Updated with correction.
An unexpected alignment of factors has made now a very good time for pension funds to insource some or more of their investment portfolios.
The combination of a low-return environment for the foreseeable future, far closer — and often more public — scrutiny of money manager fees and a need to better control investments is fueling interest in bringing assets in-house for the first time for some plans and expanding internal management for experienced investment departments.
“The move to manage money in-house is a real trend with real dollars,” said Jeb Burns, chief investment officer of the $9 billion Municipal Employees' Retirement System of Michigan, Lansing, who is in touch with a broad network of public pension plan sponsors around the U.S.
Better internal portfolio and risk-management systems, and middle- and back-office administrative outsourcing packages from custodial banks make it much easier to run money internally than a few years ago.
But lower investment management fees often are the primary driver pushing pension fund officials to pick up a pencil and make back-of-the envelope calculations on the merits of doing so.
“Asset owners are having a hard time paying fees,” said Peter Sanchez, executive vice president and head of hedge fund services, Northern Trust corporate institutional services, Chicago, which provides back-office services for institutions managing money internally.
“The insourcing trend is definitely up,” and cost savings are one big factor because they lead to higher investment returns, agreed Virgilio “Bo” Abesamis III, executive vice president, trust, custody and securities lending group, Callan Associates Inc., San Francisco.
“If you can save even one to two basis points on your cost of investment management, that's like a performance boost,” Mr. Abesamis added.
The average cost of internal management is eight basis points compared with 46 basis points for external management, according to the most recent survey of large pension funds by CEM Benchmarking Inc.
The dollars saved by pension plans experienced at insourcing investment management are substantial, pension fund officials said.
- State of Wisconsin Investment Board, Madison, which manages the $91 billion Wisconsin Retirement System, for example, saved $63 million in external fees in 2015. SWIB gradually has increased the proportion of insourced assets to 59% of total assets in 2015 from 51% in 2011.
- Michigan Department of Treasury, Bureau of Investments, which manages the $60 billion Michigan Retirement Systems, East Lansing, saves a net $20 million to $30 million per year through managing 35% of the total portfolio internally.
- Employees Retirement System of Texas, Austin, pays fewer than 10 basis points for investment management and administration of the $25 billion pension fund, with the cost of internally managed assets four times less than external manager fees. About 60% of ERS' assets are managed internally.
- Michigan MERS runs its entire investment division at a cost of 1.5 basis points per year, including the 20% of assets that are managed internally. External manager costs averaged 35 basis points in 2014.