The 73 largest state-sponsored U.S. pension funds, which represent about 95% of all state pension fund investments, reported investment fees equal to approximately 0.33% of assets in 2016, according to a 2018 report by The Pew Charitable Trusts. That represents a 30% increase in fees since 2006. An increase from 0.26% to 0.33% may seem insignificant, but in fact it equates to more than $2 billion in total annual investment fees for the 73 plans.

Pensions and supers have typically leaned heavily on third-party asset managers, but those are the kinds of numbers that get noticed. Although the fees paid vary from fund to fund, and the overall fee level rise is due in part to increased allocations to sometimes complex and risky alternative investments, fees are part of the reason that funds are pulling more and more asset management in-house. This trend isn’t just gaining traction in the U.S. – the movement is global.   An additional contributor to the trend is the realization that working with multiple managers can lead to “cross-contamination” of single stock exposure.

Marc Mallet

In-house not without challenges

For many funds, the challenges to increasing in-house asset management readily present themselves: Do you have the right technology infrastructure? Can you handle the cost and complexity of running an internal operation? Do you have people with the necessary skills – and, if not, can you attract, hire, and retain them? The answer to that last question can be a substantial hurdle.   

“Many funds aren’t located in financial centers,” says Marc Mallett, Senior Vice President, Director of Strategy Asset Servicing Americas at Northern Trust. “It’s one thing to recruit and retain the investment and the operation staff necessary to run money in-house if you’re in Boston, New York, San Francisco, or Chicago. It’s a different story in more out of the way locales.”

While Mallett does think “we could start to see a larger availability of talented people who historically would have looked to drive their careers through the asset management side of the house rather than the asset owner side of the house,” he does not believe the tipping point has been for that to be a trend. But with fee compression and continued M&A among asset management firms, it’s likely to occur at some point.

Integrated global solutions

Even if talent does become more readily available, the bulk of the challenge to bringing asset management in-house remains – but overcoming them is not as daunting as it may appear at first glance. It’s the need to help funds understand that it can be easier, and more cost efficient, than it looks that is driving innovation by Mallett and his colleagues at Northern Trust.

“The first step for funds is to define their overall goals and objectives,” says Mallett. In most cases, liabilities will be outpacing net of fee investment returns. With that in mind, he says, funds should “identify the investment strategies they would want to bring in-house and the strategies they think should remain with external managers.”

In general, what Mallett and his colleagues are seeing is asset owners continuing to leverage passive vehicles to get beta exposure in the market, and then taking a portion of their assets in-house to create the active exposure they believe they need in equities, fixed income, or alternatives. The blueprint is different for each fund, however once it’s in place asset owners can work with Northern Trust to understand the services they can leverage to get to market quickly, efficiently, and with a sustainable operating model.

For example, says Mallett, Northern Trust offers an integrated, cross-asset class global trading solution that can allow funds to sidestep the time and money needed to build out sophisticated trading technology, and instead quickly reduce the cost of external management. The solution is fully integrated with Northern Trust’s Investment Operations Outsourcing, which provides the portfolio accounting, cash processing, collateral management, and other services an asset owner needs to internally manage global assets.

“No matter what parts of the market that they want exposure to, they can achieve it without hiring staff beyond the investment professionals needed to make the investment decisions, and the compliance and risk professionals that they would need to ensure controls,” says Mallett.

Keeping pace with rapid change 

By leveraging this out-of-the-box, holistic trading and investment operations solution, an asset owner anywhere in the world who wants to manage its money in-house can do so at a speed and cost unthinkable even a few years ago.

From there, Northern Trust teams experienced in trading and investment operations undertake a process of continually educating current and prospective clients about trends they are seeing, and perhaps more importantly, making sure asset owners always understand what’s possible.

“This technology has helped to facilitate such rapid change in what is available to funds that they simply may not realize how quickly, efficiently, and at what price point they can get access to the capabilities they need in order to run the money themselves,” says Mallett. “In reality, the barriers to managing global assets in-house are being knocked down, and the tools a fund needs are as accessible to a pension fund in Helena, Montana as it is to one in New York.”