Pension funds appear to be shifting to a hands-on investment approach, bringing more asset-management responsibilities in-house to lower their costs, according to a report from State Street Corp.
In "Pension Funds DIY: A Hands-On Future for Asset Owners," State Street found that 81 percent of funds are exploring bringing more management responsibilities in-house over the next three years.
Cost concerns are driving the trend, as 29 percent of funds said it is becoming more difficult to justify the fees paid to outside managers.
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"Pension funds' desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management," said Martin Sullivan, head of asset owner sector solutions for North America.
The State Street data doesn't suggest that outside management will become obsolete, but rather that pension funds are becoming more judicious about how they select and manage outside relationships.
The largest funds have the capacity to handle multi-asset management in-house, but they are in the minority, Sullivan noted.
"The majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed," he said.
The survey examined responses from 134 defined benefit and defined contribution funds around the globe.
While pensions funds re-examine their relationships with outside managers, 77 percent are also reporting a need to increase their risk appetite to boost lackluster returns.
That means a greater push into alternatives, as equities and fixed-income "may look pricey."
"Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives," according to the report.
The report comes as Boston-based State Street revealed the Justice Department and the SEC have subpoenaed the firm for information on its relationships with consultants and lobbyists who solicit business from public pension plans, according to Bloomberg News.
State Street is the third-largest custody bank with $28.5 trillion custody and administration. It also manages $2.4 trillion of investors' assets.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
