To Outsource, or Not to Outsource – That is the Australian Question

Australia Ponders Internal vs External Investment.

(May 29, 2013) — Deciding on maintaining external managers or bringing capability in-house is one of the major issues facing superannuation chiefs in Australia, research has found.

CEOs from some of the largest funds cited deciding on the investment management model as one of their top five challenges in a roundtable debate published by State Street.

“[CEOs are] looking at the best ways to maximise returns while dealing with risk. And they’re assessing operational changes, like internalising investment functions – and the pros and cons of making those moves,” State Street said.

Australian super funds have been growing quickly, forcing their leaders to consider making decisions on how to best manage their assets. Like many other large investors around the world, some are enticed by the idea of bringing capability in-house, but admit it is not without challenges.

Being able to find the right people and pay them appropriately is an issue all funds are grappling with, the attendees said in the debate, while each fund has its own specific problems.

“Every fund is different, but the point is that you need to match the resources of your fund to the needs of the fund,” said John Livanas of State Super, which uses some external managers but has been building up its internal team. “With the changes in the markets, the legislative environments and the desire to increase our alternative investing, we needed more staff.”

He said staff additions had been made in the areas where the fund itself can add value. The State Super doesn’t manage stocks in-house because they don’t have expertise in that area, for example.

The move by these giant funds has had a knock-on effect to other parts of the industry too, the roundtable panel said.

“When you look at your internal capabilities you also need to look at your asset consultant to see how they can assist you. Research is expensive and no one likes to pay for it,” said Peter Lambert of Local Government Super. 

“So our consultants are busy trying to figure out how they can remain relevant and how they can fund their­ activities. We built an internal team to look at all the strategic work and monitoring, and when we looked at asset classes, we considered if there were any we felt we could do better. In most cases we said ­no.”

One of the barriers to building an internal team has been the failure by custodians to bring performance reports up-to-date, meaning investment managers are working off poor data.

“If you’re outsourcing your fund’s management, then [data management] should come as part of that process and will have a fee structure,” said Debora Jackson of TWUSUPER. “If you’re doing it internally … having the staff and resources to really understand how much data you need to analyse is important. It hasn’t been an interactive, go in and dive-down type of reporting.”

However, the biggest driver has been cost.

“There is a fee-saving element with it, where we are talking about core Australian equities, cash, bonds or corporate debt,” said Terry McCredden of UniSuper. “Whether we can cover all of the firms like the consultants do is questionable, but we feel that for those who have an interest in Australia, there are lots of ways to get the required data.”

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