Australian Retirement Trust CIO Ian Patrick says internalisation of asset management is not on the cards just yet, but he has left the door open to revise the fund’s position on the matter in the future.
Ian Patrick, Chief Investment Officer of Australian Retirement Trust (ART), has been vocal about his reservations that in-house asset management can provide a ‘sustainable advantage’ over a model where investments are managed externally.
In episode 78 of the [i3] Podcast, Patrick explains this is largely because of the skillset and breadth of coverage required to do it successfully.
Yes, you can bring down fees, but if the net return outcome is diminished relative to the alternative of external management, then you have to question: ‘Is that in the best financial interest to members
“Internalisation needs to deliver the same net return outcome,” he says in the podcast interview.
“Yes, you can bring down fees, but if the net return outcome is diminished relative to the alternative of external management, then you have to question: ‘Is that in the best financial interest to members?’
“Now, future returns are not assured so the next question becomes then: ‘What would be required to deliver that same net return?’, and to me that says you have to be able, through time, to continuously retain a team of the best-quality investors you can find in the world, because going externally, in theory, gives you access to teams of the highest quality, provided you can form those relationships and align interests.”
Patrick on Merger Implementation
Besides, ART is still in the midst of implementing the merger between QSuper and Sunsuper and bringing asset management in-house at this time could overwhelm the available resources and could form a distraction while the fund establishes a single-fund culture.
“We are going through a transformation: harmonising two portfolios, building the ART culture, extending our investment in technology to serve the two teams in a consistent way,” Patrick says.
“All of those things are an element of change that if you overlaid it with further changes of internalising teams could really challenge the fabric of the team and could really challenge the extent of capacity and support services.
“Being on an internal equities team, you’re making demands of IT people, of other people, at a time when the organisation is going through some level of transformation. I have used this analogy … that before you run the 800 metres make sure that you’re up to scratch for the 400 metres.”
But he also acknowledges that as the fund continues to grow, there might be a point where internalising certain investment functions makes more sense. He reflects on a strategic review at Sunsuper, where the team envisaged what would be required if the fund tripled in size.
Integration is an 18 month to three year journey. During that time, we will continue to evaluate where we are at on the question of internalisation and we may take a bolder step in three years
“We undertook an extensive exercise in 2020, just at the time the merger was becoming real, to examine what the future investment model might be for a $50 billion fund that could end up at $150 billion,” he says.
“Our conclusion then was … that there was an investment to be made in a number of initiatives over a three-year horizon to strengthen the base. And that we would re-examine the question at the three-year [point].
“I think you’re hearing, without me saying it explicitly, something similar in that integration is an 18-month to three-year journey. During that time, we will continue to evaluate where we are at on the question of internalisation and we may take a bolder step in three years’ time.”
Yet, he also says there are implementation aspects of investing that ART is already looking to insource as they have become of strategic importance to the operation of the fund.
“There are things that are strategically important to internalise: aspects of rebalancing, currency hedging, exposure management from a liquidity point of view, et cetera. Those are all critically important functions, some of which in mid-size, or smaller funds, or even in the case of Sunsuper, were historically outsourced,” he says.
“Those will increasingly become internalised because they are crucial to the operation of the fund as opposed to the origination of an infrastructure asset, where there may well be better-qualified people to do that.”
For the full podcast, please click here.
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[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.