In-house management of assets is likely to generate higher financial returns, analysis of external vs. internal management of state-owned asset pools shows.
Global SWF, a firm that tracks SWFs and public pension funds, in its June update studied the relationship between the percentage of an asset owners' portfolios that is externally managed and the financial performance of the funds.
It found a "moderate negative correlation" of -13%. However, Global SWF executives warned that "there is no neat causal relationship," since taking management in-house requires skill and capacity. External managers can still play a role in generating alpha, the update said.
Across the SWFs analyzed by Global SWF, external management ranged from 5% for the Government Pension Fund Global, Oslo, to 100% for the Future Fund, Melbourne. GPFG had 11.03 trillion Norwegian kroner ($1.29 trillion) in assets as of March 31, while Future Fund had A$178.6 billion ($136.1 billion) in assets as of the same date. Future Fund is required to outsource all money management, Global SWF said.
The average percentage of investment management outsourced by SWFs is 52%.
Among public pension funds, the lowest percentage outsourced is for Canada Pension Plan Investment Board, at 10%, vs. 82% of investment management being outsourced for the Government Pension Investment Fund, Tokyo. CPPIB had C$497.2 billion ($394.2 billion) as of March 31, while GPIF had ¥177.7 billion ($1.72 trillion) in assets as of Dec. 31. The average percentage of a portfolio outsourced to external managers is 32%. "Major PPFs are still ahead of SWFs when it comes to internal investment expertise," the update said.
Global SWF said every investor is different and the proportion of assets outsourced will depend on size, asset allocation, staff and office numbers, and active vs. passive management. Outsourcing assets and investing them in active strategies are also two different things, Global SWF said, noting that Japan's GPIF increase external management to 82% in 2020 from 69% in 2010, while at the same time increasing passive allocations to 79% from 50%, "which may have seemed counterintuitive," the update said.