Shifting trends create conflicts of interest as readily as alignments of interest.
The superannuation industry began three decades ago running the bulk of operations internally, then increasingly appointed external parties (asset consultants, fund managers). Fast-forward to today and many of those activities are being brought in-house again, largely through in-house funds management and larger advisory teams.
Assumptions, ideology and evidence have all played a role in those trends over the decades, but just what is in members’ best interests today?
In-sourcing benefits and challenges
In recent years, a rising number of industry funds have brought asset management duties in-house. Research house SuperRatings estimated that nearly 60% of funds were managing some assets in-house, according to a 2016 Centre for International Finance and Regulation (CIFR) paper.
It allows large funds to lower costs by retaining their scale advantages: in-house asset management has a fixed cost versus percentage-based investment management fees while fund managers also have capacity constraints. Funds also expect higher net returns, competitive advantages such as greater access and control and better alignment with the fund’s objectives, according to the CIFR survey.
But there are challenges. Nearly all funds interviewed (95%) saw staff management as an issue (the ability to attract the ‘right’ people, remuneration, culture), while other issues cited included governance issues of in-house teams and the challenge of managing behaviours, particularly around culture.
It is recognition that no one approach is guaranteed to deliver the best outcome for members.
A hybrid approach
Funds recognise that there are benefits to in-sourcing and out-sourcing activities but, whatever their decision, they will need to document and prove that their decisions are in the best interest of members.
We’ve previously referred to a hybrid new retirement consultant, encapsulating a best-of-breed approach using external and internal skills. In practice, this has many different iterations.
For example, we’re seeing rising interest from super funds for innovative risk management solutions including dynamic hedging approaches often found within the insurance industry. We’re also seeing growing interest in various opportunistic expressions of convexity and tail risk insurance trades.
Funds want more efficient access to alternative risk premia such as volatility. How funds implement this is evolving.
For example, funds with an internalised trading operation that want to build their own systematic dynamic asset allocation (DAA) overlay can use Milliman’s team to independently assess their strategy. This can involve:
- Independent due diligence for the fund’s board of directors
- Extensive research including attribution analysis, cost/benefit comparisons and systematic rules validation analysis
- The potential to employ Milliman’s derivative execution platform, which is designed for rules-based algorithmic trading and can help tackle potential latency issues related to various systematic strategies
Milliman’s global trading team has already implemented capital markets trading on behalf of large institutions before helping them build their own internal trading capability. These new internal teams continue to handle capital markets trading using Milliman custom software.
Milliman is one of the largest derivatives traders in the world and executes various instruments including exchange-traded futures, options and more complex bank products for global institutions, but these examples mark a different type of relationship.
Given Milliman’s capital markets expertise, actuarial rigour and technology development prowess, we see many hybrid opportunities to work with super teams to solve their problems.
The ideological debate about building in-house capabilities versus outsourcing should always be secondary to the path that delivers the best results for members. A new hybrid approach will involve strong partners acting as an extension of internal teams, giving funds the ability to solve their problems.
Contact Milliman Head of Fund Advisory Michael Armitage at Michael.Armitage@milliman.com for more information about Milliman FRM’s ability to work with large institutions and asset managers as an implemented consultant or to help build internal capability.