When to Internalize or Outsource Investment Decisions

Achieving desired outcomes through balancing internal and external portfolio management

When to Internalize or Outsource Investment Decisions

Achieving desired outcomes through balancing internal and external portfolio management

November 2022

Our recent white paper, The Evolution of Public Asset Owners, revealed that portfolio management approaches vary significantly across asset owners, depending on in-house expertise and the asset class in question. While the industry mainly suggests a one-directional trend towards internalization of portfolio management, we identified a more complex picture.

The decision regarding internal versus external portfolio management is instead highly dynamic. A majority (68%) of the asset owners we surveyed plan to change the balance between internal and external portfolio management over the next five years – 18% want to further internalize, 35% want to further externalize, and 15% want to do a combination of both.

Figure 1: The majority of public asset owners will change their mix of internal and external portfolio management

Figure 1 - When to Internalize or Outsource Investment Decisions

Source: BNY Mellon/OMFIF operating model survey 2022

To explore these dynamics further, we examined the portfolio management behavior of the top 75 global asset owners with whom BNY Mellon engages. Key observations within this asset owner cohort include the following:

  • 60% of asset owners apply a hybrid portfolio management model. Within this cohort, most pension funds and sovereign wealth funds adopt a well-distributed approach towards internal and external portfolio management (e.g., a 50/50, or 60/40 model).
  • The U.S. has the highest percentage of asset owners who exclusively use external managers (50% of total) – all U.S. public asset owners outsource the management of their private assets.
  • It is generally accepted that the majority of global central banks prefer an internal portfolio management model — however, where they invest outside of government bonds, over 90% use an external manager.
  • All sovereign wealth funds apply a hybrid model and have set up at least one internal investment team to manage Alternatives.

Figure 2: Top 75 asset owners’ portfolio management models, by region

Figure 2 - When to Internalize or Outsource Investment Decisions

Source: BNY Mellon

What Are the Main Drivers to Internalize or Externalize?


Our review emphasizes that there is no “one size fits all” when it comes to choosing between internal and external portfolio management. In fact, some of the choices being made can seem contradictory at first glance. For example, some asset owners use cost reduction and expertise as key arguments for an internal solution, while others use the same criteria to appoint external managers. We find that choices are ultimately guided by the decision makers’ individual preferences, as well as by an institution’s inherent strengths and weaknesses. The latter are largely influenced by scale, stage of evolution and talent considerations.


The most common decision criteria for internal or external management are outlined in the table below.

  Internalize Externalize
Cost More cost-effective than paying (active) external management fees, subject to reaching a minimum viable scale Low-cost exposure for passive mandates
Investment outcomes Ability to customize (long-term) investment objectives (e.g., investment in local/domestic Infrastructure) Benefit from the scale and expertise of (global) specialists to achieve superior return outcomes
Oversight Immediate oversight and the ability to tailor the controls framework ‘Off-the-shelf’ performance and risk reporting 
Talent Creates internal expertise that can help advance (public) policy goals related to national or regional growth Access to a global talent pool 
Operations Optimize processes for one (internal) investment model – reduce interaction with possibly conflicting external manager processes Transfers operational risk of running an in-house operating platform to a third party – and avoids organizational complexity more generally 
Environmental, Social and Governance (ESG) Better alignment and compliance with asset owner’s own ESG objectives Direct access to recognized ESG fund solutions with associated disclosures

Key Practical Considerations for a Successful Execution 


Dynamically adjusting internal and external portfolio management presents multiple challenges and opportunities. Our research reveals the following key practical considerations to drive a successful execution:


1. Build adequate operating models for internal management
To successfully manage assets in-house, asset owners need to set up an adequate portfolio management infrastructure. This involves the selection of an Order Management System (OMS), connectivity to internal and external data sources, robust middle office functionality, and access to pre- and post-trade analytics. In addition, some of the more sophisticated asset owners are contemplating an Investment Book of Records (IBOR) alongside their traditional Asset Book of Records (ABOR) to allow internal portfolio managers access to timely investment information.

Our research reveals that over one-third of asset owners struggle with the operating and administrative setup when adding new asset classes to their internal portfolio. This emphasizes the need to consider the right operating model alongside investment model decisions – it cannot be an afterthought. 

2. Share expertise amongst peers

Anecdotal evidence suggests that asset owners are increasingly interested in engaging with peers to learn from each other’s experiences and share best practices. For example, BNY Mellon has recently helped facilitate a discussion between a European and African central bank in regard to insourcing equity investments; another example are client roundtables to discuss front-to-back execution options to comply with new Defined Contribution pension law reform in the Netherlands.


These peer discussions, organized by a custodian or bilaterally, are conducted in a spirit of selfless knowledge sharing, aided by asset owners’ not-for-profit mission. They are an effective means to learn fast, avoid common mistakes, and augment investment outcomes.


Peer-to-peer partnership may increasingly extend to investment expertise too. Private markets, in particular, lend themselves to shared investment expertise because of the difficulty in acquiring requisite expertise and/or the often-constrained availability of investment options locally. There have been notable recent examples of co-investments, with the trend expected to continue (e.g., APG from the Netherlands and GIC from Singapore co-invested in a European hospitality business1; the GLIL infrastructure fund in the U.K. is a collaboration between public pension funds, including LPPI2).


3. Attract diverse talent
In certain countries, asset owners are considered national champions of the local investment industry. This is a great gift that has enabled asset owners to compete with the private sector in attracting leading investment talent. The focus on insourcing investment expertise to foster local knowledge and boost domestic growth is understandable and has proven successful in many cases.


At the same time, the range of skills required by asset owners has expanded. They now need ESG experts, data-driven middle-office professionals and managers adept at building relationships with partner institutions. These skills have arguably been underpromoted in the past, but asset owners now find themselves competing for talent with many industries, including technology and consumer enterprises. A further focus on attracting diverse talent has become indispensable to achieve target outcomes.


Collaboration is Key


There is no single optimal model for portfolio management in the pursuit of investment goals. In all cases, however, asset owners must ensure that their chosen investment model is underpinned by a suitable operating model that delivers performance targets at a reasonable cost with appropriate governance and controls. This will include rethinking IT and systems architecture, data management, (cyber)security and asset safety, as well as analytics and reporting tools.


To achieve this complex task, asset owners should harness the full power and network of their strategic service providers, in particular their custodian. 

Whatever portfolio management model asset owners prefer, we have the tools to support them either by interacting with their preferred external managers on a day-to-day basis or by supporting their internal team with direct data feeds and analytics.


Learn more by visiting BNY Mellon Asset Owner Academy, a platform to share bold ideas, insights and learnings to help asset owners stay agile as they transform their operating models.

Anders Reinertsen

Head of Asset Owners, Americas

Carin Looi

Head of Asset Owners, Asia Pacific

Clive Robinson

Head of Asset Owners, Middle East

Marvin Vervaart

Client Solutions Manager, Asset Owners

Xavier van den Brande

Head of Asset Owners, Europe

1. “Singaporean fund GIC strikes €2.1bn deal with The Student Hotel,” Financial Times, June 21, 2022

2. The GLIL Infrastructure website


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