Woida told PLANADVISER that her company has seen a 40% pickup in outsourced chief investment officer (OCIO) business in the last six months. The majority of the business involves full-fund outsourcing assignments, though a few clients arranged partial outsourcing to manage specialty hedge fund, private market and alternative investments.
Those numbers match up with wider industry trends. In fact, financial services consultants expect 18.5% of assets under management by 2016 will come from outsourced chief investment officer (OCIO) engagements, up from 12% in 2012, according to a research report from Cerulli Associates.
Woida points to a number of factors fueling interest in outsourced investment management. One of the most commonly cited for private DB plans is a lack of time and specialty expertise among internal resources.
“A plan’s investment committee is usually made up of some really smart and dedicated people, but they can only be part-time investment managers. They have other responsibilities within their firm,” Woida says. “We are seeing more and more plans that want full-time, active investment management at the plan level.”
In some cases, pension plans have a team of talented investment managers but lack a top-level leader with the skill to coordinate plan-wide investment efforts. Other plans turn to OCIOs to fix compliance and governance issues.
“Each individual manager might be very good,” Woida says, “but if you don’t have that top-level coach seeing the big picture, you won’t always get the outcome you want.”
One surprising reason cited by Woida is that DB plan sponsors often consider outsourcing investment management when a pension’s funded status improves—not just when investment performance lags.
“Plan sponsors are, in general, seeing much better funding levels than they were a year or 18 months ago,” Woida says. “Now, with interest rates bouncing around and ongoing talk of the Fed taper, they’re trying to figure out how to lock that in and cut out some of the market volatility. The OCIO model is one way to do this.”
The OCIO model is typically applied somewhat differently in DC plans. That’s because DC plan participants are responsible for making their own investment decisions–freeing up consulting resources to focus on governance and compliance.
Woida says the presence of an internal CIO need not preclude the outsourcing of investment functions.
“Oftentimes a CIO has many different responsibilities beyond the retirement plan,” Woida says. “In that case they seem to embrace the idea of outsourcing some partial investment functions. Instead of focusing all day on developing investment committee reports and ensuring plan governance, a CIO can focus on setting wider investment strategies.”