AustralianSuper’s Mark Delaney looks back on almost 10 years of internalisation and identifies some unexpected benefits.
When AustralianSuper started on its path of bringing asset management functions in-house in 2012, it justified the move by citing cost savings and addressing the capacity constraints it was increasingly facing as a result of the continued growth of the fund.
But these turned out to be not the only benefits the fund has seen from internalisation.
More flexibility in managing the portfolio and a greater speed at which you can execute changes are two key unexpected benefits from this move, Mark Delaney, Chief Investment Officer at AustralianSuper, said in a panel discussion at the Frontier Annual Conference yesterday.
“If you are an internal manager and you have your portfolio go up two or three times, you probably don’t like that that much because you have to manage all of those flows, but for me, at the top, it gives me a lot more control in terms of tweaking the strategies, rather than having to manage around external managers,” Delaney said.
For me, at the top, [internalisation] gives me a lot more control in terms of tweaking the strategies, rather than having to manage around external managers
“And you can do that far more quickly. You can just move the money over the next week rather than have a long conversation and make two or three trips to Sydney and sort these people out,” he said.
As AustralianSuper has grown larger, the fund has awarded increasingly larger mandates. Now at $233 billion, it is not uncommon for the fund to put $1 billion away with a manager. But when the fund changes the strategy and terminates mandates, this can have a dramatic impact on a fund manager.
Managing assets internally avoids situations where investment decisions might put managers out of business, Delaney said.
“As we’ve become larger, managers are much more sensitive about moving money between them and the good managers are hard to get into,” he said.
“So internal gives you the chance of moving money around in large sizes without them being upset that you are putting their business at risk. You can move your portfolio around a bit more easily,” he said.
The Right Size
As AustralianSuper grew, the fund realised it had to make some changes to the way it implemented its investment strategy. Delaney said that the increased scale didn’t change the way he thought about investing, but dramatically changed the way the fund could implement the strategy.
Internalisation is a key ingredient in this implementation and Delaney said the fund would continue to place a larger share of its money with its internal team.
“Size can creep up on you. You can stand still and all of a sudden you are bigger than you think you are,” he said.
“When I first started managing money 20 years ago, we were $3 billion and now we are managing $250 billion. No one would have thought when we were $3 billion that we would be managing $20 billion, let alone $100 billion.
“But it is not as big a problem as you think it is. That is not to say that you don’t change and evolve, but it is not as big a problem as you think it is.
We have moved away from a traditional multi-manager strategy. We’ve moved to a mixture of using external and internal [managers]. And now we are migrating to using more internal and less external. That is getting the strategy to fit the size we are
“Pension plans have a mixture of growth and defensive assets, they have a bit of foreign currency, a bit of local currency, that doesn’t change much.
“But what has changed dramatically is: what is your implementation approach? This is where the key difference is. The implementation approach that you follow when you are $15 billion won’t be one that you follow when you are $100 billion and won’t be one that you follow when you are $400 billion.
“I think about it this way: you get into trouble if you try to wear the same shorts today as when you were a teenager. You have to have the clothes to fit the size you are. And an implementation approach is the clothes to fit.
“So we have moved away from a traditional multi-manager strategy. We’ve moved to a mixture of using external and internal [managers]. And now we are migrating to using more internal and less external. That is getting the strategy to fit the size we are,” he said.
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