More Organizations Considering Investment Outsourcing

According to the survey, 31% of those surveyed with assets in the $501 million to $1 billion range are also considering outsourcing.

A major reason for delegating some or all fiduciary responsibility for investment decisions relates to the need for speed and sophisticated decision-making in a volatile, fast-moving market environment.

Tom Murphy, U.S. head of fiduciary management at Mercer, told PLANADVISER that a number of factors are leading committees to consider investment outsourcing. He said that typically committees only meet once per quarter, which means they cannot execute decisions in a timely fashion. He also mentioned that most committee members are not investment professionals; therefore, it would be a lot more straightforward and efficient to give the investment responsibilities to an expert.

“We believe the trend to investment outsourcing will accelerate due to a combination of factors: volatile market conditions, the desire to take faster and more considered investment decisions, and the challenge of staffing to adequately monitor performance and risk in real time,” said Murphy.

Some 27% of respondents to the Mercer survey also state that they have missed investment opportunities due to the time it takes to make or implement decisions, a 6% increase from a similar survey that Mercer conducted in June 2010. The largest impediments to delay in decision-making have been market volatility (26%) and not enough expertise (20%). The largest impediments to executing asset allocation and manager changes have been insufficient staff (18%) and market volatility (15%).

As market conditions continue to be challenging, one-third of respondents take more than three months to make a decision about asset allocation or manager changes, and 11% take six months to a year. Lack of speed of execution, once a decision has been taken, compounds the problem. Nearly half the respondents to the survey (44%) take from one to three months to execute asset allocation or manager changes. One-in-five (21%) take more than three months to execute a decision.

Murphy said this happens because there is a lot on the committees’ agenda. Based on the complex environment, many committees are hesitant to make any decisions. They are unsure if they have all the information they need to make an informed decision, and they fear they might make the wrong decision; therefore, it takes a long period of time for a committee to execute a decision on asset allocation.

For pension plan sponsors, 2012 is shaping up to be a challenging year in which there is increasing pressure for speed and quality of investment decision-making. Since the first of the year, faced with major pension deficits and the requirements of the Pension Protection Act (PPA), many major companies have announced significant increases in planned contributions to pension plans. Mercer expects to see additional announcements of large cash contributions to plans as companies file their I0Ks over the next few weeks, and expects, for many, this burdensome cash contribution requirement will carry into 2013. 

Murphy added that although the markets have been quite good, the only way companies can make up the additional deficit is to make additional contributions.

“In the corporate sector, companies are facing a dramatic increase in balance sheet deficits in 2012 and beyond, increased income statement expense, and a sizeable increase in cash contributions to their pension plans,” said Murphy. “For endowments, foundations and hospitals, the problem is often the complexity of many investment decisions and a lack of resources. Given these factors, a delegated option should look very attractive to a growing number of boards and investment committees.”

Staffing may be a particular challenge for all respondents. Half of the institutions surveyed have either one or no full-time staff managing investments, and 89% of the respondents have no plans to change staffing levels in the coming year.

Mercer’s survey was conducted in November, 2011 among 100 organizations with institutional funds. Approximately 57 of these were corporations, 25 were endowments, foundations or hospital systems, and the remainder included professional organizations and government bodies.