Do-It-Yourself: An In-House Investment Management Success Story

Reducing SMA assets and DIY cash investing helps one corporate save money while boosting returns and efficiency.

Establishing an in-house investment management operation that reduces fees paid to external asset managers and gives treasury more responsibility and flexibility in investing cash may not be common outside of mega-cap, cash-rich tech companies. But the numerous benefits it brings are definitely within reach of at least some smaller companies.

• That was among the key takeaways from a presentation by a member of NeuGroup for Cash Investment at the group’s spring meeting. The session revealed that with the proper tools and support from senior executives, setting up an in-house investment management arm is feasible for companies with less cash to invest.

Reasons to do it. The member company’s decision to bring most cash investing in-house was motivated by a desire to achieve these objectives:

1. Reduce management fees.
2. Increase risk-adjusted net returns.
3. Improve operational efficiency.
4. Optimize diversification with separately managed accounts (SMAs).
5. Enhance investment compliance efforts.
6. Minimize forecast variance.

How to do it. The first step is selecting an order management system (OMS) to manage the trading of securities. The member described the requirements and focus areas that guided the process, breaking them into four categories:

1. Position/portfolio management. A centralized view of positions and portfolios; decision support tools for portfolio rebalancing; real-time indicative P&L based on pricing.
2. Order management and trade execution. A scalable, firm-wide OMS offering electronic execution workflow, improved speed to market and a firm-wide blotter providing activity visibility across desks and traders.
3. Post-trade operations. Lowering operational risk through tighter controls and agile post-trade capabilities; risk reduction by removal of human intervention; a scalable process for increased volume and asset class coverage.
4. Compliance and audit. Instituting pre- and post-trade compliance based on the investment policy statement; rigorous pre-trade compliance approval and violations management process; real-time flagging of violations; comprehensive audit trail for each action throughout the trade lifecycle.

The Bloomberg backbone. After reviewing numerous OMS options, the member chose Bloomberg’s AIM system, which serves as the backbone for the company’s in-house investment management arm.

• The member shared with peers the annual cost of the AIM OMS implementation, noting “it’s not cheap.” But he then showed a chart comparing the company’s internal expense ratio for in-house management to the average SMA fee it pays. It demonstrated at what level of assets it pays to switch.
• As a result of reducing the assets managed by external managers, the company has saved more than 70% in fees. It has not eliminated any of its SMA managers to date, the member said.
• However, going forward, he wants to start segmenting SMA managers “more thoughtfully so we’re actually using them for specific mandates not just for core bond portfolios.”

Other benefits. Bringing investment management in-house is also giving the member’s team the ability—using dashboards it built—to do deeper analysis of asset classes and allocation, relative value and risk. Also:

• Forecast accuracy has improved significantly, with a dramatic reduction in variance and an improved ability to project book yield.
• It has generated significant interest income and outperformed its benchmark in 2023.
• Operational efficiency has improved as a result of streamlining workflow when unexpected liquidity needs arise for M&A or share buybacks, for example.