Perspectives 2019 2020 Public Sector

Citi Perspectives 81 In 2019, Abu Dhabi Investment Authority announced plans to increase investment and research-focused roles in the fixed income and treasury departments as they begin scaling up active investing strategies. 5 Five considerations for Public Sector Asset Owners looking to insource To ensure they realize the full benefits of controlling the investment process, asset owners should consider the supporting organizational, operational and governance requirements for their business model. 1) Invest in talent One of the most critical considerations will be appointing front-office portfolio managers and research analysts with the appropriate expertise to manage investments per the asset owner’s strategy. Typically, firms start by insourcing more traditional assets, such as cash and treasury bonds, and passive strategies, which are cheaper to manage and do not require specialist knowledge. Firms can also start managing domestic assets in-house if they have the existing talent. More recently, asset owners are managing complex, illiquid assets, such as infrastructure and private equity. Global firms may face recruitment and retention challenges, especially in emerging countries and popular offshore domiciles, such as Luxembourg and Ireland. Compensation will be a key consideration for recruitment — asset owners in the public sector, have limited budgets, which can affect the remuneration of investment professionals. They are competing against the private sector buy-side firms that have more flexibility and can offer higher compensation for high- quality talent. Public sector firms can attract talent by highlighting non-financial benefits, such as the fund’s vision and purpose, initiatives for community-building, work-life balance and opportunities for professional development and job security. 2) Establish governance frameworks The firm’s board and investment committee will help define the goals of internal and external investment teams. While it’s common to set up independent sub- committees to oversee day-to-day execution when appointing external managers, firms can benefit from doing the same for internal investment teams. These committees should have sufficient investment and risk knowledge to monitor the fund by setting up frameworks for performance measurement, auditing processes and authorizing investment decisions in an efficient manner. Over time, as internal teams advance, firms can rationalize third-party managers, renegotiate fees and select fewer managers for asset classes, strategies, or geographies where the firm does not have the specialist knowledge or supporting operational capabilities. For a holistic investment management strategy, firms can use internal expertise to compare external managers. As opposed to comparing external managers to their past performance, managing and overseeing internal investments teams can provide a better understanding of external managers to assess their value-add. 3) Define the target operating model Managing assets internally will necessitate a fundamental review of the firm’s supporting operating model, including the technology, infrastructure, operational processes, and partners and service providers. These areas must be considered at the outset, as without a compatible set up, internalizing investment management may not achieve its objectives. 5 Financial Times — Abu Dhabi Investment Authority in hiring push as it plans to ‘scale up’ active investing