Why the rush to internalise?

Hostplus chief investment officer, Sam Sicilia, has questioned why funds would look to internalise their investment management nowadays when fees are already low.

Speaking to Super Review, Sam Sicilia, chief investment officer at Hostplus, said when Australian Super moved in-house back in 2013, costs were a lot higher but that they had now come down in light of fee pressures and savings from mergers.

“In 2013, investment fees were up there and Australian Super worked out they could do it themselves for less. Now fees are coming down so why would you start to internalise now? Why would you bring that investment risk in-house if external managers can wear that risk instead?”

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He added that Hostplus had benefitted by being able to pick up mandates that had been terminated by Australian Super without having the HR, systems and compliance requirements of internal management.

“When a fund terminates a manager then we can step in and get a discount, it’s like being a younger sibling who gets the hand-me-downs.

“We have spent 10-15 years building relationships [with managers] so we are well positioned for the next 10-15 years.

“Increasingly, we are also creating supply and proactively seeking ways to work with trusted relationships to build capabilities where they may not have existed before. We consider external managers to be an extension of our business, an investment team in another building.”

External managers who were unwilling to negotiate discounts would have a tough time in the Australian market, he said, as there was such fee pressure on super funds.

“Fund managers have to learn that they can’t be having three or four Mercedes Benz, the times of charging two and 20 [fee structure] are gone and if they want that, then they should go to Europe. Either give us a discount or go away.”

As to whether there had been a rush by other funds to internalise and whether there could be future side-effects, he said it was unlikely any fund would ever go back on their decision. This was because of the ‘sunk cost fallacy’ where they would likely feel they had done all this work and had to make it succeed.

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