Dangerous market fuels the prosperity of outsourcing investment teams


Financial Services Update

Outsourcing investment team market “hot” Bleak prospects For future returns, capital allocators are increasingly entrusting the entire multi-billion dollar task to external money managers.

Large corporations or public pension plans, endowment funds, and foundations usually have internal investment departments and only issue specific tasks to external fund managers.

However, smaller entities lack the scale to hire expensive internal investment teams, and usually outsource the entire management to investment consultants such as Mercer or asset management companies such as BlackRock, which have professional “outsourced chief investment officers” or OCIOs.

The OCIO industry is now expanding in scale and scope, because larger companies and institutions are outsourcing capital pools to these experts in consideration of increasingly dangerous situations. Investment prospects.

“It’s hot,” said Michelle Seitz, chief executive of Russell Investments, an asset management company that owns a large OCIO business. “There are many activities. If not the fastest growing space in the industry, it is also one of the fastest.”

According to OCIO’s annual survey, by the end of March 2020, approximately US$2 trillion in assets worldwide will be managed by OCIO at its discretion or in part. Pension and investment, Industry magazine. This is almost twice the size of the industry in 2013, and its growth is accelerating.

Industry executives said that the business is increasingly competitive. Expenses may vary greatly in scale and structure, but when many other areas of the investment industry are under pressure, expenses are generally healthy and growing. As a result, large banks, money managers, and specialized OCIOs are expanding their scope to strive for authorization.

“This is a highly competitive battlefield,” said Stan Miranda, chairman of OCIO’s Partners Capital. “You have a bank, you have a consulting company, you have an asset management company, and you have experts like us.”

Although the financial situation varies from organization to organization, the typical authorization of OCIO is usually less than $1 billion-for university endowments or small pension organizations, hiring its own investment staff usually does not make sense.

According to Cerulli Associates, in the United States, more than half of OCIO tasks cost less than $100 million. Russell Investments estimates that 76% of institutional investors with assets of less than US$10 billion have not yet outsourced their investment activities-leaving plenty of room for growth in the industry.

However, according to industry executives, there have recently been authorizations of US$10 billion or more, and many expect the trend of larger OCIO transactions to accelerate.

“The outsourcing trend will only continue to accelerate,” Larry Fink, Black stone The CEO said on the asset management company’s recent earnings conference call. “As regulations strengthen, operating costs rise and investments become more complex, more and more customers want to outsource their entire portfolio.”

BlackRock recently won $30 billion OCIO authorization Managing British Airways’ pension plan—according to the asset manager, this is the largest such transaction in the history of the United Kingdom—Finke predicts that this will become a “catalyst for transformation and change in the industry”.

Goldman Sachs President and Chief Operating Officer John Waldron recently stated that its asset management department has also seen a “very strong” OCIO service channel.

Industry executives said that considering that the overall valuation today is so high, one of the main driving factors is the increasingly sluggish return expectations for the next ten years. Although the active market has expanded the size of many capital pools, the trickier prospects make it tempting to outsource investment management to larger experts.

Based on the long-term model of market valuation and subsequent returns, the researchers of the investment group AQR estimated Traditional portfolio 60% of stocks and 40% of bonds will return 2.1% annually after inflation for the next 5 to 10 years.

GMO, an asset management company founded by Jeremy Grantham, is even more pessimistic.Given the current degree of bubble in the market, it predicts that every major asset class will Actual loss In the next seven years.

The bar chart (%) of the inflation-adjusted annual return forecast for the next seven years shows that GMO predicts that most investors will face a severe test due to rising prices

Industry executives believe that although most institutions with funds of $10 billion or more have internal investment teams to manage their funds, the increasing acceptance of full outsourcing may change this situation.

In corporate pension plans, the interest in hiring OCIO is particularly strong—sometimes running a large pool of funds can distract the core of the company—but public retirement plans, foundations, and university endowments are also increasingly hoping for this Do, the industry expresses executives.

According to a survey in 2020, lack of internal resources and “better risk management” are the main reasons for using OCIO Chief Investment Officer, Industry magazine.

“This is not their main business, and they don’t have all the necessary tools internally to maximize opportunities,” Seitz said. “In a low interest rate environment, ensuring that you can repay long-term debt becomes more complicated.”

Twitter: @Robin Wig

Email: [email protected]


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