Investment consultants expect strong growth over the next five years in discretionary outsourced money management, regardless of whether the consultants offer such services, results of a Pensions & Investments' Research Advisory Panel survey show.
Strong growth in investment outsourcing predicted
Firms providing service, and even those that don't, expect expansion
Not surprisingly, those whose firms manage outsourced portfolios — representing 43% or 20 of the 47 consultant respondents — are the most optimistic about prospects for outsourcing.
Of the 10 consultants that now provide outsourced strategies and provided their predictions about growth of the outsourcing market over the next five years, two predicted growth of at least 30%; four respondents predicted a growth rate of 20% to 29%; and four said the market will grow between 10% and 19%.
Of the 19 investment consultants who said their firms have no plans to offer outsourced strategies, seven provided predictions about the growth potential of this market niche. Five of these consultants said they think investment outsourcing will increase at least 10% in the next five years.
Of the 27 investment consultants overall that don't offer outsourcing services now, seven said they are thinking about doing so and 19 said they don't intend to make a move. Of those seven consulting executives contemplating adding outsourcing, four said they expect their firms to offer outsourcing beginning next year.
When given a list of reasons for moving into the investment outsourcing business, of the seven firms that are considering going into outsourcing, six said client demand was the main driver, while three said the primary reason was to increase profitability (respondents could choose more than one answer).
Four of the seven consultants thinking about a new outsourcing practice said they will hire additional employees to staff up their nascent discretionary management businesses.
Of the 19 consultants that don't offer outsourcing now and have no intention of doing so, 12 said the main reason was to not stray from pure investment consulting and eight listed the potential for, or perception of, conflicts of interest (respondents could choose more than one answer).
Among consultants already in the investment outsourcing business:
• Of the nine who answered the question, the average number of outsourcing clients was 16;
• Of the 10 who gave their assets managed in outsourcing, the mean total was $5.9 billion;
• On a dollar basis, of the 11 that answered the question, a mean 77% had full discretion over the assets; partial discretion over a mean 16%; and no discretion for a mean 7%;
• Of the 10 that answered the question, eight said they manage their outsourced client relationships on a customized basis; and
• Of the 10 who answered the question, a mean of 65% of the consultants' outsourced assets were managed in commingled funds and 35% in separate accounts.
On the investor side, 68% of the 188 respondents said they outsource some or all of their assets.
Of the 110 of these institutional investors — pension funds, foundations and endowments — that shared their motivations behind outsourcing, 78 said lack of sufficient resources to manage the portfolio internally was the main reason they outsourced. Complexity of managing the portfolio in all asset classes was cited by 59 (respondents could choose more than one answer).
The difficulty of managing board and investment committees to arrive at investment decisions was cited by 37 investors, followed by the need to add more alternative asset classes (32) and challenging capital markets (28).
Of the 106 institutional investor respondents that use an outsourced approach and revealed more information about their outsourcing arrangements, 43 give their outsourcer full investment discretion and 32 give discretion for between 75% and 99% of their portfolio.
Of the 110 institutions that outsource and answered questions about the type of firm they hired for the program, 44 selected a consulting firm to manage their assets and four hired on outsourced chief investment officer. The majority - 60 respondents - said they hired a traditional money manager with outsourcing capabilities and 21 hired some other type of outsourcer.
Of the 60 institutions that don't outsource, the overwhelming majority — 53 — said they aren't looking at doing so. Among the 51 investor executives who provided reasons for not outsourcing, the most common reason was discomfort about handing off investment decision-making, cited by 30 respondents.
Pensions & Investments' Research Advisory Panel consists of executives at defined benefit and defined contribution plans, foundations, endowments and investment consulting firms.