Asset owners have a considerable appetite for building internal capabilities to manage their assets, but progress has been incremental and unlikely to threaten top active money management firms.
More than 80% of 134 asset owners surveyed by State Street recently expressed an interest in expanding their internal management capabilities in the next three years, but there's little evidence of a big push in that direction, said Richard Young, a senior vice president with State Street, at a panel discussion Tuesday for Pensions & Investments' Global Future of Retirement conference in New York.
Instead, the same asset owners indicated plans to increase allocations to areas — including alternatives and emerging or frontier markets securities — where internal management would be a considerable challenge, Mr. Young said.
With the tug of war between wanting to chase alpha and control costs, the move to expand internal management capabilities is likely to take a lot longer than the one- to three-year span specified in State Street's survey, Mr. Young predicted.
Still, pressure to pursue that goal — to achieve better alignment of interests — should remain strong.
A growing focus on fees is naturally prompting asset owners to think about how to better access investment opportunities by getting closer to the underlying assets in which they invest — essentially removing some of the links in the chain of finance, said Ashby Monk, executive director-global projects center, at Stanford University.
That focus is leading some pension funds to become managers — the limited partner to general partner transition, said Mr. Monk, who predicted there's more scope for asset owners to find “innovative, increasingly creative” ways for pension funds to organize their operations.
Eduard Van Gelderen, the CEO of APG Asset Management suggested that trend will still leave room for talented, opportunistic external managers. For example, APG has built smart beta capabilities internally but where there's more complexity — for example, in areas where alpha opportunities might emerge for a limited span of two years or so — it makes more sense to hire external managers than to build an in-house team, Mr. Van Gelderen said.