The challenging economic and investment management environment have led more pension, endowment and foundation funds and other plan sponsors to move to outsourcing their entire portfolios.
Changes in the economic environment have created new challenges for the sponsors of pension and other funds as they continue to exercise their role as ultimate bearers of fiduciary responsibility for investment decisions — and outcomes.
Additional resource stresses, including staffing and budget cuts and pressure to diversify portfolios across a wider array of asset classes and strategies, have coincided with a significant move to outsourcing.
In fact, the number of fund sponsors outsourcing their investment portfolios, across a range of providers, has doubled in recent years and is expected to continue. A study by consulting firm Casey Quirk & Associates LLC predicts the investment outsourcing market will grow to $510 billion by 2012, representing 13% of institutional assets and 25% of institutional investors. That projected absolute value is up from $195 billion, representing 6% of institutional assets and 15% of institutional investors, just over a year ago.
The decision to outsource is an important one and should be met with a great deal of thought and careful consideration by fund trustees. Executives should ask a series of questions to determine if outsourcing is an effective approach to oversight of their own investment programs. As part of this process, it is helpful to understand the forces behind the outsourcing trend, and if they apply to an institution's own situation. The trend involves the increasing prominence of alternative assets in institutional portfolios — and the continuum of issues that emerge from these assets, particularly during challenging times.
A look at Cambridge Associates' client base provides a sense of the migration to alternatives: Between 1990 and 2005, the firm's endowment clients' mean asset allocation to traditional equities and bonds decreased by 4.1 percentage points, to 47.6% from 51.7%, and 19.1 percentage points, to 14.2% from 33.3%, respectively. On the other hand, the mean allocation to alternative assets increased by 26.2 percentage points, to 31.4% from 5.2%, to constitute nearly a third of these clients' total portfolios. Needless to say, the shift has added significant asset class, strategy and manager complexity to these institutions' portfolios.
As a result, many investment committees are realizing that there may be limitations in their oversight approach, especially if it is heavily dependent on infrequent committee meetings. One solution, in addition to hiring additional professional investment staff, has been for institutions to turn to more engaged relationships with consultants and outsourcing providers.