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Targeting the right in-house asset management model
Pension funds in Asia-Pacific must know when to insource and when to partner to manage today’s complex investment portfolios, says Kevin Wong at State Street
Kevin Wong 14 Jan 2015
 
   
Insourcing has emerged as a major strategy for pension funds in APAC to target cost savings and generate greater oversight of their investment portfolios. A recent State Street survey shows that nearly four out of five (79%) of pension funds based in the region intend to increase the proportion of their portfolio that is managed in-house.
 
The savings that can be achieved by insourcing can be substantial. Another study revealed that pension funds globally spent, on average, 46bp on their external management compared with 8bp on internal investment capabilities. In addition, insourcing is seen as an opportunity to reduce agency risk through increased oversight.
 
When to insource and when to partner
 
The principle is clear: Pension funds believe that by getting closer to the underlying assets, they have an opportunity to save money and gain a better grip on risk and performance. That said, insourcing may be a strategy that most pension funds will want to use selectively.
 
Many start by focusing on insourcing for asset types such as government bonds or domestic equities — areas where pension funds typically have extensive in-house expertise. In other areas of asset management, pension funds are more likely to need specialist external support, especially as investment portfolios become increasingly complex.
 
Our survey shows that many pension funds in APAC, fuelled by rising risk appetite, are looking to increase their allocations to alternatives for enhanced returns. Direct loans is a priority asset type, with 60% of survey respondents saying they will increase allocations here. Other alternatives are also attracting more investment, including single-manager hedge funds, real estate and private equity.
 
As pension funds retain a range of external partners to help them leverage more specialist investment strategies, the dynamic in the relationship between asset owner and asset manager is evolving. Asset owners seek managers that can work as fully-fledged investment partners: understanding their investment goals intimately, and delivering solutions that are tailored to their long-term objectives.
 
The infrastructure to insource
 
Pension funds in APAC know that insourcing in today’s investment environment requires new skills and capabilities. Talent is high on the agenda. They need to attract people with specialist investment skills and they may need to increase headcount substantially.
 
Insourcing also demands operational expertise in areas such as risk and compliance management. Many of these roles are in high demand globally. Pension funds must design competitive packages as well as offer an exciting career path. For those that set up different specialist teams, it is also important to maintain a level of consistency and transparency across employment contracts. Otherwise, a generous deal designed to attract new talent may be resented by existing employees.
 
As they insource, pension funds will need to build the technology infrastructure that will give them a holistic picture of risk and performance across multi-asset portfolios. Some may need to overhaul their operating models and data management to achieve this objective.
 
The future of insourcing
 
There are risks as well as opportunities with in-house asset management. But the objectives of insourcing are clear — cost efficiency and improved risk management.
To succeed with insourced strategies, the region’s pension funds will need the advanced tools and capabilities required to manage the new investment mix. They will also need to attract and retain specialist investment talent. The ambition and degree of insourcing will be a careful strategic decision in Asia Pacific.
 

Kevin Wong is senior managing director and head of sector solutions, Asia-Pacific, at State Street 

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