Treacherous markets fuel the boom in investment team outsourcing
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The market for outsourced investment teams is âhotâ as the outlook for future returns darkens, with capital recipients increasingly delegating entire multi-billion dollar mandates to outside fund managers.
Large corporate or public pension plans, endowments and foundations typically have internal investment divisions and only give specific mandates to external fund managers.
However, small entities that do not have the size to employ expensive in-house investment teams often outsource all management to investment consultants such as Mercer or asset managers such as BlackRock, who have specialized âoutsourced investment managersâ or OCIOs.
The OCIO industry is now growing in size and scope as large corporations and institutions outsource pooled funds to these specialists given the increasingly dangerous investment landscape.
âIt’s hot,â said Michelle Seitz, managing director of Russell Investments, an asset manager with a large OCIO company. âThere is a lot of activity. It is one of the fastest, if not the most dynamic spaces in the industry.
Globally, there were approximately $ 2 billion in assets under management with full or partial discretion by OCIOs at the end of March 2020, according to an annual survey by Pension & Investments, an industry magazine. This is nearly double the size of the industry in 2013, and its growth is accelerating.
Industry executives say the company has become increasingly competitive. Fees can vary widely – both in scale and structure – but are generally healthy and rising at a time when many other areas of the investment industry are under pressure. As a result, big banks, fund managers and dedicated OCIOs thrive to compete for mandates.
âIt’s such a competitive battleground,â said Stan Miranda, president of Partners Capital, an OCIO company. âYou have the banks, you have the consultants, you have the asset managers and you have specialists like us. “
Although the economics vary from institution to institution, the typical OCIO mandate is generally less than $ 1 billion, a size for which it often does not make sense for an academic foundation or small fund. pension to hire its own investment staff.
More than half of all OCIO mandates in the United States are under $ 100 million, according to Cerulli Associates. Russell Investments estimates that 76% of institutional investors with assets of less than $ 10 billion have yet to outsource their investing activities, leaving plenty of room for the industry to grow.
However, there has also been a recent wave of warrants for $ 10 billion or more, according to industry executives, and many expect the trend towards larger OCIO deals to accelerate.
âThe trend towards outsourcing will only accelerate,â Larry Fink, managing director of BlackRock, said on the asset manager’s recent earnings conference call. âMore and more clients are looking to outsource their entire portfolio as regulations intensify, operating costs are reasonable and investments become more complex. “
BlackRock recently won a $ 30 billion OCIO mandate to run the British Airways pension plan – the biggest such record in the UK, according to the asset manager – and Fink predicted it would become “a catalyst for more transformational change in the industry â.
John Waldron, president and chief operating officer of Goldman Sachs, recently said his asset management division also sees a âvery strongâ pipeline for OCIO services.
Industry executives say a key driver is increasingly gloomy return expectations for the coming decade, given high valuations across all areas today. While growth markets have inflated the size of many capital pools, the more delicate outlook makes it tempting to outsource investment management to larger specialists.
Based on long-term trends in stock market valuations and subsequent returns, researchers at investment group AQR estimate that a traditional portfolio split between 60% stocks and 40% bonds will yield 2.1% per year. within the next 5-10 years after inflation.
GMO, the asset manager founded by Jeremy Grantham, is even more bearish. Based on current market developments, he predicts that all major asset classes, with the exception of some segments of emerging market equities, will lose money in real terms over the next seven years.
While the vast majority of institutions with $ 10 billion or more have in-house investment teams to manage the money, a growing acceptance of outsourcing at all levels is likely to change that, say CEOs. sector.
Interest in hiring OCIOs is particularly strong among corporate pension plans – where managing sometimes large pools of money can be an embarrassing distraction from the primary goal of the business – but Retirement governments, foundations and university endowments are also increasingly looking to do so, industry executives say. .
A lack of internal resources and “better risk management” are the main reasons for using an OCIO, according to a 2020 survey by the Chief Investment Officer, an industry magazine.
âIt’s not their core business and they don’t have all the tools they need in-house to maximize opportunities,â Seitz said. âIn a low interest rate environment, making sure you are able to meet your long-term commitments has become more complex.
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