Large institutional investors increasingly are “insourcing” asset management to improve returns by cutting costs.
That's the opposite of the trend toward smaller institutions outsourcing some or all of their investment operations.
Among the large institutional investors shifting more assets to internal management, known as insourcing, are the $258.3 billion California Public Employees' Retirement System, Sacramento; the $27.3 billion South Carolina Retirement Systems, Columbia; and the $78.1 billion North Carolina Retirement Systems, Raleigh.
The $26.6 billion Texas Permanent School Fund, Austin, is easing out of funds of funds and into a hybrid model that pairs staffers with external managers that together run direct investments in private equity and hedge funds. Eventually, the portfolios will be 100% internally managed.
Internal management isn't new: 26% of the 200 largest U.S. defined benefit plans reported that staff managed some portion of the fund as of Sept. 30, according to Pensions & Investments' annual survey . Aggregate internally managed assets totaled $932 billion, 22% of the $4.2 trillion reported by the biggest plans.
The cost savings of switching to insourcing are significant, according to analysis of Dec. 31, 2010, data by CEM Benchmarking Inc., Toronto:
- The median cost for internally managed active equity strategies was 10 basis points, vs. 40 basis points for externally managed strategies.
- For fixed-income strategies, the median internal cost was three basis points compared with 18 basis points for external.
- For real estate, the median internal cost was 21 basis points vs. 75 basis points for external and 134 basis points for an external fund of funds.
- In private equity, the median internal cost was 25 basis points vs. 165 basis points for external and 244 basis points for external funds of funds.