Internalisation has been a major theme in the superannuation industry. As the capital pool continues to grow, some funds are deciding it is valuable to bring the expertise and resources needed to manage it in-house.

AustralianSuper, was one of the first to endorse the idea: it has been shifting assets in-house since 2013. According to the fund’s annual report for 2021, about 44 per cent of assets are managed internally. It expects this figure to exceed 60 per cent in the medium term. UniSuper manages 70- 75 per cent of its total portfolio in-house. Other super funds such as Hesta, Aware and Cbus are also building their internal management capability.

It has been a gradual shift that began with the assets managers are most hopeful will benefit from internal management. Due to low returns, fixed income has not been a priority.

Michael Clavin, head of income and markets at Aware Super, says only 5 per cent of the fund’s fixed income exposure is managed inhouse, whereas its cash and short-term credit exposure is 85 per cent internal.

Gareth Apsey, Cbus’s senior portfolio manager, rates and credit, notes Cbus has brought cash in-house, along with its direct-debt portfolio – but he says the fund uses BlackRock for its fixed income exposure, which invests based on a customised benchmark. “Whether we invest internally or externally we need to be able to get a good gross return and do it at a competitive fee. Where we feel we can do it well, internal management makes sense,” Apsey explains.

At Aware Super, Clavin says fixed income is being brought into the discussion about in-house work, but it is still early days. “When we make the decision to take investment management in-house, we need to make sure we are doing so through the lend of members’ best interest,” he explains.

“Delivering scale benefits to members has always been a focus, and where we thought we could deliver scale benefits tended to be in asset classes outside fixed income,” Clavin adds. “As the fixed income market normalises, I think there will be more opportunity to deliver scale and performance benefits to members through this asset class as well.”

In a market where super fund members want to see their savings being put to good use, managers that invest to meet environmental, social and governance (ESG) mandates will have to prove themselves. If they can do so, they will be noticed.

Aware Super has so far not seen value in bringing fixed income in-house, but Clavin notes the super fund has internalised an ESG-focused bond fund. “A combination of the team’s internal management capabilities and ESG capabilities within the organisation gave us a great edge in launching this fund,” he says.

It is a similar situation at Hesta, according to Jeff Brunton, the fund’s head of portfolio management. He says HESTA’s primary reason for internalisation is to bring greater net benefit to members, but he also values its potential to allow the fund to make a greater ESG impact with its investments. “Our investment north star is to go after investment excellence with impact, and this means creating positive returns and outcomes through investing with purpose, advocating with influence and leading by example,” he says.

To this end, Brunton says Hesta plans to bring a significant proportion of its cash and fixed-income exposure in-house over the next 12 months. “Fixed income is an asset class where we can help with acceleration of the impact lens, through the likes of green bonds and deposits,” he says. “We want to work with our partners in various markets to make sure fixed income is not where poor business models get funded, versus the rigour we have in equity markets. We need sustainability impact in fixed-income markets.”

Despite plans to internalise processes, Brunton says external managers will still have a role. In addition to the parts of the portfolio they will carry on managing on Hesta’s behalf, Brunton hopes they will be able to evolve their mandates to include collaborative communication rather than straight asset management. He wants shared views on trends across asset classes.

“Some partners may see internalisation as a threat, but hopefully most of them will see opportunity,” he says. “We are looking at discerning a new hybrid model, whereby as an active asset manager with inhouse capability and a broad array of strong partnerships with the world’s best active managers, we seek to blur the boundaries between us and the outside world.”

Brunton continues: “The external managers that will thrive in this environment will be those that share insights and activities about the most important investment challenges of the day. We are looking for a true partnership approach.”