Financial crisis puts a dent in growth prospects for investment outsourcing

Investment outsourcing firms have a rosy view on growth in the industry, but a recent analysis by Casey Quirk & Associates LLC sets lowered expectations.

An update of a report by the consulting firm estimates the investment outsourcing market will grow to $320 billion by 2012 and $410 billion by 2014; in 2008, the report had estimated the business would reach $510 billion by 2010.

Kevin Quirk, founding partner and principal with Casey Quirk in Darien, Conn., attributed the lowered projection to the world financial crisis.

Mr. Quirk said in a telephone interview that difficult capital markets have helped drive the investment outsourcing business. A growing interest in alternatives, which investment committees often have little experience in managing, also has generated interest in outsourcing, he said.

“I think the long-term trend (toward outsourcing) will continue,” he said. “The financial crisis and volatility in 2008 and 2009 and (the recent single-day ‘flash crash' on May 6increased the demand for outsourcing.”

Paul Klauder, vice president and managing director of SEI Global Institutional Group, Oaks, Pa., said corporate pension plans have been outsourcing investments for roughly 12 years, and he expects growth to continue over at least the next five years.

Mr. Klauder said the global financial crisis slowed outsourcing business in early 2009, but it increased significantly by the fourth quarter.

“People felt paralyzed to move portfolios in a dramatic market environment,” he said in a telephone interview, adding that as markets have stabilized, plan executives are again looking to outsourcing as an alternative.

SEI, which runs a manager-of-managers program, had picked up 11 new clients with $1.5 billion in total assets, for the year to date through May, Mr. Klauder said. Corporate defined benefit plans are still the largest segment of the market, but hospital-related plans have outsourced considerably in the past three to five years, he said. He said SEI has 45 health-care clients with about $12 billion in total assets.

Jennifer Tretheway, managing director of business development and client relations for Northern Trust Global Advisors Inc., Chicago, said hospital systems face additional challenges because many have endowments used for building programs in addition to operating costs and retirement plans.

“They are not in the investment business; they are in the health-care business,” she said. “Outsourcing is good business when it's not your main focus.”

She said NTGA also is seeing increased interest from pension plans in outsourcing part of their portfolios, particularly in hedge funds and private equity.

NTGA has been hired by 13 new clients in the past 12 months with $4 billion in combined assets, she said.

Some investment outsourcing firms are seeing some interest from public funds as well.

Deborah Boedicker, principal at Strategic Investment Group, a dedicated investment outsourcing firm in Arlington, Va., said while corporate DB plans and endowments and foundations are still the 800-pound gorilla in investment outsourcing, “we're starting to see some glimmer in the public funds.”

She noted the $7 billion San Diego County (Calif.) Employees Retirement Association approved a plan in March to outsource the duties of its in-house investment management staff.

She said Strategic's investment outsourcing business has grown roughly 20% since March 2009 to roughly $18.8 billion.

“That gives you perspective,” she said. “It's a reflection that today we are at the highest assets in our 22-year history.”