Assets managed in investment outsourcing arrangements for institutional investors globally totaled $586 billion as of March 31, according to Pensions & Investments' first survey of firms that assume responsibility for managing all or significant portions of institutional client portfolios.
Institutional investors outsource $586 billion in assets
At least 2,700 institutions leave investing to others
Globally, more than 2,700 pension funds, endowments, foundations, sovereign wealth funds and health-care organizations have out-sourced all or part of their investment management decision-making to the 31 investment outsourcing firms that participated. (Outsourcers were asked to exclude target-date and lifecycle funds and insurance company assets from their reported assets.)
Industry observers and investment outsourcers themselves report a huge surge of interest and investment by institutional investors, particularly since the 2008 financial crisis, as organizations seek solutions to shrinking internal resources for investment management, volatile capital markets and increasing portfolio complexity.
Historical growth comparisons aren't possible, but money manager consultant Casey, Quirk & Associates LLC predicts a 13% compound annualized growth rate for outsourcing in just the U.S. institutional market over the five years ending Dec. 31, 2015.
“These outsourcing companies will become major investment gatekeepers for a large proportion of the defined benefit and defined contribution plan market globally over the next 10 years,” said Kevin P. Quirk, partner and principal at Darien, Conn.-based Casey, Quirk & Associates.
The largest outsourcer on P&I's ranking is Russell Investments, which ran $75.7 billion as of March 31, followed by Cambridge Associates LLC with $72.1 billion, and SEI Investments Co., with $54.7 billion.
P&I's survey unveiled wide variations in the degree of investment discretion each manager has, as well as the proportion of a client portfolio each actually manages.
Among the highlights:
• The weighted average for full investment discretion was 42%; for partial discretion, 50%; and for minimal to no discretion, 8%;
• The weighted-average amount of assets for which outsourcers manage 100% of a client portfolio was 63%, while partial portfolio management totaled 37%;
• Most outsourcers offer a customized strategy; the weighted average was 96%; and
• The weighted-average split between outsourcing vehicles was commingled funds, 52%, and separate accounts, 48%.
Survey results show just how wide a spectrum investment outsourcing encompasses.
At its simplest, investment outsourcing involves the delegation of 100% of an investor's portfolio to a third party that grants a level of investment discretion for a portfolio-based fee, according to Casey, Quirk.
The definition of outsourcing and the delineation of what's meant by “investment discretion” is “one of the biggest challenges for the industry,” said Joseph Gelly, managing director-investment outsourcing solutions, at Russell Investments, Seattle. Mr. Gelly is based in the firm's New York office.
“It really matters whether you're talking about investment discretion over asset allocation or manager selection or both. The definitions are really blurred and a lot of outsourcing buyers are confused. A lot of what we do here is to help investors understand what kind of discretion they are comfortable giving to their outsourcer,” Mr. Gelly said.
Russell's outsourcing approach, more than 20 years old, integrates investment consulting, which gives the company the bench strength and capability to offer 94% of its 376 clients a fully customized approach, Mr. Gelly said. Russell's average plan size is $140 million.
Kimberly Wood, partner and U.S. leader for implemented consulting solutions in Mercer Investment Consulting's Chicago office, acknowledges “the definition of outsourcing is certainly a big challenge, but we decided that we can't be rigid about it and we decided not to try to bucket what we do.”
“For us, anything that's more than an advisory role is implemented consulting, outsourcing,” Ms. Wood said. She said Mercer's 283 institutional outsourcing relationships range from customizing a mix of the firm's funds of funds for smaller clients with between about $100 million and $300 million to portfolio construction for larger clients that uses an entirely customized mix of separate accounts from individual managers.
Charles Salmans, a Mercer spokesman, declined “for competitive reasons” to provide Mercer's outsourcing client average size.
Like Russell and Mercer, SEI Investments' roots were in consulting, but in the mid-1990s, the firm got out of the business of giving advice and into the business of managing money, said Jonathan Waite, director and chief actuary of the Oaks, Pa.-based firm.
“We couldn't respond to clients appropriately as a consulting firm,” he said. “We really needed investment discretion. We built managers of managers, built up an advice unit and over the last five years or so, have increasingly been given more responsibility for managing larger portions of many client portfolios and in a number of cases, have taken over whole portfolios,” Mr. Waite said.
The average plan size among SEI's 454 clients is $122 million.
Messrs. Gelly and Waite, and Ms. Wood, all report strong institutional investors inflows into their outsourcing programs in the past two years. They said 2011 is shaping up to be a banner year.
Russell Investments, for example, reported an increase in outsourcing hires of about 40% for the first six months of the year, compared with the same period in 2010.
Ms. Wood said different kinds of potential clients have been contacting Mercer officials. “We've started to hear from larger investors, from more sophisticated investors that are seeking alternatives and more esoteric strategies. We've also seen a strong push from defined contribution plans over the same time frame.”
Said Deborah D. Boedicker, partner, at outsourcer Strategic Investment Group, Arlington, Va.: “In every year since 2008, on the tailwind of the market crisis, we've seen very strong growth and interest from institutional investors who are reviewing how to best manage their portfolios going forward.”
Strategic Investment Group's average plan size is $564 million.