannuation side, BT Super merging into Mercer Super, it was a big bang approach. When I think around the consolidation in the industry, I can’t think of another instance…where we actually had a commingling of assets on day one.”
Willment said it took very careful thought to work out how to put the organisations together, and what sort of investment team the enlarged entity was going to need. That required an assessment of not only current needs, but how it was likely to grow.
In total, 350 colleagues came across from BT, a significant number of whom were employed in call centres, administration, operations, and technology. Around 40 joined the broader investment team in areas like compliance and risk.
“Specifically, into the investment management team, it was 14,” Willment said.
“It was a big bang, in terms of commingling assets on a day. We took a rip-the-band-aid, big-bang approach to actually bringing the teams together. It was a restructured, future-fit team on day one, with everybody in their new roles.”
Insignia Financial deputy CIO Stanley Yeo has also managed a business through a merger – IOOF, ANZ’s wealth management operations, and MLC – and says the task of finding the optimum structure and size of the investment team – and settling cultural issues – has been complicated.
“With three different entities come …two different governance structures,” Yeo said.
“We’ve been able to amalgamate IOOF and ANZ…under one governance structure, being the investment management committee…that approves manager hires, manager terminations, strategic asset allocations, and strategy, so that the investment team actually has a big delegation, in terms of tactical asset allocation.
“[Cultural issues] are something that the whole business, the whole Insignia, Financial, is dealing with. The investment team we consolidated pretty quickly. We’ve been together for about a year under Dan Farmer so once that happened there’s people from both MLC and ANZ in my team, and vice versa. There’s, a mixture of MLC, ANZ and IOOF people in the leadership team up there.”
Yeo says the biggest challenge facing the business over the next 12 months will be simplifying its product range and structure.
“[We are] in the midst of simplifying, making sure we don’t drop the ball as well,” he says.
“Our number one objective is still performance, but in the background, we still have to simplify the business, which then gives us more time to focus on performance.”
