Partnership models with fund managers could become more prevalent across the superannuation industry due to the internalisation of asset management, says academic at Frontier Advisors Annual Conference.
The Future Fund model provides a hint of how the relationships with fund managers may look as super funds rework the arrangements with service providers, Geoff Warren, research director at the Centre for International Finance and Regulation, told delegates in Melbourne on Tuesday.
“On the Future Fund model, they’re not allowed to internally manage money, so what they’ve done is develop more of a partnership model with external managers, so the fund manager becomes an extension of what they do. And the reason I mention that is I get the sense this has a lot to do with their success,” Warren said.
Warren encountered four broad approaches for structuring in-house management during research for his paper In-House Investment Management: Making and Implementing the Decisions. The executive summary of the paper lists these as:
- “Dedicated internal structure, where an asset class is managed entirely in-house;
- Hybrid external/internal models, under which the in-house team is responsible for a slice of the assets in conjunction with external managers;
- Co-investments, where the fund piggy-backs on the ability of an external manager to identify and source assets through taking a ‘slice on the side’; and,
- Partnerships, either between funds, or with an external manager, involving the fund providing capital, while some management functions are performed externally.”
Research by SuperRating shows that around 60 per cent of super funds manage some assets internally and for 20 per cent of super funds there is a sizeable commitment of 20 per cent or more of assets.
Internalisation ‘not a fad’
Fiona Trafford-Walker, director of consulting at Frontier Advisors, who was on the panel with Warren said the move to internalisation was not a fad, but neither was it appropriate for all institutional investors. As such, the board, chief executive and chief investment officer of each super fund needs to sit down and work out which model was right for them.
“We are in an environment where everyone is trying to bring costs down, so the net returns can still be what they need to be. This is kind of the big bang and probably one of the only ways really you are going to save quite a lot of money. What you don’t know is what you’ll pay as you transfer risk internally, and what it will end up costing, if it doesn’t work,” Trafford-Walker said.
She added she had spent a lot of time examining the Canadian model.
“For me, the Canadians are among the best investors in the world, but they are in a very different situation to us. I used to think they were amazing until I understood they don’t have peer risk, they have a very supportive media that are very proud of what the Canadian industry has achieved, whereas here I think we have peer risk all the time and a media that makes it difficult for everybody,” she said.
“The Australians punch well above their weight in that respect, but what the Canadians have done is a good combination of what you can do internally and what you should outsource, and it varies for a lot for those funds.”