Internally-managed pension funds in the UK have clearly outperformed pension funds using external managers, according to a report from State Street Investment Analytics.
The report, Lessons from internally managed funds, found that internally managed funds produced annual returns of 8.8% for 25 years to the end of 2011, compared to 8.3% for their peer group, the All Funds Universe. This outperformance was attributed to the ability of internally managed funds take a longer term view than externally managed funds, as well as lower costs.
The findings are based on 21 internally-managed funds in the UK, which are defined as funds where than two-thirds of assets are run internally. The average size of these funds was £8 billion, larger than the average fund size of £1.7 billion in the WM universe. On average, the funds had over 20 in- house investment professionals, with local authorities running smaller than average local authority fund teams ranged in size from 8 to 22, with an average of 13, compared to a range 7 to 51 (average 30) for corporate pension funds.
In terms of the costs, internally- managed funds averaged a cost of 0.1% a year compared to 0.3% a for the average externally managed fund. Looking at different asset classes, internally-managed produced better UK equity returns, by 0.2% a year over 25 years, at a lower level of risk than funds, and also had a lower annual turnover. Internally-managed funds also outperformed by 0.4% for equities and by 0.8% for alternatives, but their results were in line with externally-managed funds property.
On pay for in-house investment staff in the UK, the report found that while private sector in-house staff are paid at the same levels as their equivalents at external managers, this is not the case public sector staff. Instead, public sector schemes are able to retain skilled professionals at acceptable costs because of the location factor. “For an investment professional working in and the centre of England, where all the internally-managed local authorities are based, there are fewer opportunities than in London, and salaries will be competitive with competing employers,” the stated.