Is ADIA a Threat to Asset Management?

ADIA has successfully insourced massive amounts of it portfolio. With its size and clout, does this spell trouble for the traditional asset management industry? 

The growing trend among the largest institutional investors to bring assets in-house is forcing global asset managers to adapt—but not in the way you might expect, industry experts have said.

This week, the Abu Dhabi Investment Authority (ADIA) revealed it had taken around $70 billion out of the asset pool available to the world’s global investment firms in 2014.

“There is a desire for more in-house co-ordination, to manage the managers, consultants, and providers.”
—Tim Giles, Aon Hewitt
Its leaders had decided there was more value in running the money internally than farming it out—and paying fees—to external managers.

“ADIA made solid progress in 2014 on multiple fronts, from improving internal processes and increasing our flexibility to target investment opportunities, to a continued strong focus on the development of our human capital—a key driver in fulfilling our mission,” said Hamed bin Zayed Al Nahyan, managing director of the fund in his foreword to the ADIA review, published yesterday.

The fund’s staff grew by 150 to 1,650 over 2014—and, the managing director said, there was more of that to come.

The $70 billion figure is an estimate. ADIA does not formally disclose its total assets, but most agree they are somewhere near $770 billion and it reported that it moved from managing 25% of its assets internally in 2013 to 35% last year.  

They are not alone. Most of the largest sovereign wealth funds have a substantial in-house capability that has either been developed with the growth of the assets or specifically put in place at the outset. Even the world’s largest pension, Japan’s Global Pension Investment Fund, has appointed a CIO in its first steps towards the ability to manage at least a small percentage of its $1.1 trillion in-house.

What does this mean for asset managers? It could be suspected that the moves by these behemoth investors would spell the end for many third-party managers as the flows of new money dries up.

Not so, says Hélène Donnadieu, global manager of BCG Asset Management practice.

With her team, Donnadieu conducts a global survey in which 50% of the asset management industry participates and has found that there has been little impact on flows—and there is little evidence there will be.

“We are not seeing a drop in flows,” Donnadieu told CIO. “In 2014, net flows were 1.7%, which is just above the 1.6% of the year before. We are not yet back at the pre-crisis levels of between 3% – 6%, but we are already well above the less than 1% net flows we saw during the crisis.”

Donnadieu’s research—revealed exclusively to CIO—suggests that although there is a definite trend by large institutional investors to bring more assets in-house, there are not enough of them to hit flows.

Indeed many large investors in less developed financial markets, such as pension funds in some parts of Asia, are outsourcing their burgeoning portfolios to third parties.

However, that’s not to say there has been no impact at all.

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“The insourcing trend sends a signal to everyone in the industry—including the small and mid-sized investors—that negotiation on fees is possible,” Donnadieu said. “In 2014, we saw a definite pressure on price.”

This pressure could be as simple as smaller investors seeing larger peers refusing to pay external managers and feeling more confident to do the same.

“The insourcing trend sends a signal to everyone in the industry that negotiation on fees is possible.”
—Hélène Donnadieu, BCG
In April, the US’ largest pension, the California Public Employees’ Retirement System, disclosed that it had cuts its costs by tens of millions of dollars by bringing considerable chunks of its assets in-house.

People noticed these savings and wanted in on it too.

This may already have had a ripple-down effect to managers. Research by PwC published in February showed 46% of 155 asset management CEOs surveyed by the firm were aiming to cut costs and 28% said they were looking to outsource some functions to save money.

Combined with a move towards passive investments that are by nature poor fee-generators—collecting an average five basis points for equities and six basis points for bond products, according to BCG—managers are feeling the squeeze.

This is not all bad news, however. At least not for investors.

“Asset managers are reviewing their sales and distribution approach,” said Donnadieu. “It’s no longer just enough to have strong sales people; firms are adapting their materials to accommodate their different team members and the needs of the potential client.”

A new world of digital client interaction to help managers respond to requests should add to the value proposition offered increasingly professional institutional investors—even those who don’t take the step to insource.

“We are seeing a trend at a CIO level,” said Tim Giles, partner at Aon Hewitt. “There is a desire for more in-house co-ordination, to manage the managers, consultants, and providers.”

This almost half-way house approach is a likely contender for governance solutions further down the institutional investor chain and has been seen across the UK and Australia.

For some, even of a sufficient size, building or expanding a team to bring assets in-house doesn’t make sense if the end is already in sight, according to Giles.

He cited the recent move by UK energy provider National Grid to sell off its in-house fund manager Aerion, announced last month, as its pension fund looked to de-risk.

For those that do maintain or grow their internal teams, their impact on investment managers is likely to be broader than it is today, however, Giles said. Investors who may begin with creating passive equity or government bond products in-house may eventually feel confident enough to branch out.

“Defined benefit pensions are going through a period of change,” he said. “If anything, we could see in-house bond teams now having to move towards liability-driven investment, which is more specialist.”

It seems that while some assets are being taken off the table, others are being put in their place, but managers will have to step up their game to be in with a chance of managing them—and then the real test begins to hold on to them.

Additional reporting by Nick Reeve

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