Asset managers and advisory firms are benefitting from strong growth in outsourced chief investment officer (OCIO) business among a relatively untapped client bases—public defined benefit (DB) plans.
Cerulli finds OCIO mandates are also increasingly sought by private defined contribution (DC) plans, for many of the same reasons their DB counterparts seek an outside chief investment officer.
“Given the multiple challenges that institutional investors are facing—stretched budgets, regulatory and accounting rule changes, underfunded pension liabilities, and more complicated and volatile markets—the opportunities for OCIOs are continuing to increase,” explains Michele Giuditta, associate director at Cerulli.
The Cerulli research shows nonprofits and private DB plans are still “top targets” for OCIO providers, but nearly one quarter of providers polled “expect significant growth opportunities to support private DC plans and public DB plans with a sleeve of their portfolio.” Within the DC segment, Cerulli finds OCIOs expect the greatest opportunities in large and mega plans that generally take a more customized, institutional approach to asset allocation.
“Many OCIOs are gradually seeing opportunities within the public DB space, in particular for support with alternative investments,” Giuditta adds.
Cerulli expects continued industry expansion for OCIOs, “albeit at a slower pace compared to recent years.” The research concludes the OCIO industry will continue to evolve and grow over the coming years, presenting evolving opportunities for providers.
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While public DBs are still moving into the OCIO segment, Cerulli says they are already “leading the charge” on other trends, including expanding use of environmental, social and governance (ESG) investing strategies—boosted recently by DOL rulemaking.
Variation in approach and philosophy can differ widely across institutional investors when it comes to ESG, the research finds: “While some institutions pursue strategies with positive impact, others look to prohibit investment in companies that support certain industries or causes, or fail to engage in fair labor practices.”
Cerulli highlights the California Public Employees’ Retirement System (CalPERS), the Oregon Investment Council (OIC), and California State Teachers’ Retirement System (CalSTRS) for having “integrated an ESG framework into their investment beliefs.”
Denoting pent up demand for ESG, Cerulli says most consultants with whom it spoke “have seen an uptick in interest from institutional investors.” Implementation has been slow, however, but that could change with regulators’ increasing acceptance of the importance of ESG for long-term investing success.
According to one consultant interviewed by Cerulli, while more and more institutions are putting language about use of ESG principles in their investment policy statements, “only a small percentage” are taking action right now. “However, investment committees continue to think critically about the meaning of responsible investing for the institutions they serve. Many investors and consultants are applying ESG factors at the investment due diligence level. As a result, investment consultants continue to grow the number of products they track, and in some cases rate, that incorporate responsible investing.”
The Cerulli research, “OCIO Providers Seeing Increased Interest from Public DB Plans and Private DC Plans,” can be purchased here.