Perspectives 2019 2020 Public Sector

Citi Perspectives 79 Asset Owners’ Appetite to Insource The drivers and considerations to bring investment management in-house David Walker  Matthew Bax  Sid Newby  Shivani Arora Asset owners are increasingly taking control of their investments by managing them in-house. While portfolio management is a front-office role, asset owners should implement the supporting infrastructure and capabilities, as insourcing has implications that stretch to the middle and back-office layers and beyond. The Asset Owner’s dilemma The asset owners’ business model is more complex than ever before. In today’s continuing low returns macro environment, public sector asset owners — pension and sovereign wealth funds, central banks and insurance funds — can no longer afford to leave money on the table. In the search for yield, asset owners are diversifying their portfolios: it is no longer profitable for asset owners to hold traditional and passive investments managed by external managers and simply benchmark performance against market beta. Now asset owners seek a mix of public and private assets across different strategies and geographies, with management split between in- house and external portfolio managers. As the business model becomes more multi-faceted, asset owners are increasingly taking control of their investments. In a global survey of 485 investors that held a combined $8 trillion of assets, almost 20% had increased the proportion of assets managed internally in the last three years and another 10% plan to in the following year. This insourcing trend is even more apparent among larger firms — 45% of firms, with assets above $25 billion, manage a higher proportion of their assets in-house compared to three years ago. 1 Furthermore, a deep dive of the world’s five largest sovereign wealth funds reveals that they collectively manage half of their assets internally, almost $2 trillion. 2 Largest five global sovereign wealth funds: Proportion of portfolio internally managed Rank Fund Country Fund Value (USD) Proportion of portfolio internally managed 1 Government Pension Fund Global Norway $1,073 billion 96% 3 China Investment Corporation China $941 billion 37% 2 Abu Dhabi Investment Authority United Arab Emirates $697 billion 45% 4 Kuwait Investment Authority Kuwait $592 billion 5% 5 Hong Kong Monetary Authority Investment Portfolio Hong Kong $509 billion 66% 1 bfinance — Asset Owner Survey: Innovations in Implementations, September 2018 2 Official annuals reports for respective sovereign wealth funds, as at 2018 fiscal year-end