Insourcing Assets is Not the Solution for all Public Investors
Excluding certain asset classes, several trends and studies point out that internal management of fund assets may outperform external managers after fees. There is a major push among public funds to insource more assets. A number of the massive Canadian pension systems have a higher proportion of assets managed in-house. On the other hand, a super-majority of pension funds in the United States continue to depend on external managers and banks for asset management and deal execution.
Restrictive factors come into play whether insourcing assets makes sense. External management can be beneficial for public investors in numerous ways.
Budget Constraints and Governance Structure
External asset management is commonly found in instances where public investors have administrative budget restraints. Many public funds are under legislative authority for budgeting purposes, making approvals in hiring personnel or increasing compensation difficult. This is compounded when a public fund fails to perform in a given year.
The governance structure of a public fund has a material impact on whether a public investor should insource fund management. First, public funds need to have a substantial budget to handle such internal operations. Second, the board or trustees should have an understanding and belief into the benefits of insourcing asset management. Even if board members understand the concept of insourcing asset management, the public or other stakeholders may not. If public investors do not have internal operational capability and flexibility from the board, then external management would be the optimal choice.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]Tweet
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