The key criterion to determine whether pension funds build internal investment capabilities or use external asset managers should be asset allocation strategy over a focus on cost, experts have said.

Speaking at the IPE Conference & Awards 2014 in Vienna, chief executives from leading pension funds said cost-based decisions were inappropriate for deciding how to manage key asset management functions.

Christian Böhm, chief executive at €4bn APK fund in Austria, said the major factor would be the type of asset allocation model operated by the fund.

“If you have a dynamic asset allocation model, you need in-house capacity to make decisions,” he said.

“Another factor is the knowledge base you have. If you force your investment professionals to follow market developments, they are more captured on what is going on.

“The cost issue is not the most important factor – for us, the decision was based on how we can run our model and build up the knowledge base.”

CIO of the UK’s Coal Pension Fund Stefan Dunatov supported this and said the real competitive advantage to in-house capabilities was the ability to time investment decisions.

“It doesn’t matter how big or small a pension fund is, [with in-house skill], your real advantage is time,” he said.

“Being able to ride out the bad times and spot the good valuation, that to me is the biggest advantage and not being sucked into a decision based on whether a team is one and half basis points cheaper than an external manager.”

Mike Boychuk, chief executive of the Canadian Bell Pension Fund – which, after a significant strategy switch in 2009, reassessed its in-house and external expertise – also supported the view. 

The mature fund shifted around 75% of assets into a liability-driven investment strategy mostly accounted for by fixed income holdings.

Boychuk said, as a result, the fund began to outsource all non-fixed income investments retaining internal management for its LDI strategy in-house.

“First and foremost, our direction was making sure we had the right structure for us,” he said.

“Making an in-house team gives you greater control over your assets. Once you give it to an external manager, it is gone, and the control you have is as well.”

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