According to research published this week by State Street, more than 80% of pension schemes globally plan to bring more asset management responsibilities in-house as part of a more proactive approach to investing. As long term investors, pension funds have historically played a somewhat conservative role in the financial system. However, in today’s fast-moving environment it seems they are taking their destiny into their own hands, in particular by insourcing asset management capabilities and overhauling their approach to risk and governance.
The research surveyed 100 pension funds and found that the trend of bringing asset management in-house is driven partly by cost, with over a quarter indicating it is becoming increasingly difficult to justify external management fees. Over half of the pension funds are expecting to embrace lower-cost strategies alongside increased adoption of technology platforms and software solutions.
“Can we insource some components of the process and outsource other components? Traditionally we’ve bought the whole car. Maybe we need to buy the engine or buy the brakes or buy the engineering capability and just build the car ourselves.” – Richard Brandweiner, Chief Investment Officer, First State Super
The survey also points to a number of other trends that will shape the pension fund industry over the next five years.
Driven by lacklustre returns in a low-interest environment, pension funds are re-evaluating risk, with over 77% predicting risk appetites will increase. Pension funds are also expecting to make major shifts in asset allocations, steadily moving away from equities and bonds to less familiar asset classes such as alternatives in order to drive growth and meet long-term liabilities. Private equity is emerging as an attractive area for investment, with direct loans, real estate and infrastructure all expected to benefit.
Pension funds are also showing greater interest in investing in hedge funds. Globally 29% of pension funds that already invest in hedge funds plan to increase their allocations, while 25% plan to invest for the first time. It also comes as no surprise that over half of the respondents are planning to make better use of low-cost investment strategies. Many are adopting what are known as “barbell strategies” which involve blending a passive investment strategy with a higher-growth/risk strategy such as alternatives.
Finally, the survey points to some interesting conclusions around pension funds’ approach to risk and governance. One particular area of interest is the complex relationship between the pension fund and its asset manager, with 58% of respondents saying it is a challenge to get an accurate picture of their risk-adjusted performance. More than half also say it is increasingly difficult to ensure the interests of asset managers they are working with are aligned with their own.
Are there any implications for Investor Relations teams?
Yes, there could be, as global pension funds will increasingly look to invest and engage with companies directly. To prepare in advance it may be beneficial for IR teams to have a solid understanding of the largest pension funds, especially in North America and Europe where the above trends have been most prevalent. According to OECD, assets under management of pension funds reached $21.8 trillion in 2013 – this was concentrated mainly in the US, UK, Australia and Japan. There are a large amount of online databases and resources which can help you in your research, and we are more than happy to point you to the right direction.
How can Closir help?
Closir is a platform for professional investors to learn more and engage directly with Investor Relations teams. The platform is marketed to global pension funds, especially those taking a more proactive approach to investing. Closir’s reporting can give listed companies a better understanding of how industry trends are impacting the company and help them to target the most active pension funds.
Full State Street report can be requested online