Super funds embrace hybrid management, keeping external managers in the mix

19 March 2025
| By Maja Garaca Djurdjevic |
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External managers remain essential as funds embrace hybrid management models, with only a few choosing to manage the majority of assets in-house.

Super funds have spent over a decade talking about and acting on internalisation, but external managers are still in the game, with most funds said to be favouring a hybrid approach – bringing some functions in-house while keeping experts on hand for other investments.

At a media briefing on Tuesday, Chant West’s senior investment research manager, Mano Mohankumar, noted that full-scale internalisation remains rare. Only AustralianSuper and UniSuper manage more than 50 per cent of their assets in-house, while most funds that have taken the internal route manage between 12 and 35 per cent directly, he noted.

“This does mean that external fund managers play a critical role in super fund portfolios,” Mohankumar said. “While there is internalisation, it’s a hybrid model.”

Citing Cbus and Aware Super, Mohankumar noted that both funds continue to outsource over 60 per cent of their portfolios to external managers.

“The hybrid model is what funds have chosen,” Mohankumar said.

For those looking to boost their internal capacities, like AustralianSuper, which is targeting 75 per cent of its assets to be managed in-house by 2030, he emphasised that strong governance is crucial to internalisation, warning that it’s not just about onboarding but also about ongoing scrutiny.

“Have your committee challenge you, and your external consultants too,” he said, adding that, at most funds, CIOs can’t approve new investment mandates without investment committee sign-off.

Mohankumar also warned that funds must be prepared to pull the plug when needed. “Almost every fund with internal management has terminated a mandate or multiple mandates over time.”

Discussing the motivations behind the pursuit of internal management, the researcher noted that the bar for internal mandates is often higher, as terminations can sometimes be a lot quicker.

While internalisation has helped reduce fees, funds that have internalised don’t have that as their primary motivation, Mohankumar said, adding that funds believe internalisation can boost net returns for members.

“CIOs and other senior investment staff with variable bonuses have them linked to their balanced option, the default, so it actually incentivises everyone to think about where their members are invested and provide the best outcome for them.”

Mohankumar also confirmed reports that funds with sizeable in-house management teams, and those overseeing growing overseas investments, are hiring economists to help manage their expanding portfolios.

Speaking to media, he said it’s an “important” move. “Macroeconomic research is critical and we’re seeing a number of funds building out their strategy teams.”

Late last year, Morningstar reported that all Australian Prudential Regulation Authority (APRA)-regulated funds use external managers. The vast majority of profit-to-member funds – over 90 per cent, accounting for more than $1.4 trillion in assets – continue to engage external asset consultants.

“In a sector trending inexorably toward fewer, larger super funds with increased investment insourcing, reliance on external asset consultants may be expected to decline. So far, this trend has failed to materialise,” Morningstar said.

For large funds that have chosen to insource, the research house said, private assets have been a particular focus, with a majority of the “big eight” reported to have teams managing private equity, private debt, infrastructure, and/or property.

Mohankumar agreed that this is an area funds are increasing exposure to, particularly in overseas markets.

“Unlisted infrastructure and other unlisted assets are key components of most super fund portfolios, providing an important source of value-add and diversification benefits which help provide members with a smoother return journey,” he said.

Chant West data shows funds’ growth options have lifted unlisted infrastructure exposure by 5.2 per cent over the past decade to 9.2 per cent last year, while private equity rose 1.7 per cent. Meanwhile, exposure to private debt, hedge funds and other alternatives fell 4.7 per cent to 5.7 per cent.

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