Survey: Pension Funds Looking to Increase Internal Asset Management

pension funds

Pension funds across the world are looking to bring asset management responsibilities in-house, according to a recent survey by State Street.

In addition, a majority of funds are thinking of turning to lower-cost investment strategies.

From ValueWalk:

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.”

The survey polled 134 pension executive from the Americas, Europe, the Middle East, Africa and Asia.

Survey: 81 Percent of Pension Funds Looking to Bring More Investment Management In-House

wall street

CalSTRS recently announced its plans to eventually manage 60 percent of its assets internally. According to a recent survey, a majority of pension funds are beginning to think the same way.

A survey by State Street released this week found that 81 percent of pension funds are planning to bring more investment management duties in-house in the near future.

From BenefitsPro:

81 percent of funds are exploring bringing more management responsibilities in-house over the next three years.

Cost concerns are driving the trend, as 29 percent of funds said it is becoming more difficult to justify the fees paid to outside managers.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management,” said Martin Sullivan, head of asset owner sector solutions for North America.

The State Street data doesn’t suggest that outside management will become obsolete, but rather that pension funds are becoming more judicious about how they select and manage outside relationships.

The largest funds have the capacity to handle multi-asset management in-house, but they are in the minority, Sullivan noted.

“The majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” he said.

The survey examined responses from 134 defined benefit and defined contribution funds around the globe.

The survey also found funds are willing to take on more risk:

While pensions funds re-examine their relationships with outside managers, 77 percent are also reporting a need to increase their risk appetite to boost lackluster returns.

That means a greater push into alternatives, as equities and fixed-income “may look pricey.”

“Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives,” according to the report.

The full report, called “Pension Funds DIY: A Hands-On Future for Asset Owners,” can be found here.