FRINGE BENEFITS
The experience of managing assets in-house has proven to have many unexpected fringe benefits. So attractive are these that some have spoken quietly of them being greater than the initial rationale of cutting costs and the problem of capacity constrained active fund managers.
AustralianSuper is learning that having inhouse analysts who talk directly with domestic companies is putting its finger on the pulse of corporate Australia. This was how it learnt of toll road operator Transurban’s intention to place a bid for the contract to run a major section of the state of Queensland’s motorways. It was also how it was able to assess the company’s strength in making the bid. AustralianSuper and Tawreed Investments, an Abu Dhabi based investor, joined the Transurban bid and successfully beat off several other consortiums to purchase the contract for AU$7bn in 2014.
AustralianSuper was a useful strategic partner for Transurban. Firstly, it was a provider of capital and a sub-underwriter of the rights issue connected to the purchase. Secondly, its in-house infrastructure assets team was active in helping assess and put forward the deal to the Queensland state government.
More generally, AustralianSuper has seen itself gain preferential status to access limited-revenue-raising from domestic companies.
The longer such in-house teams are in place, the better the funds become at using them. During the turmoil and confusion in markets in January, AustralianSuper’s in-house equity analysts informed positions on currency hedging and buy and sell opportunities. Analysts who could measure the impact of low oil prices on individual companies, helped inform the view that oil prices would not see a significant rebound for some time.
Increasingly internal teams are being used to fill inefficiencies and take opportunities. Philip Hope, managing director of Morse Consulting, who has advised leading funds on setting up in-house investment operations, says: “There are inherent inefficiencies in a multiple equity manager model, which can lead to over or under exposures in certain areas.”
These opportunities are being pointed out by an improved data flow to investors from custodians. “Traditionally, it might take a few days to consolidate data from all the managers, but that was taking too long,” says Hope. “Now it is more timely, granular, and accurate, so the CIO can make some timely decisions about adjusting exposures at a fund level.”
Opportunities and inefficiencies can also be managed by an in-house staff with the skill to employ derivative overlays.
David Iverson, acting chief investment officer at NZ Super, says the lack of such a treasury team during 2008-9 held back its response to the crisis. “It was difficult for an external overlay manager to manage our currency and risk levels in volatile times,” he explains. “We therefore set up an internal treasury team (we call it portfolio completion) and in-housed our cash management, currency overlay and equity overlay programme. This team was a key enabler in our use of derivatives and in the implementation of our strategic tilting programme.”
