The Technology Challenge of Building In-House Investment Teams

Eagle’s Marc Rubenfeld looks at the growing trend among Australia’s superannuation funds towards building in-house investment teams and the challenges posed when it comes to technology.

 

Many asset owners have traditionally been content to delegate the management and execution of their investment strategies to third-party asset managers. In recent years, however, we have seen an increasing number—including sovereign wealth funds, endowments and pension funds—looking to build their own investment capabilities in-house. This is particularly true of the Australian superannuation market. While these efforts are designed to add new efficiencies and take on more control, one series of hurdles are the technological demands required to manage and report the performance of these assets effectively.

Eagle is working with a number of superannuation funds that are enhancing their in-house investment capabilities and recent research estimates that two-thirds of Australian superannuation funds are expecting to bring asset management operations in-house over the next ten years1.

There are a number of reasons behind this trend, but chief among them is the desire to reduce costs and deliver higher returns for their members. Consolidation in the superannuation market has had a part to play in this as the average fund size has been driven higher. This is a trend that looks set to continue and it is likely many of the smaller superannuation funds will be subsumed in the coming years. At the same time, the total costs per member have increased and the operating costs of Australian superannuation funds are higher than in many other OECD countries. Between June 2009 and June 2014, KPMG estimates that the total cost per member increased by 52%2.

There are several factors behind these increasing costs. Commitments to enhance services and improve the member experience is one example and at the same time, the transparency into operations has brought fees clearly into focus. As a result, the larger funds in particular are recognising the cost savings available by bringing their investments in-house and reducing the fees paid to external managers.

But it is not simply about trimming costs. By bringing investment management in-house, funds are looking to get closer to their assets, which they believe gives them greater flexibility and autonomy to execute their strategy and manage their assets more effectively.

Yet the decision to bring investment management in-house is not as straightforward as it may seem, with far more to consider than simply hiring an experienced investment team. A number of significant operational hurdles need to be addressed in order to realize the potential of insourcing. Firms typically need to expand their technological capabilities and frameworks with the front- and middle-office tools needed to support the activities of their investment team. This is particularly true against a backdrop of increasing investment and regulatory complexity, and as data demands grow across the industry.

Some of the key considerations when it comes to technology include:

  • Ability to measure risk and performance across complex investment portfolios and different asset classes
  • Flexibility to accommodate future regulatory changes as well as new investment trends and asset classes
  • How to manage technology: in-house, outsource or a co-source approach
  • Ensuring that your technology can support future growth and will be fully supported in the long term

These are just a few points that help bring into focus the challenge of setting the technology foundation for in-house investment teams. Whether replacing a legacy system or building a technology infrastructure from scratch, the task can seem daunting. But such an undertaking is not done alone, making the selection of a knowledgeable and experienced technology vendor an influential first step towards success.

1 http://www.superreview.com.au/news/superannuation/super-funds-embracing-insourcing
2 https://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/supertrends-australian-superannuation-industry.pdf

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