Bringing equity and fixed-income strategies in-house efficiently does not have to be the reserve of the largest asset owners, according to the CEO of Railpen, the UK’s Railways Pension Scheme.
Chris Hitchen said—from experience—that “very simple” fixed-income investment can be run internally by sub-£1 billion ($1.4 billion) funds, according to a BNP Paribas Securities Services report.
Railpen overhauled its investment strategy beginning in 2013, ditching allocations to global aggregate bond products and simplified its approach to reduce costs and bring the investments in-house.
Instead of often complex external mandates, BNP Paribas’ report said Railpen uses UK government bonds, held to maturity, to obtain the desired fixed-income exposure.
This meant that “very simple fixed income can be done in-house for portfolios measured in the tens of millions of pounds,” BNP Paribas’ report stated.
However, across the other asset owners featured in the report—including investors from the UK, Sweden, the Netherlands, Australia, Germany, Denmark, Norway, and Finland—the consensus was that larger portfolios were better suited to insourcing.
“Asset owners tend to see some benefit in insourcing fixed income,” the report said. “Yields are so low that every basis point off fees helps. But allocations have to be big—or relatively simple—to merit the start-up costs.”
David Braga, head of Australia and New Zealand for BNP Paribas Securities Services, said many of Australia’s well-respected superannuation funds have taken domestic assets in-house and plan to do the same with listed overseas investments.
“This will have implications on the service they need from their providers of trading services but also custody and fund administration, which will need to provide round the clock services,” Braga added.
In contrast to the insourcing trend, however, BNP Paribas highlighted Finland’s state pension fund VER which has invested “heavily” in passive and exchange-traded funds to bring its asset management costs down. The €18 billion fund’s staff of 24 focus instead on asset allocation and oversight, BNP Paribas said.
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