CEM study reveals in-house savings

A defining characteristic of leading pension funds globally is the cost savings garnered from in-house investment management. An organisational design study by CEM Benchmarking has revealed that “leading” funds have an average of 49 per cent of assets managed in-house, and yet the internal staff and non-manager third-party costs make up only 15 per cent of total investment costs.

The study examined the organisational design of 19 of the world’s largest funds with average assets of $90 billion and found that these funds spend an average of 46.2 basis points on external management, compared to 8.1 basis points on internal investment capabilities.

Partner at CEM Benchmarking, Mike Heale, said the funds with internal management platforms are better performers after cost, and this is largely driven by lower costs of internal management.

The biggest cost savings were from internal private equity, with the median cost of internal management for private equity 25 basis points, while for external private-equity management the median cost was 165 basis points.

For fixed income the difference was 3 versus 18 basis points, for equities 10 versus 40 and for real estate 21 versus 75 basis points.

Heale says in the past 10 years there hasn’t been a great deal of internal private-equity management, but he believes the industry is on the cusp of change.

Sponsored Content

According to CEM Benchmarking vice president, Jody McIntosh, the extent of in-house investment management was a driver of many organisational aspects, including the number of staff and the compensation.

“The number of staff at these 19 funds ranged between 20 and 647 full-time investment staff. This is a big variation, and it was interesting to see what was driving that was internal assets under management.”

CEM conducted a regression analysis that revealed 70 per cent of the variation in the number of staff was due to internal management.

McInstosh says most funds plan on increasing the number of staff over the next three to five years, some by as much as 10–20 per cent as they increase internal management.

There was also a clear relationship between the number of front and back-office staff, with 1.7 people required in the back office for every member of front-office investment staff.

“The number of front-office staff is the best predictor of governance, operations and support staff,” he says.

Resource allocation matters

But it is not just the number of staff that distinguishes these funds, it is where the resources are allocated.

Large funds have a substantial number of full-time staff dedicated to asset allocation and risk, with an average of 13 of 135 staff allocated to this area.

A survey of these funds strategic objectives revealed that risk management was the number one priority, followed by organisational leadership, culture, talent and asset allocation.

McIntsosh says the number of internal staff was also a clear indicator of the compensation paid to the senior staff.

“The best predictor of compensation for the highest paid five staff was the number of full-time staff in the organisation. The higher the number of people, the higher the compensation,” she says.

Of the funds surveyed, the highest compensation was in Canada, followed by Europe, US and Australia/New Zealand.

Average salaries at investment departments in Canada was $536,000, in Europe it was $246,000, for the US $148,000, and in Australia and New Zealand $139,000

The average salary of the top five investment staff in Canada was $1.5 million, in Europe $720,000, in the US it was $372,000 and in Australia $297,000.

Heale says the study is part of global leaders program introduced by CEM last year, which looks at understanding the common characteristics of the funds, including big internal operations, sophisticated asset mixes, high need for performance-management information and high allocation to private markets.

The organisation design study is the initial piece of research into which CEM plans to drill deeper.

One response to “CEM study reveals in-house savings”

  1. Salvatore Manual Rodriguez

    OMG… I should get a job at a pension fund!!

    …and who thought working for a pension fund wasn’t sexy??

Leave a Comment

Sort content by

The benefits of US regulatory reform

US regulatory reform, such as the SEC’s plan to restore the uptick rule and the Volcker rule to restrict proprietary trading, are a step in the right direction for those advocating transparency. Amanda White explores the story with the chief executive of Principal Global Investors, Jim McCaughan, and head of research, analysis and strategy at

CalPERS considers new asset class classification

CalPERS is considering doing away with traditional asset class classifications in favour of classifying assets according to fundamental characteristics in a bid to provide a better understanding of portfolio risks and performance drivers and so move to a more effective portfolio construction and risk management framework. Amanda White reports. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Risk parity becomes bittersweet flavour of the month (2)

  “Understanding a program’s results involves attributing relative performance to active management, identifying any tactical asset allocation decisions and assessing mechanical factors such as leverage costs. “For most investors implementation of a leveraged strategy would likely require the retention of a beta overlay manager to execute and maintain the desired leveraged systematic exposures or an

Selective opportunities in private markets: Wurts

Private market investors should focus on distressed debt and to a lesser extent secondaries, according to the annual private equity outlook by consultant Wurts Associates, which contrary to other industry observers believes value can be added through top down analysis of the sector. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Strategic implications drive climate change study

The 14 institutional investors participating in the climate change strategic asset allocation study, a collaborative between Mercer, Carbon Trust and the IFC, will all receive individual portfolio scenario analysis of how physical and policy climate change-related events could affect their portfolio at an asset allocation level. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

CalPERS sharpens risk, liability tools

After watching the simultaneous declines of its market value and funded status during the financial crisis, the $204.8 billion CalPERS will conduct a full review of the methodologies underpinning its asset liability management (ALM) process. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Previous