Custodians see opportunities for pension funds taking asset management in-house

Asset owners are seriously considering bringing their trading capabilities in-house, which could result in a shrinkage of assets managed for a fee by managers.

By Joe Parsons

Asset owners, such as pension funds and insurance companies, that are emerging as competitors for traditional asset managers are presenting new opportunities for custodians to provide enhanced data services, according to an industry expert.

Speaking on the sidelines of InvestOps 2019 in Florida, Northern Trust’s director of strategy for asset servicing, Marc Mallett, explained asset owners in North America are seriously considering bringing their trading capabilities in-house, which could result in a shrinkage of assets managed for a fee by managers.

“The impact for the asset manager is there is less assets to manage – while the pool of investable assets continue to grow, but for the pool of assets being managed for a fee, if that starts to shrink, that will really hurt the asset management industry,” said Mallett.

“For custodians, our asset owner clients are demanding services at the same level, or sometimes more services, than at the asset management level. They are starting to operate and look more like an asset management firm rather than an asset owner.”

Costs are a significant factor in this change in mindset, in which Mallett highlighted it costs pension funds 50 basis points for using an external asset manager, however for an asset owner to run an in-house equity fund it costs 17 basis points, and for an in-house fixed income fund it costs four basis points.

As pension funds opt away from asset managers and choose to their own investments, they will turn to third-party providers for real-time data and performance analytics on a daily basis.

“Now they [asset owners] are saying they need data in a near real time, cash projections, performance and analytics because they are making decisions every day about how to invest available cash, changes to portfolio allocations, which is a whole different world,” explained Mallett.

He added that for a long time in Canada, around 80% of pension funds have managed their assets in-house. Pension funds in the Nordics are also looking at how they can adopt asset management capabilities, and certain funds in the US have appointed new chief investment officer (CIOs) looking to take the asset allocation process in house.

“For a traditional pension fund who look to a custodian to aggregate their investments that they had outsourced to third-party asset managers, that was one level of service where they were not making day-to-day trading decisions – they were making monthly or quarterly allocation decisions. Now they are saying they need data in a near real time, cash projections, performance and analytics because they are making decisions every day about how to invest available cash, changes to portfolio allocations, which is a whole different world,” said Mallett.

Vincent Pasqualicchio, COO of investments at American Family Insurance, told delegates that his firm used to outsource most of its assets but recently reversed this.

“We had 70% of our assets externally managed, but we went through a business transformation process where our focus was on bringing the right technology and skill sets onboard so that we can make decisions on what we continue to outsource,” Pasqualicchio said. 

“We looked at people, processes and technology from front to back-office, and looked at the opportunities of insourcing versus outsourcing. Now, 70% of our assets have gone from being externally managed to internally managed because we think we can do it better ourselves. We are looking for that to grow to 90% over the coming months.” 

Last year, Northern Trust combined its global fund services and institutional investor group in North America to create a new asset servicing division, whereby it can combine its asset management services for asset owners demanding similar services.

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