Big future, big money seen for solutions units
Updated with corrections
The world's largest money managers are in hot pursuit of the industry's holy grail: the capability to provide an end-to-end investment solution for investors.
Managers are pouring substantial resources into restructuring, beefing up and modernizing their investment solutions business units to meet what they believe will be huge demand from a wide range of investors.
Among megamanagers making a priority to develop a seamless path from investment-only multiasset-class strategies to customized investment outsourcing approaches are BlackRock (BLK) Inc. (BLK), Goldman Sachs Asset Management, Morgan Stanley (MS) Investment Management, Northern Trust Asset Management, State Street Global Advisors and The Vanguard Group Inc.
At stake are trillions of dollars from investors, ranging from the largest defined benefit plans and sovereign wealth funds to individual savers seeking solutions-based investment strategies, said Justin White, principal at money manager adviser Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn.
Total assets managed in multiasset-class strategies totaled $4.75 trillion as of March 31, data from eVestment Alliance LLC showed.
Outsourced assets managed for worldwide institutional investors were $2.09 trillion as of March 31, data from Pensions & Investments' recent survey of outsourcing managers showed.
Annual growth of the combined multiasset-class strategies and OCIO business over the next five years will be between 8% and 9%, according to a CQA estimate.
If the forecast is accurate, even at the low end of the estimate, managers will be vying for at least $2 trillion of new multiasset and OCIO inflows between now and the end of 2023.
"The intersection between multiasset-class strategies and outsourcing is the battleground for the industry going forward," said CQA's Mr. White, stressing the largest money managers recognize they must build full capabilities in both areas to meet client demand.
"Outsourcing is the broadest part of the advice and solutions spectrum. The question for the end investor is 'who can help me meet my objectives? Will a multiasset-class strategy suffice or do I need a full outsourced solution?'" he said.
And money managers are in serious building mode.
BlackRock (BLK), the world's largest money manager with $6.4 trillion under management, for example, consolidated all of its multiasset portfolio construction activities, including OCIO and its client solutions practice, into a single unit — client portfolio solutions — in March (Pensions & Investments, March 8).
BlackRock Inc. (BLK)'s client portfolio solutions group managed $200 billion in multiasset-class strategies of which $105.3 billion was in outsourced-chief-investment-officer strategies as of March 31.
The unit's 150 employees — 30 of whom were hired since March — are focused on tapping the "common core" of multiasset-class skills including centralized research, portfolio construction and asset allocation for a broad client range for both investment-only and OCIO assignments, said Ryan Marshall, managing director, who leads the new unit.
Goldman Sachs Asset Management's outsourcing business also has the full support of parent company, Goldman Sachs Group (GS) Inc., New York, and was mentioned as one of the money management business' strongest investment areas in the firm's 2017 annual report.
GSAM also has combined its multiasset-class and OCIO businesses into a global portfolio solutions unit, which managed a total of $135.2 billion in outsourcing programs as of March 31, with $81.6 billion of that managed with full or partial discretion. The unit managed $113 billion in multiasset-class strategies as of the same date.
Managing OCIO programs for very large institutional investors is a legacy business for GSAM that began in the 1990s and continues to be an area of strong growth, said Kane Brenan, managing director, global head and co-CIO of the client solutions business.
The mid-2017 acquisition of the strategic partnership-based OCIO business of Verus Investors pumped up the firm's large-plan OCIO business by $21 billion and added senior staffers with experience in managing outsourced mandates.
GSAM managed a total of $1.498 trillion as of March 31.
State Street Global Advisors, like Goldman Sachs, also got a jump-start in its investment solutions business through an acquisition. Its parent company, State Street Corp. (STT), acquired GE Asset Management on July 1, 2017, said Daniel P. Farley, executive vice president and CIO of SSGA's investment solutions group. "The motivation behind the GE Asset Management acquisition was to bring in OCIO skill and the experience of the GE investment team" which would allow SSGA to enhance its existing outsourcing capabilities, Mr. Farley said.
"The basic premise behind the merger was that the OCIO market will grow upmarket and accelerate," said David W. Wiederecht, executive vice president and head of the firm's global outsourced CIO business, who noted SSGA's target investors for OCIO services are large corporate defined benefit plans with at least $1 billion, and preferably more than $2 billion, in assets. The firm already has 25 such OCIO clients.
SSGA managed $92.3 billion with discretion in worldwide institutional outsourced assets and $213 billion in multiasset-class strategies, and had total assets of $2.729 trillion as of March 31.
By contrast, Vanguard Group, Malvern, Pa., has not integrated its multiasset-class investment function with investment outsourcing, said Christopher B. Philips, principal and head of Vanguard Institutional Advisory Services, the firm's OCIO business.
The firm's multiasset-class investments totaled $872 billion as of March 31, of which $650 million was managed in target-date funds for defined contribution plans within the company's equity investment group. Aggregate OCIO assets managed with discretion were $41 billion as of the same date.
Given Vanguard's firmwide focus on low-cost investment, Mr. Philips — not surprisingly — noted most OCIO approaches are "insanely expensive; 18 basis points on $500 million is a lot of revenue for the manager."
Vanguard's customized approach to OCIO mandates range from 30 basis points for the smallest plans to 5 basis points for the largest plans, Mr. Philips said.
"We can manage even a small defined benefit plan (between $2 million and $5 million) with a customized OCIO approach including full outsourced services at the same cost the plan sponsor would pay if staff managed the plan,” Mr. Philips said.
Vanguard managed a total of $5 trillion as of March 31.