Amid an expected pickup in consolidation for outsourced CIOs, top providers — overseeing a mix of corporate, nonprofit and healthcare plan assets — insist that scale is a friend, capable of accelerating their own growth while delivering better value for clients.
Competitors focused on narrower market segments such as endowments and foundations, by contrast, say they’re careful to maintain a more modest pace of growth that won’t inhibit their search for alpha.
Analysts say the industry is broad enough to allow providers on both sides of that divide to build successful businesses.
In the outsourcing business, scale generally does help from a provider profitability perspective because costs go down and revenues go up, said Ravi Venkataraman, managing partner and co-owner of Chestnut Advisory Group, a Westport, Conn.-based boutique management consulting firm focused on asset managers and investment solutions providers.
Ever more complex solutions, meanwhile, call for “increasing technology spend, which in turn will favor firms that can build scale — even if there’ll always be room for specialist competitors that know their market segment better than anybody else,” Venkataraman said.
The largest managers in Pensions & Investments’ latest OCIO rankings say increasing heft in terms of outsourced assets under management benefits their businesses.
“Scale is increasingly important and we’re going to continue to see scale be a differentiating feature and factor as people make decisions,” said Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management.
GSAM — which retained second place in P&I’s latest ranking with $328.9 billion in worldwide outsourced institutional AUM as of March 31, up 33% on year — reported in May that UPS hired it to manage the Atlanta-based package delivery giant’s $43.4 billion in North American defined benefit assets.
“Every time we bring in another $50 billion, we're able to leverage that scale, (providing) better savings not only for our existing clients but for new clients” as well, Braude said.
Mercer, which held on to the top spot in the latest rankings with a 39% surge in outsourced AUM to $469.2 billion, helped by two sizable acquisitions, likewise made scale work for its clients last year, noted Rich Nuzum, Mercer’s executive director, investments and global chief investment strategist.
By way of example, when Mercer “closed the liftout” of Australia’s A$63 billion ($42.7 billion) BT Westpac retirement business on April 3, 2023, “we passed back that benefit of increased size” with a more than 30% drop in expense ratios for a representative account of A$50,000 — a concrete example of how scale can drive better outcomes for clients, said Nuzum.
Some competitors contend there’s a self-reinforcing element to such scale increases, allowing OCIOs to offer compelling value propositions to ever-larger plan sponsors.
Several years ago, when BlackRock’s OCIO business was considerably smaller, a number of corporate retirement programs in the U.S. boasted sufficient scale to make them competitive with BlackRock's team in terms of hammering out attractive terms with external managers, noted Ryan Marshall, managing director and co-head of BlackRock’s multiasset strategies and solutions investment group.
But with the continued healthy growth of BlackRock's OCIO business, “we can now bring economies of scale to more and more clients,” delivering benefits for very large organizations in a way BlackRock wasn’t able to do when it was smaller, he said. At present, Marshall noted, BlackRock's book of business with external managers has grown to $150 billion.
That value proposition is coming under consideration in an ever-expanding number of C-suites.
“If you’re a (chief operating officer) sitting at almost any institution, you’re being asked about core and noncore activities. And increasingly with these large mandates being public, you’re being asked … is that something that might make sense for us as well,” said Marshall.
Michael Cagnina, senior vice president and managing director of SEI’s institutional business, agreed that scale has its advantages but that, he suggested, doesn't necessarily mean that bigger is always better. Once an OCIO manager achieves a certain critical mass, the benefits of further scale may diminish, he said.
For providers approaching the top 10 in OCIO industry rankings, even if a competitor brings an addition $50 billion in AUM to the table, the pricing they get from external managers should be “pretty similar,” Cagnina said.
Scale becomes the enemy
OCIO managers focused on endowments and foundations, meanwhile, say they see scale as more problem than solution and their AUM growth for the year through March 31, even accounting for the 4% to 5% disbursements those nonprofits distribute annually by law, remains relatively modest.
For example, Hirtle, Callaghan & Co. stood 33rd in the latest rankings, with a 5% gain in worldwide institutional outsourced assets to $12.7 billion, while Global Endowment Management, in 37th place, reported a 0.9% increase to $10.2 billion.
Global Endowment Management doesn’t aspire to manage $50 billion or $60 billion in client assets, said Matt Bank, a partner, deputy CIO and head of the client portfolio management group at the Charlotte, N.C.-based OCIO boutique. That kind of scale would impinge on the ability of GEM's team to deliver investment excellence in less traveled corners of the market such as small private equity buyouts or elite venture capital.
For those market segments, scale is the enemy of returns and at a certain point “we would have to take more risk … to deliver the same kinds of returns that clients expect,” Bank said.
Bank said such considerations could take on greater importance with the end of a 15-year run of favorable market conditions marked by rock-bottom interest rates and steady gains in equity market beta that effectively helped buoy all boats.
That change of fortunes will make it more difficult to deliver strong results going forward, setting the stage for a pickup in consolidation that will pose the central question: What are clients getting out of it, Bank said.
“Every firm in our space can be plotted somewhere on the spectrum of treating (OCIO) like a business or treating it like a profession,” with more and more treating it like a business, Bank said.
Consolidation by those like-minded firms could benefit them but “I’m not sure what the benefits are to the clients at the end of the day: Are you getting a better portfolio? Are you getting more engagement? Are you getting a willingness to do things that don’t scale and help these institutions through difficult times?”
It’s an open question, Bank said.
Consolidation, meanwhile, could prove more complicated than many are anticipating, analysts say.
"If you can successfully scale it's very profitable," but achieving that in the OCIO business is not always a straightforward exercise, noted Amanda Tepper, managing partner and co-owner of Chestnut Advisory Group. "Not all the transactions are going to work out for everyone involved," she warned.
By way of example, Tepper pointed to Mercer's policy of not taking on public fund clients, which resulted in the firm not taking on all of the clients that came with Mercer's March 2024 acquisition of Vanguard's OCIO business. Mercer no longer works with public pension plans after a 2010 lawsuit settlement.
In light of the enormous "breakage fees" incurred when a client changes OCIO provider, that has been a "wake-up call for every client who has an OCIO," Tepper said. "That's a risk that generally had not been thought about or considered as a key risk going into hiring an OCIO," she said.
