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New Dynamic Emerging Between Pension Funds and Asset Managers As Pensions Look for Lower Costs, More Transparency

Many pension funds are moving portions of asset management duties in-house in a bid to reduce costs; many more funds are pushing for more transparency from their external asset managers.

In the wake of these trends and others, a recent State Street survey claims that a new dynamic is emerging between pension funds and their asset managers.

More details on the findings of the survey, from State Street executive Rob Baillie:

Many pension funds are looking for a new type of relationship with their asset managers. In interviews conducted as part of our research, pension funds stressed how important it was to find asset managers who can understand their objectives and investment philosophy. The ability to align interests around shared goals is also key to success in these relationships. More than half of pension funds (52 per cent) find it difficult to ensure their asset managers’ interests are tightly aligned with their own. By contrast, asset managers that can build solutions around their clients’ objectives can gain an edge in a highly competitive market.

Transparency is also a key differentiator. In today’s highly regulated environment, pension funds need granular information on the issues that drive risk and performance across their investments. This is a huge challenge in the multi-asset world: almost three out of five pension funds surveyed (58 per cent) say it is a challenge to gain a complete picture of risk-adjusted performance. Asset managers that develop the analytical tools and reporting capabilities to address this need will again have a huge advantage.

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In recent years, many pension funds have decided to insource some of their asset management. This was one of the strongest findings in State Street’s survey of pension funds: 81 per cent said they intended to manage more of their assets in-house.

Insourcing doesn’t remove the need for external asset management, but it does create a new dynamic in the relationship between pension funds and their service providers. They are less willing to pay a premium for straightforward investment strategies that they can easily support in-house. What they value, however, is asset managers that are able to deliver strong and reliable returns through a tailor-made investment solution.

Australia’s Largest Pension to Bring Global Equity Management In-House

In a bid to cut external management costs and handle more asset management duties internally, Australia’s largest pension fund is preparing to hire a team to bring its global equity management in-house.

AustralianSuper’s plan is to bring 40 percent of total asset management duties in-house by 2018.

But for now, the fund is looking to hire a team of managers to manage its global equities investments internally.

From Bloomberg:

AustralianSuper Pty, the country’s largest pension fund, is recruiting money managers as it prepares to start investing in global equities through its own team within a year.

[The fund] expects to have as many as nine people on the new team, said head of equities Innes McKeand, who is traveling to the U.K. next week to interview candidates.

AustralianSuper wants to cut external management costs and aims to manage about 40 percent of its assets in-house by 2018, from the current 15 percent. It already has in-house teams overseeing some of its Australian equities, infrastructure, property and cash holdings and has just hired two managers for Australian small cap investing, McKeand said.

“Global equities is the next big thing” for in-house management, McKeand said by phone Wednesday from Melbourne. “We are just in the process of building the team. In the next nine months to a year we would be funding the team.”

The global equities team will be based in Melbourne and have a mix of Australian and international managers, he said.

AustralianSuper manages $67 billion in pension assets.

Fired CIO of San Diego Pension May Retain Role Until Nearly 2016

Trustees of the San Diego County Employees Retirement Association (SDCERA) voted in November to fire the firm acting as its outsourced CIO, Salient Partners, and hire an in-house official.

The pension fund could make that hire by March. But trustees learned this week that Salient Partners could retain its asset management duties until November 2015.

The reason for the delay: a consultant told the board that it would be best if Salient continued its duties while a new CIO adjusted to the job and developed and investment strategy.

From U-T San Diego:

Salient Partners, the embattled outside investment strategist for San Diego County’s pension fund, may continue managing much of the $10.3 billion fund through November.

The timeline, which was presented at a meeting Thursday by the pension system’s independent consultant, surprised some trustees who’ve been pressing to fire Salient since late summer.

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“I also thought I understood, at the end of the year (2014), it was stated that we would be terminating the Salient contract after we hired the CIO,” said trustee and county supervisor Dianne Jacob, who moved in September to terminate the contract and begin a transition. The board rejected the motion.

[The fund’s consultant] Scott Whalen advised the board to let Salient continue managing its portions of the portfolio until a new CIO was in place and trustees had settled on a new strategy.

He said the board could fire the firm and shift the investments into index funds, but that would amount to two major portfolio transitions in a brief period.

The SDCERA board voted 8-1 in November to move CIO duties in-house and thus cut ties with Salient Partners.

Two UK Pensions Enter Investment Partnership – What Will It Look Like?

Last week, two UK pension plans, each with assets of around $7 billion, entered an agreement to pool their assets and invest as one entity.

Officials say the partnership will lead to lower investment costs and stronger governance. But what will the partnership look like?

Chief Investment Officer found out:

Under the proposed new agreement, each fund would remain responsible for its own liabilities but the asset management would be pooled.

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“Both funds have a similar investment philosophy,” says Susan Martin, CEO of the LPFA. “We have a joint aspiration to close our funding gap.”

The basis for this relationship lies in bringing more assets to be managed in-house, both sides say.

“It gives us better governance, lower costs, more efficiency, and better control over execution,” says Martin. “There will be a joint committee that is responsible to both funds, on which a representative from each will sit as they will understand the cash flow required.”

Each fund already has a substantial in-house investment team, but approval from the FCA will mean the partners can carry out a range of investment activities that had previously been accessible to them only through asset managers and other providers.

Clearly, the move would see several fund managers lose their mandate.

“We need to look in detail at each fund,” says Graham. “There might be funds and some managers that can be merged or pooled or we could run some in parallel for a time.”

Graham also has ambitions that push outside the strict boundaries of the pension.

“In creating our own investment manager and partnering with LPFA we are mitigating risk,” he says. “We can begin training people up and start succession planning. We could have a centre of excellence for finance in the North West of England.”

More background on the partnership, from Ai-CIO.com:

“We believe in greater collaboration, so this is really putting our money where our mouth is,” says Lancashire County Council Deputy Treasurer George Graham.

Graham is speaking to CIO on the day the £5 billion local authority pension announced it had agreed—in principle—to tie up with one of its peers based 300 miles away in the UK capital, the $5 billion London Pensions Fund Authority (LPFA).

“We have a broad agreement about the shape of something and now we will sit down with lawyers and the Financial Conduct Authority (FCA) to come up with something that suits both funds and to which we can both formally agree,” says Graham. “We have been in talks about this since the late summer.”

The funds have collective assets of £10 billion and want to bring the majority of them under their own auspices. Along with a joint belief in self-management, the funds are against a push from central government towards public pension funds being managed purely on a passive basis. It would be a “backwards step”, according to Graham, and would work against the efforts each team has been doing to manage its own assets and liabilities.

The pension funds say that they would be receptive if other pension funds were interested in joining the partnership.

Photo by @Doug88888 via Flickr CC License