Mercer Investments, New York, enjoyed the largest asset growth among the top five, thanks to continued interest from corporate defined benefit plans seeking to outsource liability-driven investment strategies, a steady stream of endowment and foundation hires, and a zero-to-$10 billion boom in business from corporate defined contribution plans.
“Outsourcing for defined contribution plans has been a very strong area of growth for us and shows no sign of slowing down,” said Thomas P. Murphy, senior partner and Mercer's U.S. head of fiduciary management. Year-to-date inflows as of May 31 for investment outsourcing are ahead of the two prior years, he said.
Nearly all of Mercer's DC plan clients select a traditional outsourcing approach, handing off all aspects of managing the plan, including full investment discretion, Mr. Murphy said. Companies want to “simplify their plans, reducing the number of managers and investment options, and often adding customized target-date funds,” he added.
Investment pool sizes also have risen demonstrably in the past two years, Mr. Murphy said. “We are seeing interest from plans with assets of $1 billion, $2 billion, $3 billion and larger these days. Two years ago, it was very ad hoc to see a prospect of that size.”
Hewitt EnnisKnupp, Chicago, is another example of institutional investors' inclination to turn to investment consultants for outsourcing expertise. HEK's outsourcing assets jumped 179.1% to $37.3 billion in the two years ended March 31, with 74% of the assets managed on a fully discretionary basis.
Corporate defined benefit plans seeking LDI approaches have dominated the firm's client base for the past two to three years, pushed by federal pension funding regulations and bad memories of the 2008-'09 market crash, said Kemp Ross, senior partner and head of investment solutions. “Many corporate defined benefit plan sponsors knew they needed to manage their assets dynamically, but found it very hard to do internally,” Mr. Ross said.
“The daily monitoring of the plan's funded status — and the required shift in assets in response to triggers encountered — requires a strong infrastructure, including technology and dedicated portfolio managers,” something most corporations are unwilling or unable to provide, Mr. Ross said.
HEK's corporate defined benefit plan clientele averages about $250 million in assets, but “the size of prospective investors is trending upward and our pipeline is very strong,” Mr. Ross added.
HEK launched its outsourcing service in 2009, while NEPC LLC launched its investment management services in January 2011, said Steven F. Charlton, director of consulting services for the Cambridge, Mass.-based consulting firm.
NEPC squeaked into P&I's 2011 ranking as last, with $734 million. In the 2013 ranking, the firm ranks 40th in a much larger universe with $3.2 billion — a 339% increase over the two-year period.
Mr. Charlton said the vast majority of NEPC's investment outsourcing clients are new to the firm; by design, the consulting firm was “not out to cross-sell to our existing clients. Most already have good governance and are doing well in consulting relationships, rather than an investment management relationship,” Mr. Charlton said.
Marco Consulting Group Inc., Chicago, saw a significant 39.4% growth in investment outsourcing assets in the two years through March 31 to $7.7 billion, managed with full discretion, from its predominantly Taft-Hartley plan client base, confirmed Amy F. Forebaugh, vice president, division of fiduciary services.
Marco, which launched its first core investment outsourcing strategy in 2005, spent 2012 expanding its investment lineup with the addition of a hedge fund portfolio and other alternative investments, she said.
The success of investment consultants in persuading institutional investors to trust them with their assets despite the absence of a substantial track record is “pretty positive news,” for investment consultants, said CQA's Mr. Quirk. He declined to name any such firms. A number of investment consulting firms have struggled with the transition to money management, Mr. Quirk said.
Despite the eye-popping asset gathering success of some smaller players, industry observers predict the investment outsourcing bubble eventually will burst, but they won't hazard a guess as to when this might happen. Outsourcing, especially in the U.S., still is “an immature industry” that currently is experiencing “a huge land rush,” said Andrew McCollum, consultant, Greenwich Associates, Stamford, Conn., a research consulting firm.
“There are 65 outsourcers in the U.S. and as with any new industry, consolidation is inevitable with maturation. There definitely will be a shakeout, with winners emerging and losers dropping out of sight, but it's not clear exactly when this will happen,” Mr. McCollum said.
Mr. Quirk agreed, predicting that the “very overcrowded field will consolidate dramatically and assets will be concentrated under management within a group of 10 to 15 of the players with the best infrastructure, returns, fees and marketing.”
P&I's data already show signs of impending consolidation. The 10 largest investment outsourcers in P&I's universe controlled 62% of total reported outsourced assets under management, while the 25 largest managers held 87%.