The consequences of bringing superannuation investments in-house need to be examined thoroughly says APRA, although it does not have a position on the matter.
APRA wants super funds to take a holistic assessment of in-housing that is larger than just the investment thesis.
The regulator does not have a position on whether super funds should bring investments in-house or not, but is adamant that the full ramifications of the decision need to be examined.
“Fundamentally, it is about the risk profile, as it will change if you choose to bring equities in-house,” Craig Roodt, Head of Investment Risk, APRA said at AIST’s Superannuation Investment conference.
“The key thing here is there are different issues now. You need to deal with the dealing process, you need to think about what you [are] doing in the middle office, does the performance attribution interchange? There’s a whole range of other things that need to change.”
“What does it mean at the board level? Does the board need some different skills?”
He added, like any project, in-housing needs to have success criteria and milestones.
In addition to the investment thesis for bringing it in, there also needs to be a proper understanding of all the issues and a holistic assessment of all the operational things that go with that. For example, all the IT systems need to be sufficiently robust to cope with the change.
“What we are looking for is what is the basis for the decision; how will success be defined?” Roodt said, adding they wanted to see the fundamental logic behind that activity and how sustainable it that will be.
“Really critically, what resources and capabilities are present and what is the plan to go and get [more] resources and capabilities, because presumably this is an activity that you’ve not done before. How will they be acquired and how will you retain them?”
For example, if a fund thinks investing can be done cheaper in-house, it needs to figure out how it can attract and retain the appropriate talent. Linked to this is the issue of cultural alignment, as presumably, the risk of a mismatch increases in step with the amount of new people brought in.
“Importantly, how will they be assessed? Because there is a very different decision between how you address performance issue for fund manager and address issues amongst your own staff.”