Pension Funds Plan To Increase Internal Asset Management


Pension funds are preparing to manage more of their investments internally, according to a recent report from State Street Corporation and the Economist Intelligence Unit.

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The report, titled “Pensions Funds DIY: A Hands-On Future for Asset Owners,” (H/T Finalternatives) tracked major trends in the pension fund industry. Perhaps the most noteworthy and decisive trend was the pensions managing their own investments internally.


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Pension funds bringing more asset management responsibilities in-house

Over the next three years, a whopping 81 percent of pension fund respondents said they are exploring bringing more asset management responsibilities in-house. A primary reason? Fees and costs were a major issue, with 29 percent saying it was a challenge for the pensions to justify the fees of their asset managers.

An unspoken issue is the relatively low returns, as many hedge funds are both highly correlated to the performance of the stock market as well as underperforming major stock market indices. This leads to the question: why not just primarily invest in an stock index ETF for the primary equity exposure?

As part of this shift to internal investing,  53 percent of the respondents are expecting to use more lower-cost strategies to achieve desired investment outcomes. This would likely include low cost ETFs designed to capture the beta of the stock market.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance and is leading to a need for more in-house accountability for asset and risk management,” said Martin J. Sullivan, head of Asset Owner sector solutions for North America, State Street. “However, this undertaking requires pension funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.”

Pension funds: Focus on corporate governance

Handling the increased investment workload in-house will require changes to pension fund infrastructure. As such, 43 percent  of respondents said they were expanding the number of technology platforms and software solutions they employ, while 51 percent said they were going to focus on enhanced corporate governance.

“While the largest and most sophisticated funds can handle most aspects of multi-asset class portfolios in-house, the majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” continued Sullivan. “This shift underscores pension funds’ need for new, more collaborative partnerships with asset managers who can offer them transparency and effectively tailor investment ideas and solutions to their unique needs.”

The survey considered 134 responses from pension fund executives. The Americas represented 42 percent of respondents, 36 percent were from from Europe, Middle East and Africa while 22 percent were from Asia Pacific. Fifty-two percent came from public sector pension funds, 31 percent from private sector pension systems and 16 percent from superannuation funds.

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