In-sourcing investment bound by philosophical challenges

The structure of internal investment teams and developing appropriate governance to house new investment staff is a key challenge for super funds in-sourcing their investment functions, according to State Street.

Super fund panellists at a series of State Street roundtables agreed that three main challenges existed for super funds looking to in-source investment functions: garnering clear board support, developing a structure around in-sourced activity, and attracting and maintaining appropriate talent.

Ian Martin, State Street's head of global services for South Asia and the Pacific and head of global markets Australia and New Zealand, said funds also had to answer a number of philosophical questions to determine whether an in-sourced or out-sourced model would work best for their fund.

"It changes the game quite dramatically — if you're managing $10 billion in equities and you decide to run a billion in-house and then $9 billion outhouse — how are you able to create a really appropriate governance structure around that?" he queried.

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While some funds found they could, others were nervous, according to Martin.

"It's easy to think about it in isolation from a cost point of view," he said.

Funds could determine whether they could beat the management fees paid to external fund managers by in-sourcing, but it was harder to quantify the challenges beyond that, such as how to integrate a new team, how to provide an adequate governance structure and how to retain talented staff.

"There's remuneration challenges — you can get a cultural mismatch within a firm and then in the long run you leave yourself exposed to losing your team, because if they're successful someone back in the commercial arena can come in and pick them off," he said.