The Centre for International Finance and Regulation (CIFR) has developed a framework for superannuation funds and other asset owners to implement in-house investment management.
The framework is included in CIFR's latest research which argues members of larger funds can benefit directly from in-house investment management, provided it is done properly.
The framework is based on addressing the elements of capabilities, costs, alignment and governance - and provides checklists of various aspects to consider.
CIFR research director Dr. Geoff Warren completed the research alongside chief executive Professor David Gallagher and centre director Tim Gapes. Warren said managing some of the assets in-house can reduce investment expenses for larger funds.
"Nevertheless, the efficiency gains go beyond just cost reduction. In-house management can allow 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," Warren said.
The research draws from interviews with 20 superannuation executives, and also reveals varied approaches and views towards in-house management.
Warren said while there was broad agreement on key factors to address when deciding whether assets should be managed in-house, that is where the agreement ended.
"There was a striking range of views on how to conceptualise the problem, and the management issues deemed most important. For instance, some consider the ability to tailor investments towards fund objectives of prime importance; while others argue that tailoring can be effectively achieved using external managers," Warren said.
Most fund executives saw the ability to scale up as a key driver in the decision to bring funds in-house, and approached the issue on an asset class-by-asset class basis.
"While there are some risks, in our view this should not prevent in-house management from being embraced where there are benefits. In-house management is rarely of sufficient size to 'sink a fund' in its own right, as it typically occurs across pockets of a fund's investments, such as one component within particular asset class portfolios," Warren said.
He added a key task for funds is to identify and mitigate the risks associated with managing assets in-house, and there are strategies for doing so. Warren said many funds aim to address the challenges around staffing and alignment by targeting prospective employees who are culturally aligned.