CAPACITY ISSUES
It should be remembered that the initial business case for in-house investment often starts with the inability to place more money with the most highly-rated managers of Australian equities. The $2trn invested in superannuation in Australia is greater than the value of the Australian stock exchange at AU$1.5trn, and it is growing at a faster pace. This is a pace that active managers of domestic equities cannot keep pace with and frequently, they are turning away money over fears of diluting their market positions. In a country with one of the world’s biggest biases to domestic equities – holdings of 25-35% are normal – this is a significant problem.
Most internal teams choose to run vanilla core equity strategies – UniSuper favours large well-funded corporates with high dividend payouts – and then reconfigure their multi-manager line-ups to favour higher conviction managers. Funds such as UniSuper also argue that such experience makes them shrewder purchasers of active equity managers.
PERFORMANCE
The performance of such internal strategies has not been widely publicised. However, success should be fairly easy if internal teams stick to vanilla core strategies and do not charge a profit margin. Domestic equities at AustralianSuper are being run at a cost of 9bps and this figure should fall further once its global equity team becomes fully-funded and starts to share the costs of its shared middle office functions and technology.
Interestingly, before it undertook its in-house revolution, AustralianSuper sought guidance from CEM Benchmarking of Canada. The consultancy said that every 10% of assets taken in-house leads to a 4bps reduction in costs from the removal of fund manager profit margins.
There is a school of thought that says a superannuation fund will be more tolerant of an underperforming internal team, but that depends on how tough the board and executive team are. As such, UniSuper revealed it ‘sacked’ two of its internal strategies in 2013 after they had not performed to “expectations”.
