asset classes

Kerrie Williams, Head of Practice at Frontier Advisors

Which Asset Classes to Insource?

Navigating the Insourcing Trend

Pension funds that are planning to in-source parts of their asset management functions are faced with the question of where to start?

Do some asset classes lend themselves better to in-house management than others?

A report by asset consultant Frontier Advisors, released last month, found that most funds start an insourcing program in cash, fixed interest and domestic equities.

These are often less complex strategies and investment staff is more readily available than for asset classes that require specialised knowledge.

But is it at all feasible for pension funds to run successful investment teams in the more complex areas, such as international equities, private equity and real assets, and compete not only with commercial asset managers but also with an increasing number of large pension funds?

Kerrie Williams, Head of Practice at Frontier Advisors co-authored the report ‘Navigating the Insourcing Trend’ with analyst Sarah Cornelius.

Williams said that although these asset classes provided greater hurdles to insourcing, they also tend to provide the largest cost-savings.

“Ultimately, it will depend on the capabilities that exist at the fund, or what capabilities they can readily acquire or choose to acquire,” Williams told [i3] Insights.

“Some asset classes require deep specialist or technical knowledge and, while challenging, can still be managed in-house as long as the capabilities are there to do so.

“Indeed, if they’re well implemented, they have the potential to provide a more sizeable long-term benefit to members by way of a more significant reduction in external management costs.

“The Ontario Teachers’ Pension Plan is one example of a fund that is actively pursuing private equity opportunities through its internal team.

“Insourcing the management of offshore asset classes presents additional challenges that need to be considered and addressed, including the challenge of having staff operating in global locations,” she said.

Ontario Teachers’ Pension Plan runs private equity, venture capital, real assets, absolute return, renewable energy and opportunistic alternative strategies in-house.

Together these asset classes represent 80 per cent of the pension fund’s assets.

Yet, the Canadian funds are often seen as being the front runners in the insourcing trend and for a fund that only just embarks on this route building significant alternative teams might not be a feasible option.

Active or passive strategies?

Some funds aim to get around the issue by starting with a passive strategy, as this is often a less complex strategy to run, but this is also an area where the cost savings will be minimal.

“If funds are focused solely on the cost reduction benefits that insourcing may bring, then traditional passive management of asset classes is not a logical step,” Williams said.

“However, the benefits for a fund taking a long-term view of insourcing can be much broader than cost reduction.

“Insourcing a strategy that is focussed more on execution than alpha generation can allow a fund to test the water, ensuring that it can support insourcing arrangements more broadly, has an effective governance framework in place and is able to build the necessary operational and risk management skills.

“Again, there is no ‘one size fits all’ approach to insourcing.

“The $52 billion Alaska Permanent Fund Corporation (APFC) will reportedly insource the creation of passive and quasi-passive listed equity portfolios focused on smart beta strategies.

“To date, in-house teams at Australian superannuation funds have typically been involved in the design of tailored smart beta strategies, but have still ultimately appointed an external manager to implement the strategy,” she said.


A big driver behind insourcing asset management functions in Australia is capacity. When a pension fund grows larger than $50 billion it is almost forced to start running domestic assets partly in-house, because it cannot add external managers indefinitely.

Currently, there are more than eight superannuation funds that run certain asset classes in-house, of which AustralianSuper has the largest investment team with 115 staff.

As more funds grow over $50 billion, it is likely they will need to insource as well, but it raises the question of how many funds will be able to build top-quality investment teams.

Yet, Williams doesn’t believe that this will be a driver for further consolidation.

“We would expect the trend towards more internalisation to continue.  We don’t believe this will be a key driver of further consolidation within the superannuation fund space, but do expect consolidation to continue for other reasons,” she said.

“The Australian Prudential Regulation Authority (APRA) has stated publicly this year that it is targeting funds who fail to deliver value to their members, so the industry consolidation debate goes well beyond the insourcing debate.

“As for the ability of funds to recruit highly capable investment staff, the reality is there is a global pool of experienced and skilled staff, and funds that insource can provide great career opportunities in their capacity as large, growing and sophisticated asset owners and employers.

“However, it’s challenging to build a truly excellent team and funds should not underestimate that,” Williams said.

See the full Frontier Advisors report here.

Earlier last month, the Centre for International Finance and Regulation (CIFR) also published research into the trend towards internalisation. Read an interview with Geoff Warren, Research Director at CIFR, here.


[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.