Industry consultant PwC is reaffirming the view that superannuation funds should think carefully before internalising investment management.
In its latest paper, Internal Investment Management - Yes or No?, PwC notes while there may be many good reasons for Australian superannuation funds to insource investment managers, there are various issues and complexities that need to be carefully explored.
"Over the last few years one of the more interesting trends in the superannuation industry has been the larger funds starting to manage some of their investments internally," the paper said.
"There are many good reasons to do this, but there are also a number of risks and potential complications. The decision to insource investment management is a significant change, and careful strategic planning is required."
Citing reasons to avoid internal management, the paper highlights how the move will likely have a significant and lasting impact on culture, remuneration, staffing and numerous other factors impacting the organisation.
On the issue of culture, the paper notes how investment managers and superannuation funds tend to attract different types of employees with differing remuneration demands.
"Investment managers attract highly motivated and commercial staff, and the success or failure of investment strategies and their managers is highly visible," the paper said.
"Consequently, successful investment managers expect to be rewarded well. This could lead to tensions over time if other staff can become resentful of the amounts paid to the investment staff."
Additionally, the paper warns many successful managers have received equity in the business, or have left to establish a boutique, putting a superannuation fund at risk of losing key investment staff.
In recent years, at least 10 large Australian superannuation funds have insourced or are in the process of insourcing components of investment management. Notably, industry superannuation fund Cbus significantly expanded its in-house investment team in August last year from 34 to 59 and implemented a newly-defined strategy aiming to capture several scale advantages.
The PwC paper does concede that internal investment management does have a number of benefits including cost reduction, gaining access to unique investment opportunities, and aligning investment management objectives with fund objectives.
"Internal investment management can work if it is implemented carefully, but superannuation funds will also have to be careful that they stay efficient and focused, and don't go down the same path as the mutual life offices," the paper concluded.