Increasing complexity, use of LDI fueling the demand for investment outsourcing
Updated with correction
Investment outsourcing gained steam as assets managed worldwide for institutional investors rose 26% in the year ended March 31.
In aggregate, $1.206 trillion was managed worldwide for institutions on a full or partially discretionary basis at the end of the first quarter, up from $955 billion a year earlier, Pensions & Investments' third survey of investment outsourcers shows.
(In 2013, P&I's data included only firms managing at least $1 billion in outsourced assets under investment management).
Thanks to a boom in liability-driven investment and increasing investment complexity, survey respondents' outsourcing programs worldwide — including advisory-only assets — grew 25% to $1.329 trillion in the year ended March 31 from $1.066 trillion as of the same date in the prior year.
The rank order of the four largest outsourcers based on worldwide assets under management for institutional investors remained unchanged from 2013:
- Russell Investments was in first place with $115 billion, up 6%;
- Cambridge Associates LLC, second, with $98.7 billion, a 12.9% increase;
- Mercer Investments, third, with $91.6 billion, a 23.9% rise; and
- SEI Investments (SEIC) Co., fourth, up 7% to $71.8 billion.
A new entrant, Wells Fargo & Co., ranked fifth, with $71.6 billion. (A Wells Fargo spokeswoman said in an e-mail that she was unable to arrange an interview by press time with Wells Fargo executives about the firm's outsourcing business because of scheduling conflicts.)
All but two of the 25 largest outsourcers had growth of assets under investment management in the year ended March 31, led by Pyramis Global Advisors, which enjoyed a 73% gain to $13.3 billion. That bumped the firm to 23rd from 30th last year.
Outsourced strategies under investment management by BNY Mellon Investment Management declined 26% to $16.1 billion in the year ended March 31, the biggest decline among the largest outsourcers. BNY Mellon Investment Management dropped to 19th in P&I's 2014 ranking from 13th the prior year.
BNP Paribas Investment Partners also experienced a 13.6% drop in outsourced assets under investment management to $27.3 billion, moving the firm down to 15th from 11th.
The three largest managers of worldwide institutional assets under investment management with full discretion held the same positions as they did in 2013: Mercer, $91.6 billion; Northern Trust Asset Management, $52.8 billion; and Hewitt EnnisKnupp, $41.2 billion.
New entrants to P&I's discretionary outsourcing assets under investment management — Credit Suisse AG, $38.9 billion, and Goldman Sachs Group (GS), $37.8 billion — displaced Alan D. Biller and Associates Inc., with $32 billion, and SEI Investments (SEIC), with $28 billion, for fourth and fifth, respectively.
The growth of outsourcing in six years from nearly nothing to more than $1 trillion under management was driven to a huge extent by the devastation wrought by the 2008 market meltdown, especially among smaller pension plans.
“The movement to outsource — as one of the industry's big ideas — continues apace. In difficult, volatile markets, fund executives are increasingly turning their portfolios over to third-party experts,” said Kevin P. Quirk, co-founder and partner of specialist money management consultant Casey, Quirk & Associates LLP, Darien, Conn.
“The same market conditions that pushed small plans to move into outsourcing after the financial crisis now are pushing larger plans to look at outsourcing,” said Phillip de Cristo, president of Mercer Investments, who works in the Boston office.
Mercer's new client wins are getting bigger — $1 billion and larger — and more multinational companies are choosing to outsource management of all of their pension assets to a single manager.
Mr. de Cristo declined to identify Mercer's new multinational corporate outsourcing clients.
Still fairly small
Despite the reported rise in outsourcing hires by bigger pension plans, endowments and foundations, most moves still are fairly small, sources said.
A representative list of institutions both large and small that are searching for or hired outsourcing managers in the year since P&I's last survey includes:
- George Washington University, Washington, which seeks a single firm to assume management of its $1.4 billion endowment;
- Royal Shakespeare Theatre Pension Scheme, Stratford-upon-Avon, England, which hired P-Solve LLC for full fiduciary management of its defined benefit plan. The size of the plan could not be learned;
- Allegheny County Port Authority, Pittsburgh, which selected Peirce Park Group Inc. as the outsourced chief investment officer of two multiemployer pensions plans and two defined contribution plans totaling $91 million; and
- Sembcorp Utilities (U.K.) Ltd., Middlesborough, England, which named SEI Investments (SEIC) outsourcing manager of its £95 million ($162 million) pension plan.
Outsourcing manager upgrades still are rare, given the youth of the industry, observers said.
“Outsourcing assets have proven to be fairly sticky, at least so far,” said Andrew McCollum, managing director and a consultant at Greenwich Associates Inc., Stamford, Conn.
“Investors probably will stay with their current outsourcers until there's a reason to switch — for instance, the bottom falling out of the market. Post-2008, there was an uptick in investment consultant changes because institutional investors needed to have someone to blame. The same kind of stress may unseat investment outsourcers,” Mr. McCollum said.
A notable exception is Delta Air Lines Inc., Atlanta, which in August moved the outsourcing of its $8.9 billion defined benefit plan to Wurts & Associates Inc., replacing Segal Rogerscasey. The outsourcing arrangement, with both Wurts and Segal Rogerscasey, is a partnership with UBS Asset Management.
Delta's defined benefit plan was 46.9% funded as of Dec. 31, up from 38.1% a year earlier. In May, company officials said they want to increase the funded status to 80% and will contribute about $1 billion per year through 2020 to reach that goal (P&I, May 6).
The funded status of corporate DB plans has been an increasingly important reason for the growth in investment outsourcing as companies move to an LDI approach, industry sources agreed.
“Increased funded status means that plan executives are trying to derisk their portfolios and protect that position,” said Joseph W. McInerney, managing executive of Chicago-based Northern Trust Asset Management's multimanager solutions unit.
“More and more corporate plans are adopting a glidepath and are handing over management to us. We are finding that LDI is a very big driver of corporations' decision to outsource both large and small defined benefit plan management,” Mr. McInerney said.
Mr. McInerney declined to name Northern Trust's new corporate outsourcing clients.
Northern Trust had $52.8 billion in outsourcing strategies under investment management as of March 31 and was ranked eighth.
Seeing strong inflows
Aon Hewitt, Lincolnshire, Ill., continues to see strong inflows into its outsourcing strategies from frozen and active defined benefit plans of all sizes, said Kemp Ross, head of solutions and operations for investment consulting.
“Corporations with underfunded plans need management of the growth portion of their portfolio and, once they are close to fully funded status, need help with the complex implementation of the LDI part of the portfolio,” Mr. Ross said.
Hewitt EnnisKnupp, an Aon Hewitt subsidiary, had $46.8 billion of outsourced assets under investment management as of March 31, the ninth largest in P&I's ranking.
Mr. Ross, who is based in Aon Hewitt's Chicago office, declined to name clients.
Although still young compared to other investment management industry segments, the investment outsourcing playground already is “a very overcrowded place,” ripe for consolidation, said Greenwich's Mr. McCollum.
P&I's universe of investment outsourcers with assets under investment management has grown steadily, from 32 in 2011 to 56 in 2013 to 71 in 2014. The 2014 group includes OCIO outfits, investment consultants-turned-money-managers, manager-of-managers specialists and multiasset class megafund managers.
“I think there will be some acquisitions in this part of the money management industry,” Mr. McCollum said, noting OCIO companies might seek to acquire similar managers to gain client assets.
He said larger outsourcers, including consultants and fund-of-funds managers, might be in the market for smaller firms to add teams to boost their capabilities in investment management or administration. Traditional multiasset management houses that are desperate to offer their investors more “solutions,” on the other hand, might snap up outsourcers with investment consulting legacy practices to boost their internal advising capabilities, Mr. McCollum said.
“The competitive landscape is heating up and the professionalism of outsourcers is rising as investors become savvier,” said CQA's Mr. Quirk.
“Investors, especially new entrants, are beginning to sift between winners and losers in their initial evaluations. Essential qualities investors look for increasingly include scale; robust infrastructure; institutional quality sales, marketing and client services; brand recognition; and perhaps most importantly, true capability to manage an institutional portfolio in its entirety,” Mr. Quirk said.
This article originally appeared in the July 7, 2014 print issue as, "Assets top $1.2 trillion after a 26% increase in a year".