Changing dynamics in investment management and related operations have driven some asset owners to add new asset classes to their internal mix, while others choose to outsource the associated investment operations.
BNY Mellon and Pensions & Investments conducted a survey to examine the decisions that asset owners face when structuring an asset management model. One fundamental decision involves whether asset management and related operations are handled internally or externally.
Of those asset owners that have brought asset management in-house, many believe that they can achieve the dual benefit of cost savings and better investment returns. Importantly, the decision to insource is not always combined with a desire to bring middle-office functions in-house. In fact, many asset owners view the operations of asset management as complex and technologically challenging.
The majority of the firms surveyed continue to outsource their asset management strategies and cite satisfaction with the performance of their external managers and the ability to scale their businesses as chief reasons.
Larger asset owners are more likely to manage assets in-house:
But the majority of firms will continue to outsource:
It’s a trend that may seem counterintuitive: Many large asset owners are reviewing their external asset management and considering expansion of their in-house investing capability. The reasons for this move are largely philosophical and a reaction to the lack of control many asset owners experienced during the financial crisis. For some, a tradition of in-house investment management has been expanded to include additional asset classes; for others, the lower cost of in-house management has contributed to better risk-adjusted returns over time.
Internal Management by Asset Class
Cash and fixed income are the most common asset classes managed in-house across the size spectrum, though over two-thirds of large asset owners manage equities and alternatives in-house
The nature of “rightsourcing” has and is continuing to evolve, as asset owners look to develop new kinds of collaborative arrangements with outside asset managers that blur the lines between internal and external management, while at the same time seek to outsource additional middle office and technical support functions. Asset owners are identifying areas where insourcing can add value and where it can’t.
The largest asset owners are the most likely to insource investment management, with 58% of those with portfolios over $25 billion among the 245 U.S. and international asset owners surveyed managing assets in-house. The survey results indicate that of these larger asset owners, public pension funds are more likely to insource than corporate pension funds, or endowments and foundations.
Overall, a quarter of asset owners that insource manage over 50% of their portfolio in-house. Cash and fixed income are the asset classes most likely to be managed internally: 79% of asset owners that insource manage cash and 80% manage fixed income. For the largest institutions, equities and alternatives are also common areas for insourcing, with 79% of asset owners with $25 billion or more managing some equities and 68% managing some alternatives internally.
“Insourcing investors are looking for a more transparent and holistic view of their portfolio, whether part or all of the assets are managed in-house.”
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Dec. 31, 2015, BNY Mellon had $28.9 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.
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Managing Director, Head of Public and Not-for-Profit Global Client Management, BNY Mellon
Philip Falivene is Managing Director, Head of Public and Not-for-Profit Global Client Management at BNY Mellon. In this role, Phil has leadership responsibility for a team of client executives responsible for the management and development of relationships with strategic clients and prospects delivering the breadth of the company’s investment management and investment servicing insights and solutions. Clients are represented by state and local government agencies, municipalities, endowments, public funds, and other non-profit institutions.View Profile