Speaking on a panel at the recent Financial Services Council Summit in Sydney, First State Super chief investment officer Damian Graham discussed the merits of super funds internalising asset management operations.
He noted that while in-sourcing and outsourcing are often presented in opposition to one another, First State Super actually prefers a hybrid model. “Over the long-term,” he said, “even as we grow larger, we’re going to have relationships with external managers.”
Some of the advantages of in-sourcing, he continued, involved the fund getting better information about market pricing and deal-flow access. “Plus,” he said, “it helps us deal with external providers in a richer discussion.”
Graham believes the decision to internalise comes down to individual asset classes. “We try to think about the things we’re trying to solve within an asset class,” he said, “We want exposure to high-quality, high-conviction managers and want to be able to access longer-term strategic positions. Over time, some may become fully internalised, some not at all.”
As an example, Graham said that at First State Super, “we haven’t felt like we’ve had the competitive positioning or advantages in internalising private equity, because deal-sourcing origination is harder in that part of the market.
“But again, you’ve got to feel like you have a sustainable approach. You do go through cycles and I’ve got no doubt we’ll have different levels of internalised versus externalised asset management.”
When questioned about the difficulties of swapping an asset manager mandate versus the potential HR issues involved in terminating an underperforming employee, though, Graham said he wasn’t sure the process was that different.
“The good and the bad part with an internal portfolio manager or analyst is that their performance is pretty clear,” he said. “That role ends up being similarly accountable with regards to performance issues.”
“Having an internal strategy has more levers to deal with underperformance,” he continued.
“We don’t have that opportunity to tell an external manager how they’re doing business. Those additional levers are opportunistic, but it’s no harder from a portfolio management perspective than in other areas of the business.”
Ultimately, Graham said he believes some level of internalisation is inevitable for funds growing above the $100-300 billion mark. “They got to a point of scale where they will always have some internal asset management,” he said. “And I think that’s where I can see Australia moving towards. The hybrid model may be relevant longer-term.”
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