Smaller pension plans, nonprofit educational endowments, and charitable foundations frequently outsource the oversight of investment policy development, asset allocation, investment manager selection, and other noninvestment functions to an outside entity, Cerulli notes in the second quarter issue of “The Cerulli Edge – Institutional Edition.”
Managers, investment consultants, and dedicated OCIO providers responding to a recent Cerulli survey expect outsourced assets (client assets in which they have some discretion) to expand 33.6% on average in the next three years (or a median growth rate of 22.5%). Many outsourced advisers tell Cerulli a number of factors are driving more institutional clients to embrace an outsourced solution.
According to the survey, 69% of respondents cite a lack of internal resources as the top reason their clients engaged an OCIO. Outside of the larger pension plans and endowments with internal staff and investment resources, many institutions cannot retain the personnel or afford the technological expertise to respond to the global financial markets’ speed and complexity.
Nearly two-thirds (63%) of Cerulli survey respondents report their clients’ desire to transfer more responsibilities to another entity. While it is extremely rare for an institution to completely cede fiduciary duty, an increasing number of boards feel overwhelmed by their oversight responsibilities. Some say they don’t have the time to properly administer plans, they lack the knowledge to address complex investment issues, they are being pulled away from the original mission of the institution, or some combination of these concerns.
For these reasons, many OCIO firms tell Cerulli they see signs of OCIO moving “up-market,” to larger institutions in corporate defined benefit (DB) and non-profit segments, such as endowments and foundations. Traditionally, smaller institutions (those with less than $100 million in assets) sought outsourced services, and this is still largely the case, according to Cerulli survey data. However, approximately 5% of managers report corporate DB and non-profit mandates (4.6% and 6.1%, respectively) in accounts between $500 million and $1 billion, a fairly large size for an OCIO account, Cerulli notes.
According to the report, as boards seek to place more discretion and responsibility with an outsourced provider, they expect OCIO managers to bring additional capabilities and resources to the table. With more boards embracing objectives-based measures of success (e.g., returns above a foundation’s minimum level of spending), there is greater demand for OCIO managers with multi-asset-class capabilities, a demonstrated record of successful asset allocation, and the ability to deliver a total portfolio approach customized to the institution’s objectives. Multi-asset-class capabilities require significant investment resources and experience, including investment platforms able to offer alternative investments, according to Cerulli.
Another trend moving OCIO up market is the demand for outsourced liability-driven investing (LDI) services from corporate DB plans. With many corporate plans derisking and attempting to better match assets and liabilities that are unique to each plan, plan sponsors seek OCIO managers with specific skills, Cerulli says. These competencies include long-duration fixed-income expertise, quantitative skills to accurately assess plan liabilities and construct derisking glidepaths, and management of derivatives overlay strategies to more accurately hedge liabilities.
Many institutions employing an OCIO today have maintained a relationship with that provider for five, 10, or more years. Cerulli says some institutions are re-evaluating their relationships and seeking more customized and comprehensive services—all at lower fees.
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