Outsourcing here to stay but will continue to evolve

Updated with correction

Investment outsourcing has continued to evolve over the past five years as more institutional investors adopt the practice, according to sources that Pensions & Investments spoke with.

Michael Rosen, a principal and chief investment officer of Santa Monica, Calif.-based consultant Angeles Investment Advisors LLC, said that “in the endowment and foundation worlds and in the corporate pension world, (OCIO has) been much more widely accepted as an alternative approach.”

“It's unlike a lot of investment ideas that are really nothing more than fads; the OCIO concept is rooted in a good idea,” Mr. Rosen added. “It's an approach that solves a number of challenges in a more efficient way.”

Angeles Investment Advisors started its OCIO business in early 2002 with one client, a foundation in Texas. Currently, OCIO assignments are more than half of the firm's business. Angeles' investment outsourcing AUM was $1.46 billion as of March 31, up 30% from the year before.

Debra Woida, a director and head of delegated investment services, North America, Towers Watson & Co., Chicago, sees the OCIO industry definitely gathering momentum. “More and more asset owners are at least looking at the model that they've used and are looking at OCIO to see if it's a good model for them to use, and many of them are saying yes,” she said, adding that she expects the sector to continue to grow. Towers Watson reported $74.8 billion in OCIO AUM as of March 31, up 15% from the year before.

Tom Murphy, senior partner and U.S. head of fiduciary management at Mercer, Boston, said that about five years ago, Mercer was among a small number of companies educating the market about OCIO and what it was. “Our conversations with clients normally stated with, "Here's what OCIO means,'” he said. “Fast forward five years, that dynamic has changed considerably. There's been a huge growth in the area.”

OCIO assets under management have grown 134% since P&I first surveyed managers in 2011. It should be noted, however, that data included only managers with at least $1 billion.

Mr. Murphy also pointed out that five years ago, OCIO was a solution for the small- and midsized markets. Now, larger asset owners have adopted it.

Tim Barron, CIO at consultant Segal Rogerscasey in Darien, Conn., told P&I that he puts the OCIO business in four phases.

The first phase was centered on the early adopters, such as Russell Investments in the mid-1980s and SEI Investments (SEIC) Co. in the early 1990s, which lasted until 2008. Then, after the global financial crisis, there was the event-driven phase, which was “driven by foundations and endowments with cash flow problems.” “Lots of entrants, lots of money and more importantly, lots of hype,” said Mr. Barron.

He then noted that the industry is currently entering the maturity phase, which will eventually lead to an upcoming fourth phase: the shakeout.

“There's too many money managers,” Mr. Barron said. “In the fourth phase, we actually have track records and plan sponsors (telling OCIOs), "you failed to achieve your goal over the trailing five-year period.' That's probably not more than two years out.”