Driven by cost pressures, liquidity needs, and a push for greater control, institutional investors are increasingly managing public market assets like equities, bonds, and cash internally. Northern Trust’s latest Asset Owner Peer Study finds cost, customization, and liquidity are driving this trend, signaling a new era in how institutions balance efficiency with control. Traders Magazine sat down with Grant Johnsey, Head of Market Solutions, Americas, at Northern Trust Banking & Markets, to unpack the findings and discuss how insourcing is reshaping the relationship between asset owners and asset managers.
What are the key findings of the report?
When we surveyed institutional asset owners earlier this year, we were surprised by the prevalence of in-sourcing asset management responsibilities. While private market and alternative strategies remain largely outsourced, there is a growing trend to internally manage public market investments, including equities, bonds, and cash. For example, 39% of the institutional investors responding to our survey said they “mostly insourced” management of public equities, which was a larger percentage than I expected and equivalent to the percentage who responded they “mostly outsource” equities. Management of cash was even more lopsided, with 44% responding that they primarily manage cash in-house compared to only 21% who responded that cash management is mostly outsourced to third parties.
What are the key drivers behind the growing trend of institutional asset owners insourcing public market strategies like equities, fixed income, and cash?
Liquidity emerged as a top theme amongst respondents to our survey, another surprise given that markets have not had a major liquidity scare for some time. One driver is ever larger allocations to less liquid investments in private markets. An asset owner with internally managed cash and public market assets can tap their liquidity with immediate effect—even intraday. This immediacy is not available with third-party managed portfolios that may be valued at end of day with a T+2 settlement, or which require advance notification or a reconciliation before liquidating.
Cost efficiency, of course, emerged as a key theme. Our study found that 56% of asset owners listed fees as a top three factor when choosing investment partners. Customization also emerged as a theme, especially for those with ESG goals or tactical views on the market. Cost and customization are also linked: it is usually less costly to implement bespoke portfolio adjustments internally than it is to pay a third party to do so.
How is the shift toward insourcing reshaping the traditional asset owner–asset manager relationship, particularly in public markets?
This question is timely, as the market is adapting as we speak. Many of the asset owners we see adopting in-house management strategies often still work closely with third-party managers, but the nature of the relationship is evolving. For example, I am beginning to see more demand from institutional investors to buy portfolio models, which has more commonly been associated with wealthy clients and RIAs. These model portfolios are then implemented internally, which achieves a number of objectives for the asset owner as previously discussed, including cost efficiency, better control, and customization. Quant-active equity models are a common example in my experience. If this trend of insourcing continues, I suspect asset managers will have to further adapt their business models.
What are some of the biggest operational and technology challenges institutions face when transitioning trading, FX, or middle-office functions in-house?
When an asset owner begins to manage assets internally, they must understand and build the downstream process. The good news is that there are many consultants available to assist as well as outsourced operational providers, such as Northern Trust, that can take on much of the burden. When I advise our clients, I always start with a schematic of the workflow, which maps out the process while highlighting the key decisions to be made. The first gap you’ll see on the schematic is the need for an order management system (OMS), which helps connect investment decisions with execution and operations. Working from there, the operational steps are fairly logical and easy to solve for. The operational and tech framework seems daunting, but it is imminently solvable…otherwise, we probably would not have more than 15,000 SEC-registered investment advisor firms in the US today!
How are leading asset owners balancing the desire for greater control and cost efficiency with the need for scale and resilience in their internal models?
Some asset owners view greater portfolio control as enabling better resiliency. Those goals are not mutually exclusive because when outsourcing, you are simply relying on someone else’s resiliency planning. When managing internally, resiliency can be further enhanced by selecting the right partners and attaining a location-neutral operating environment, whereby normal day-to-day activities can be supported if physical offices are not accessible. Achieving scale can be a problem, especially for smaller asset owners, and that is another reason to partner with a service provider that has global expertise and scale.
Do you see this trend toward insourcing continuing across all segments of asset owners, or is it more concentrated among larger, more sophisticated institutions?
I would suggest that larger asset owners – those with $50 billion or more in assets — are driving this trend thus far. Smaller asset owners can also benefit from insourcing, especially given their lack of pricing leverage compared with larger firms. However, with fewer staff and perhaps more shared duties among investment professionals, there may be fears that insourcing some investment management functions is not achievable because of operational challenges, lack of scale, or worries on resiliency. But as already discussed, these hurdles are less daunting than they appear, and partners are available to help navigate this path. And we are starting to witness smaller to mid-sized asset owners beginning to insource investments.
As investment models evolve, how are asset owners rethinking partnerships—with custodians, technology providers, and trading platforms—to support internalization without overextending resources?
Broader partnerships are likely to continue to proliferate. And by broader partnership, I mean fewer but deeper relationships between an asset owner and the partners they choose to support their business. The increasing importance of partnerships reflects a strategic move towards more complex investment management strategies broadly—managed internally or by third-party firms—while partnering with service providers to handle operational complexity.
