Current Thinking

What’s Really New About Investment Outsourcing?

Much has been written in the press since the 2008 US financial crisis about a brand new market, the OCIO market: known as the outsourced Chief Investment Officer market. Several high profile investment firms take great pride in being the early pioneers of this market dating their history back to the 1980’s or early 1990s.

The OCIO market can involve either a partial outsourcing to external experts of the investment management of certain specialized asset classes (such as private equity or alternatives) or a complete outsourcing to an external manager who will assume responsibility for the entire investment process. In essence the hired OCIO firm may assumes as much of the client’s fiduciary responsibility as is possible. The duties can include: review, analysis and changes to the client’s Investment Policy Statement, portfolio asset allocation, portfolio strategies, manager due diligence and monitoring, portfolio rebalancing, and if desired, individual buy and sell decisions for the client. The manager typically will provide customized reporting for the client with the desired transparency and can even provide risk reporting metrics.

According to March 2013 data in Pensions & Investments, the OCIO market is nearly $1 trillion in size, a huge number for an industry that barely existed before 2008. Investment managers have taken notice of this huge growth with a doubling of the number of firms offering this service in the two year period ended March 2013. Significant growth is again expected in the next 12 months. OCIO services are offered to all manner of institutional clients: corporate defined benefit and defined contribution plans, public plans, endowments and foundations, banks, thrifts, and insurance companies.

The decision to use external managers to address portfolio management, market complexity, risk management and increasing regulatory challenges makes sense, especially in a budget constrained environment which many clients face as the new norm. The OCIO manager can provide an integrated one-stop solution to improve the management client portfolios, help clients benefit from more timely decision making, provide board and investment committee reporting, and help the client reduce their costs.

Contrary to the pronouncements of numerous managers, the OCIO market is not a new market. Investment outsourcing is not even new to the 20th century and dates back to the Middle Ages or before. Nonetheless, Pentegra’s 70 year history as an outsourced OCIO manager stands apart from any other investment firm in the business today. Pentegra was formed in 1943 as an outsourced investment manager for the defined benefit plans of the employees of the Federal Home Loan Banks. Today we have over 1,400 institutional relationships that involve, in most cases, the complete outsourcing of our clients’ DB or DC plans.

So what really is new since 2008? We believe that successful investment managers realize that in order to grow their businesses, they cannot limit themselves to focusing on only one goal…the goal of maximizing total return of a portfolio versus some benchmark. Investment managers are an extremely competitive lot. Their careers have been built on amassing assets by beating generally accepted market benchmarks, e.g. the S&P 500 index. However, in pursuing investment performance goals, many top portfolio managers may not know who their clients are, let alone what business they are in.

We believe that especially since 2008, investment managers must be focused more on client goals. Increasingly managers are being asked to do more, to understand their clients’ needs and help them meet their challenges. The skills needed here are consultative in nature and not found in the competitive DNA of many managers. A portfolio can exceed its benchmark by several hundred basis points, but did it help improve a DB plan improve its underfunded status to an acceptable level? Did it help an endowment adequately fund its annual budget needs? Did an insurance company improve its product spreads to permit higher crediting rates to grow its business? These issues illustrate why we believe successful OCIO teams will need to analyze and understand the role that assets will play in helping their clients meet THEIR liability and spending goals regardless of the standard public asset benchmarks used. Discussions with clients need to be more robust with broader discussion of goals and objectives. There are daunting challenges ahead for investment managers who are not able to adapt to this environment.

NOTE: Information presented herein represents the personal opinion of the author, is for discussion and illustrative purposes only, and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.

About the Author

Sarah Lange




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