Local and global perspectives on the topic of internalising funds management were shared by a line-up of expert panellists at The Summit 2019.

By Lachlan Colquhoun


Australian superannuation funds are insourcing the management of some asset classes, such as large cap Australian shares, while relying on outsourcing to specialist fund managers in more niche asset classes.

This is the view of First State Super CIO Damian Graham, who told the FSC Summit 2019 that his fund was comfortable with pursuing this “hybrid” model of management, which delivered multiple advantages.

“For the very long term we are going to have multiple relationships with dozens of external managers,” Graham said.

“And as we have managed internally we are able to get better information on what market pricing should be and also deal flow.”

One asset class which First State is more comfortable outsourcing, said Graham, is private equity where “deal sourcing is tougher” than seeking to track an index.

Outsourcing management, he said, made sense where there was “specialisation in an asset class and a geography where you are getting the best opportunities.”

During the session, the Summit audience were asked to vote on the question of “which asset class is best to internalise.”

The overwhelming response was from the 73 percent who nominated Australian equities, while 13 percent voted for private equity, 8 percent for small cap stocks, and 6 percent for international equities.

From Narrow Road Capital, Portfolio Manager Jonathan Rochford said he believed that the discussions about index tracking and internalising management were similar.

“The largest and most liquid markets, the transparent markets are the ones where it is extremely difficult for fund managers to beat the index,” Rochford said.

“But if you don’t beat the small cap index (as a manager) there is something wrong with you, so that’s going to take you towards a manager.”

The panel then discussed the issue of scale, and whether internalising management was something for larger funds.

“When I do talk to funds of around $200 billion around the world, they have got to a scale where they have some amount of internalised management and that is where I think Australia is going,” said Damian Graham.

The issue was then put to the Summit audience in the question “at what level does it make sense to internalise management.”

The responses correlated to the view that the larger the fund, the more logical it was to internalise. 44 percent said it made sense for funds of $50 billion or more, 36 percent said greater than $10 billion, 11 percent said greater than $5 billion, while 9 percent said greater than $1 billion.

The third panellist was Chris Cummings, the CEO of the Investment Association in the United Kingdom.

Cummings said the trend on internal management in the UK over the last 20 years was “a bit like the tide.”

“It washes up the beach and then comes down again,” he said.

Cummings agreed that there were similar trends, and “different asset classes require different levels of expertise” and this played into the internalisation discussion for many funds.

For some funds, the consideration was to control costs and fees in more index tracking assets, and then externalise in other areas “where they want to have more of an impact.”


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