Who holds the decision cards at super funds?

Fund managers believe internalisation has led to internal teams having greater power over decision making than chief investment officers, according to Frontier.

A 10-year review of Frontier’s annual fund manager survey outlined how trends have changed for super funds and fund managers over the decade.

One area it noted was the impact of the decision by funds to move towards internalisation for their investment management rather than external fund managers. 

Certain funds such as AustralianSuper and UniSuper have in-house teams managing as much as 70 per cent of their assets.

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Historically, the CIO was named by external fund managers as the most influential person until 2021, when internal teams began to outrank their boss. Similarly, chief executives dropped down to least influential over investment decision making.

In 2023, 48 per cent of respondents ranked the internal team as most important and 32 per cent ranked the CIO, down from a peak of 52 per cent in 2017.

Frontier described how the “rock star persona” was now more likely to be working within the super fund than the fund manager.

The report noted the move to internalisation had occurred at a “much faster rate” than initially been expected and changed the way that investment teams are working.

A quarter of fund managers said the internalisation of investment management was a challenge for them as super funds shifted away from external active managers and towards passive players in a bid for lower fees.

Investor behaviour has also been affected by the Your Future, Your Super performance test as funds shy away from any strategies that are less aligned with traditional benchmarks and risk them not passing the performance test.

“Super funds have always wanted to outperform, but the behaviour is now much more benchmark-aware and the risk appetite for seeking alpha now depends much more on how much ‘budget’ a fund has based on previous outperformance,” the report said.

Interestingly, while there is a big push towards internalisation, this has not come without its drawbacks as 13.6 per cent of fund managers said it has changed the philosophy and culture for the worse and 17 per cent said it “is a major cost for funds and just adds to the process”, up from 3.9 per cent and 11.7 per cent, respectively, in 2014.

The number who said it has changed the philosophy and culture for the better declined from 30.5 per cent in 2014 to 10.2 per cent this year.

Frontier said: “The longer-term trends across responses could reflect the fact in 2014 the question was being answered from expectations of how internal teams might evolve, as they were just developing in many cases. 

“Whereas now the question is being answered from actual experiences with more, and larger, internal teams being active along with an acceptance of the calibre of personnel being recruited within many funds. 

“It may be that managers now accept large and capable internal teams are here to stay and their influence on the culture of the organisations they work for has well and truly taken effect. Most would agree the power balance, or relationship dynamic, between internal staff and managers has shifted considerably with the ‘rock star’ persona now more likely to reside in the asset owner organisation than in the fund manager.”