Institutional investors with significant scale and size are increasingly turning into asset managers by insourcing part of their traditional investments.
That is according to Bruce Keith, co-founder and CEO of InfraHedge, which is a managed accounts platform aimed specifically at big institutional investors.
A recent InfraHedge’s global survey showed that 81% of pension funds intend to increase the proportion of their portfolio that is managed in-house. ‘They want to rely more on their own expertise to take better investment decisions and cut costs,’ Keith told Modern Investor.
Keith believes this trend will develop globally as in many countries, such as the UK, asset owners have started to pool their assets. ‘Pension funds are generally insourcing their equity and bonds portfolios. Regarding alternatives, they are awarding bespoke mandates where they make very clear what they want from the external manager,’ he said.
When outsourcing alternative investments, Keith said, investors are showing a very strong, hands-on approach. ‘Asset owners dictate very specific criteria which need to be followed closely by the chosen managers.’
Keith believes Australian and Canadian pension funds were the first to push towards this insourcing direction, while other markets, often fragmented, are still struggling in this regard.
Speaking to Modern Investor in October, former cover star and PPF CIO Barry Kenneth said the fund had started to bring more investments in-house since he joined the company in 2013. He also explained why he's thinking of insourcing his LDIs and corporate bond portfolios.
Easy private equity
Speaking about different alternative asset classes, Keith said private equity is becoming very popular among institutional investors as he said it is quite ‘easy’ to understand. ‘Private equity is very pure in terms of alignment of interests. The only problem is that it’s largely illiquid.'
Despite some general scepticism about hedge funds, Keith said the allocation to the asset class has been growing over the past few years and is now back at pre-crisis levels. ‘Institutional investors allocating into hedge funds have changed the asset class itself, bringing more transparency and liquidity.'
‘Pension funds are approaching this space through very specific mandates which enable them to be more in control of the strategy.’
Generally speaking, Keith said he has seen a shift in risk appetite over the past six months among several institutional investors. ‘They are happy to lock their capital for a while in more illiquid strategies. They simply look for liquidity elsewhere in their portfolio.’