Industry still in its infancy lacks transparency

The institutional investment outsourcing industry worldwide might be approaching $1 trillion under management, but it is the one niche in money management where performance of individual managers can't be compared.

After five years of exponential growth, investment outsourcing still is a relatively immature industry that lacks transparency and the well-known analytical tools applied to every other type of money management, sources said.

For example, neither of money management's most popular performance databases — eVestment LLC and InvestorForce Inc. — even has a category for investment outsourcers, also known as outsourced CIO, fiduciary management or implemented/delegated consulting.

If and when data aggregators do add outsourced investment strategies, they will not find it easy to obtain information from outsourcers or to develop standardized performance reporting.

“Questions that should be easy are very difficult to answer: Who has the best returns? Who has the lowest fees?” according to a February report about investment outsourcer selection from investment consultant R.V. Kuhns & Associates Inc., Portland, Ore.

Rebecca Gratsinger, CEO of R.V. Kuhns, said in an interview that a crucial question for investment outsourcers is how they can be compared with their competitors, just as are all other money managers institutional investors evaluate.

R.V. Kuhns is among only a few firms that provide institutional investors with independent evaluation of investment outsourcers. The consultant does not offer investment management services.

After Pensions & Investments surveyed investment outsourcers in April and May about their assets, client base and the level of investment discretion they have, in June respondents were asked for performance and fee information.

Only 22% responded with performance or fee information about their investment outsourcing business.

The most common reason managers gave for not providing such information was that all or much of their outsourcing accounts are customized to each client's investment and liquidity needs and a composite return is impossible to calculate or would lack relevance.

“All of our clients have different investment programs and goals and we feel it would be misleading to distill what are inherently complex individual scenarios into one collective example,” explained Katherine Stouffer, a spokeswoman for Russell Investments, in an e-mailed response to a request for return and fee information. Russell Investments, Seattle managed $108.5 billion in investment outsourcing programs for institutional investors as of March 31, according to the firm's response to P&I's recent survey.

SEI Investments provided a similar response.

“Our clients have very customized asset allocations depending on their goals and type of institutional account. Therefore, providing implementation performance would be too extensive and providing composite account performance would not be relevant,” said Laura Edlin, a spokeswoman for Oaks, Pa.-based SEI, when she declined by e-mail to meet P&I's request. SEI Investments managed $67.1 billion in investment outsourcing programs for institutional investors as of March 31, according to the firm's response to P&I's recent survey.

Neither Russell nor SEI Investments provides performance or fee information publicly, the spokeswomen said in their respective e-mails.

Investment outsourcers also are remarkably unforthcoming about their fees.

Typical annual fees for outsourcing range from 30 basis points to 100 basis points of assets and don't include management and/or performance fees for underlying managers, said R.V. Kuhns' researchers in their report.

By contrast, traditional consultants' annual retainer fees range between four and 10 basis points of assets, excluding manager and custodian fees.

The costs of investment outsourcing are “less transparent and harder to evaluate” than consulting fees, the Kuhns consultants concluded.

Andrew McCollum, a consultant at Greenwich Associates, Stamford, Conn., agreed. “Outsourcing fees definitely are not as transparent as institutional investors would like,” he said. “All kinds of services can be bundled into the fee and it's hard to get clarity about exactly how much you are paying for which services.”

While unwilling to share performance, Cambridge Associates LLC, Boston, did provide P&I with the following net fee schedule: 30 basis points up to $500 million; 26 basis points for the next $500 million; and negotiable for portfolios $1 billion or larger with a minimum annual fee of $300,000.

Among the exceptions to the opacity rule regarding investment outsourcing performance is Cardano Risk Management BV, Rotterdam, Netherlands. Cardano has made a point of publicly releasing the composite performance of its fiduciary management clients, said Philip Page, London-based client director, in an interview.

Cardano's net performance for the period ended March 31 was 13% for one year and 14.1% annualized for three years. The strategy reached its fifth anniversary on June 30, but returns were not ready by press time.

Cardano's particular style of outsourcing is called “solvency management,” Mr. Page said, because it focuses exclusively on the funded ratio of corporate defined benefit plans. Cardano's fees are based on performance and the firm only gets paid if a client's funding ratio has risen, Mr. Page said.

Other investment outsourcers that provided performance to P&I were (multiyear returns are annualized):

• NEPC LLC provided gross March 31 average returns for discretionary institutional clients for one year, 12.2%, and two years, 8.5%;


• Strategic Investment Group provided net March 31 returns for its global balanced composite for one year, 10.1%; five years, 5.2%; and 10 years, 9.8%;


• Segal Rogerscasey provided a gross composite return of 16.3% for its core strategy for the 52-months ended May 31; and


• State Street Global Advisors provided March 31 gross returns for a sample outsourced defined benefit plan for one year, 8%; five years, 5.3%; and 10 years, 9%.

Assets managed for institutional outsourcing clients worldwide as of March 31,according to each firm's response to P&I's recent survey, were $87.5 billion for Cambridge Associates; Strategic Investment Group, $33.2 billion; SSgA, $12.7 billion; Segal Rogerscasey, $11 billion; Cardano, $9.9 billionand NEPC, $3.2 billion.

With so little standardization and so much opacity about performance reporting and fees, the industry inevitably will spawn far more third-party intermediaries and consultants, like R.V. Kuhns, New England Retirement Consulting LLC. and Due Diligence Review Corp., the few firms that now evaluate outsourcers, said Kevin P. Quirk, principal, Casey Quirk & Associates LLC, Darien, Conn. CQA is a consultant to money managers.

Greenwich Associates' Mr. McCollum noted that many first-time outsourcing clients are “quite naive” about the services that will come with their new governance arrangements.

Trust is the first criteria for selection of an investment outsourcer. “If you're handing over the keys, you have to have a great deal of confidence in who you are handing them to,” Mr. McCollum said.

One intangible outsourcing benefit of that new-found trust — independent, as least so far, of returns and fees — is the “sleep quotient that is gained as plan sponsors and endowment CIOs get better manager access, freedom from administrative duties, more investment capability, and a reduction in the pressure on investment committees,” he added.