Super funds need to consider in-sourcing options for funds management

Superannuation funds considering the prospect of in-sourcing part of their funds management services will need to think carefully about what is right for them, a report reveals.

Research by the Centre for International Finance and Regulation (CIFR), examining the growing trend of in-house investment management by superfunds said the shift was driven by industry and fund growth, competitive tensions and innovation.

The CIFR said the tendency to manage assets in-house matched the policy agenda of improving the efficiency of the superannuation industry, however, it said funds would need to assess "whether in-house management sits comfortably within the organisation" before committing to adopt in-house asset management.

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"Managing in-house, rather than contracting out to external investment managers, can reduce investment expenses for larger funds," the CIFR said.

"Nevertheless, the efficiency gains go beyond just cost reduction. In-house management can offer opportunities to access additional returns, tailor the portfolio towards member needs, and address the capacity constraints that can be encountered as funds under management grow.

"In particular, it helps funds address the problem that active managers are able to handle mandates only up to a certain size.

"Thus, in-house management facilitates efficiency improvement through allowing superannuation funds to invest in ways that not only enhance member outcomes, but are also more scalable and hence better able to accommodate asset growth and perhaps consolidation."

While the CIFR noted the benefits of in-house asset management, the report warned, "there is no doubt that some mistakes will inevitably be made with in-house management".

"However, fear of error should not prevent in-house management from being embraced where benefits are evident.

"Done properly, in-house management is capable of generating improved net returns, plus increased control allows assets to be managed in a way that is better directed to member needs and delivered with higher confidence.

"A further advantage of establishing an in-house capability is that it provides a platform for the future, especially if designed as scalable and flexible."

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