Market Views: How should instos approach investment insourcing?

The number of asset owners looking to insource investment management and reduce their use of external fund houses by building in-house teams is rising in Asia, as it is globally.

Australian superannuation funds, such as AustralianSuper, have been moving aggressively in this direction in recent years, and the trend has become more prominent generally in the persistently low-yield environment.

Other names to have set out ambitious internalisation strategies in recent years include California State Teachers’ Retirement System, Investment Management Corporation of Ontario and the Teacher Retirement System of Texas.

For pension funds, sovereign wealth funds, insurance firms and other institutions, improving internal investment capabilities holds the prospect of major benefits: reducing costs, increasing control over assets and therefore risk, and developing a stronger pipeline of investment opportunities through partners.

But building a strong in-house team does not come cheap and it is not easy to source the best talent, even for asset owners with the deepest pockets. That is especially the case in Asia, where there is a smaller – though growing – pool of investment expertise.

And as more pension and sovereign funds establish local presences in Asia, the competition for talent is growing ever fiercer.

Moreover, some – such as Elliot Hentov, head of macro policy research at State Street Global Advisors – have noted that if asset management fees come down sufficiently (as they have been doing in recent years) insourcing becomes less cost-effective.

AsianInvestor elicited comment on the current challenges of insourcing and how asset owners should approach it from three experts: an asset management industry recruiter, an investment consultant and a research specialist.

Their responses have been edited for brevity and clarity.

Andrew Oliver, co-head 
Profile Asia (Hong Kong)

The asset owner community in Asia is a growing consumer of investment talent in an already tight marketplace. Insurers are bringing more and more assets in-house, and the sovereign wealth and pension funds outside the region are increasingly coming in. 

There’s a push across the board to improve investment capabilities in public and private markets, from traditional equity or fixed income to private equity and credit, and real estate.

That said, it tends to be incremental growth for these institutions, rather than, say, when a client-led business decides to open in a market and looks to hire a lot of people at once, leading to a big run on talent.

What’s more, going to an asset owner is a very viable career choice for someone that maybe five or 10 years ago may not have been seen as desirable, but it very much is today.

Asset owners looking to recruit should do a very thorough review of the market in question and ascertain if the price point is something they're interested in. You can't come in and set a price point from outside. I would always advise starting with competency-based recruiting, and then price it based on what the market yields not by what they want to pay.

A large pension will probably end up paying more for talent locally than they thought they were going to – and probably more than they do sometimes in their home jurisdiction. 

There are greater challenges for asset owners than talent shortages when it comes to insourcing, such as the lack of resources and time for due diligence, reporting and performance monitoring, as well as lengthy investment approvals and decision-making processes.

Asian institutions also continue to grapple with the issue of hiring and retaining investment talent. For example, Korea’s National Pension Service has reportedly faced high staff turnover rates in recent years and, in response, the fund plans to introduce a new hiring policy and groom fresh talent.

Meanwhile, Thailand’s Government Pension Fund and China’s Ping An Group believe that constant engagement in new, challenging tasks is beneficial for their staff’s career growth and progression, and thus retention.

Alternatives and ESG [environmental, social and governance] investing are two popular areas where Asian institutions hope to expand their investments and in-house capabilities.

With regard to ESG, the subjective and contextual nature makes it difficult for investment professionals to claim proficiency in the subject matter. But the international regulatory push in this area will definitely help pave the way in developing ESG standards and talents.

For instance, Thailand’s Securities and Exchange Commission recently proposed mandatory ESG training for investment professionals. This, however, will take time, and in the near term, Asian institutions will likely collaborate with their peers or external managers for knowledge transfer while venturing into new and niche strategies. 

Janet Li, wealth business leader for Asia
Mercer (Hong Kong)

Whether and to what extent to outsource and when to build in-house investment capabilities is the eternal question for asset owners. 

Roiling markets and pressured budgets bring this issue to the fore. The answer depends on the maturity, goals and size of the investment programme along with considerations such as the stage of the economic cycle and any applicable regulatory requirements. The cost/benefit analysis must weigh where asset owners can best spend their valuable time and their budgets to get the most out of their in-house teams.

Returns are driven most importantly by asset allocation. Asset owners looking to build out their teams must first look to ensure that they are equipped to look across asset classes with breadth and depth. The next priority is asset class specialists. 

As the team grows, it will be important to remain focused on the overall objective of the fund – a challenge will be how to avoid teams falling into silos – and setting KPIs accordingly. One last bit of advice: focus on the culture you wish to foster. This will help navigate the many issues that are impossible to document in the procedure manual.