An aging bull market, uncertain interest rates and a volatile global economy pose a particularly difficult set of challenges for today’s institutional investors, even as they cope with heightened expectations around risk management, tight budgets and regulatory changes.
Such factors are driving more chief financial officers and investment committees to look externally for help navigating these challenges from an outsourced CIO. In January, Cerulli Associates estimated that the compound annual growth of U.S. OCIO assets under management would reach more than 8.1% through 2023.
State Street Global Advisors, the seventh-largest provider of OCIO services, has seen that increased demand from institutional asset owners who are looking for enhanced governance and fiduciary oversight, as well as more efficient investment decision-making. They’re also all typically looking for cost savings, according to Natasha Dayaramani, managing director and global head of portfolio strategies with State Street’s OCIO team.
“The cost of having a team that can really look at strategic and tactical asset allocation, implementation and trading, investment and operational due diligence, compliance, legal, even HR can all be saved when moving to an OCIO model,” Dayaramani said.
Those savings are easier to see as OCIOs move to unbundled pricing and more transparency around their cost. That way, clients understand when they’re paying for specific projects, but they can also see the lower fees that OCIOs are able to achieve through scale.
As more institutions look to move to an OCIO model, they’re also demanding more from their OCIOs, and OCIOs are rising to meet the challenge.
Soaring interest across the board
While smaller institutions have historically been more likely to use an OCIO model, larger investors including pensions plans, endowments and defined contribution plans are increasingly finding that the model makes sense for them as well.
In addition to cost savings and market uncertainty, institutional investors often have specific reasons for moving to an OCIO model. A CIO might retire, for example, or a recent merger could mean that one institution suddenly finds itself with several distinct pools of assets, all with different funding statuses and investment objectives. Large, multi-geographical clients turn to OCIOs to help navigate the complex regulatory funding and governance structures across different plans around the globe.
Smaller institutions, such as registered investment advisers or family offices, on the other hand, may need more partnership around risk and governance or in trustee training. Pension plans of all sizes are looking for advice on the best course of action, whether that’s hibernation, or reducing or terminating their pension liability.
“As we always say to clients, the best testament to an effective OCIO mandate is putting ourselves out of business, which means they’ve reached a well-funded status, at which point they may decide to annuitize parts of the plan or terminate. ” Dayaramani said.