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Asian asset owners seek higher returns inward | Asset owners

Over the past six years, internally managed assets have outperformed those managed by third parties, both globally and in Asia, showing why asset owners should invest in their internal fund managers by providing additional resources and training.

of June Global SWF monthly report, a data platform that tracks more than 400 sovereign wealth funds and public pension funds, has found that internally managed assets are likely to generate higher financial returns than outsourced ones. Overall, he found a negative correlation of -13% between the percentage of large funds outsourced assets and their average return from 2015 to 2020.

In Asia, that number was even higher at -28%, based on data on 11 top public investors that Global SWF provided to AsianInvestor.

Source: Global SWF

“This indicates that internalizing asset management (among many other conditions) can be a good way to improve performance,” said Diego López, Managing Director of Global SWF. Asian investor. But he stressed that the number should only be used as a benchmark, as funds rarely publicly disclose the financial performance of their own managers to outsiders.

Specific examples of better internal performance include the Social Security System (SSS), the Philippines’ national social insurance program for those working in the country and abroad, which claims its internal fund managers have achieved success. “Much better results” than their external counterparts during the pandemic. The internally managed portfolio grew by 12%, while some outsourced assets suffered losses of up to 8%.

As the country’s largest pension fund, SSS manages $ 20 billion in assets. Its diversification into national services and financial sectors before Covid-19, including investments in the largest telecommunications company, a digitally-comfortable bank and a leading food company, generated big gains for fund, said Rizaldy Capulong, executive vice president of SSS and head of the investment sector during AsianInvestor‘s Asian Investment Summit in June.

The pension fund has no assets abroad and manages most of its assets internally. In 2019, it started to outsource some of the fund management, but this has slowed down due to the pandemic.

INTERNAL BOOST

Public investors around the world have traditionally entrusted part of their portfolios to external managers, especially in the private markets.

But as asset owners have built their internal teams over the past few years, they have become less reliant on external managers, the report noted. These include AustralianSuper, the country’s largest pension and retirement fund, which previously outsourced the management of all of its assets but has reduced it to around 50% since 2012.

Rizaldy Capulong,

Social security system

“Bringing asset management in-house can improve bottom line returns, increase alignment with stakeholders and expand transaction origination,” the report says. “Internalizing asset management is a learning curve requiring skills and capacity building.

Performance incentives combined with training programs to increase investment and financial literacy are offered to portfolio managers of the Korea Investment Corporation, a spokesperson said. AsianInvestor.

The Korean sovereign wealth fund had $ 183.1 billion in assets under management at the end of 2020, with the ambition to increase them to $ 400 billion by 2035, according to Global SWF. It has 132 in-house portfolio managers, according to the spokesperson, who declined to say how many outside managers it uses or how successful they have been in generating returns. According to data from Global SWF, KIC manages 27% of its assets externally.

In another sign of a fund investing in people to improve performance, the world’s third largest pension fund, Korea’s National Pension Service, worth $ 780 billion, announced in April that it would hire 54 investment managers to strengthen its internal and external asset management capacities.

In addition to receiving comprehensive training, new hires will also have the opportunity to work with foreign investment partners as well as foreign offices of NPS.

Andrew Shin,

Willis Towers Watson

NPS manages 77% of its alternatives in-house, while outsourcing 57% of the actions, according to Global SWF.

As portfolios grow – NPS wants to have 1 quadrillion W ($ 894 billion) in assets under management by 2024 – big asset owners need to hire more people and come up with good plans to train and retain internal managers to strengthen governance, Andrew Shin, Head of Korea Investments with Willis Towers Watson, said AsianInvestor.

In addition to their internal assets, asset owners still need people to manage outsourced programs so that they can monitor the performance of external managers and make investment strategies and decisions. “It takes a lot of energy and resources, even if you don’t really buy or sell directly in these foreign markets,” Shin said.

EXTERNAL PERFORMANCE

While the Global SWF report shows that internally managed funds have done better than those managed externally, it also indicates that there is no clear causal relationship between financial performance and who generates it, and the managers externalities can still play a role in alpha generation.

“Using their services helps capitalize on their local expertise and specialist knowledge, thereby avoiding businesses and sectors with weak governance and other underlying issues,” the report said.

Diego Lopez,

Global SWF

“The outside fund managers, I think, had an advantage over us in the bond mandates because they were much more nimble,” SSS’s Capulong said, noting that interest rates changed rapidly over the 12-18. last months.

Asset owners often look to outside managers when investing in a new asset class, region or industry, and lack the in-house expertise to do so, Global’s López noted. SWF.

However, no two funds are the same and several factors determine whether and to what extent a fund is managed externally. These include size, asset allocation, number of employees and offices, and an active or passive asset management strategy, he noted.

For example, the world’s largest pension fund, the Government Pension Investment Fund (GPIF) of Japan, has only 150 employees in Tokyo, while GIC of Singapore has more than 1,800 employees in 10 offices on four continents. . GPIF will therefore naturally outsource a higher percentage of its portfolios to external managers, he said.

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