Volatility, complex markets buoy OCIO

Demand for the services of outsourced chief investment officers is likely to remain robust in the coming years as institutions face a persistently volatile market environment requiring professional expertise, while the growing appeal of high-returning alternative assets will also buoy the need for OCIOs.

Set back by difficult market conditions in 2022, OCIO assets managed for institutions worldwide with discretion declined to $2.55 trillion as of March 31, down 4.5% from $2.68 trillion in 2022, according to Pensions & Investments' latest survey of OCIO managers.

However, Peter Corippo, Seattle-based managing director, fiduciary solutions-retirement at Russell Investments, said the ongoing volatility in the public markets will likely benefit OCIOs as more asset owners would rather transfer management of their assets to outside entities with high expertise. "Volatile markets like what we have been experiencing really test the mettle of investors and I think many of them would prefer to let an outside firm handle their investments," he said.

Russell Investments had $152.5 billion in outsourced assets under management as of March 31, down 13.3% from the prior year's survey.

The robust demand for OCIO services from institutional clients is an ongoing scenario that was heightened by the "incredible volatility of markets" in 2022, agreed Sona Menon, Boston-based head of the North American pension practice and an OCIO at Cambridge Associates LLC.

"This has been a long-term trend and I think it will continue unabated," she said. "As markets remain volatile and institutional investment portfolios have become more complex, the need for OCIO services keeps increasing. Institutional clients often do not have in-house expertise in managing their assets, and OCIOs can provide day-to-day portfolio management and oversight, proactively manage risk and also quickly and nimbly rebalance portfolios when necessary, especially during market dislocations."

Cambridge had $48.7 billion in outsourced AUM with discretion as of March 31, down 5.8% from a year earlier.

David Keil, Chicago-based partner and corporate defined benefit solution leader at Aon Investments USA Inc., also acknowledged that the ongoing volatility — much of it induced by high inflation — in stock and bond markets has provided a boon for OCIOs as such a difficult climate compels asset owners to rely more on outside professionals to manage their assets and navigate turbulent waters.

“OCIOs can provide a governance framework to help asset owners rebalance portfolios amid a volatile backdrop,” Mr. Keil said.

Most of the larger OCIOs have the broad expertise in handling many types of market conditions, he added, and, as active managers, they can respond quickly as market conditions change.

Aon had $178 billion in outsourced AUM as of March 31, down 13% from the previous year.

Continued volatility tends to lead investment committees to take a closer look at their organization's investment portfolio, noted Kane Brenan, Radnor, Pa.-based CEO of TIFF Investment Management. "Historically, these types of reviews have led asset owners to seek out OCIOs through formal searches," he said via email.

"OCIOs have been busy responding to RFIs and RFPs," Mr. Brenan said, noting that search activity was up 22% between 2021 and 2022. "Some asset owners are seeing a drop-off in performance as a reason to initiate a search, while others are doing so due to service concerns."

TIFF had $8.3 billion in outsourced AUM as of March 31, up 6.4% from a year prior.

Thomas J. Kennelly, Boston-based managing director and senior investment strategist in the investment solutions group of State Street Global Advisors, agreed that the "drastic shift" in central bank policy in the midst of inflationary shocks experienced in 2022 and the heightened market volatility have been tailwinds for search activity and prompted asset owners to research the benefits that an OCIO can bring to plan sponsors and non-profit investment committees.

SSGA reported $152.9 billion in outsourced AUM as of March 31, making it the sixth-largest OCIO in P&I's database, down 15.8% from 2022.

Research from Cerulli Associates published earlier this year supports Mr. Kennelly's conclusion that asset owners are watching the space closely. According to Cerulli, roughly 25% of institutional asset owners said they are considering the services of an outsourced chief investment officer in some capacity over the next 24 months. Specifically, 14% of asset owners said they are considering outsourcing their CIO responsibilities and 11% said they are considering expanding the role of their current OCIO from managing a partial portfolio, or sleeve, to a total portfolio or the addition of other in-house-managed asset pools.

Some of the institutions currently seeking out the services of an OCIO manager are:

• Illinois Firefighters' Pension Investment Fund, Lombard, which issued an RFP in February for an OCIO firm to assist on a new private markets portfolio. The fund has $7.5 billion in total defined benefit assets.
• Braintree (Mass.) Contributory Retirement System, which issued an RFP in January for an OCIO manager due to the upcoming contract expiration of incumbent SEI Investments. The pension fund has $252 million in assets.
• Greenwich (Conn.) Town Retirement System, which issued an RFP in January for an OCIO manager due to the upcoming contract expiration of incumbent Neuberger Berman. The pension fund has $618 million in assets.

Institutions are challenged by the same hiring and turnover trends affecting other industries, leading to increased needs for investment and operational support to manage investment portfolios, added Timothy Yates Jr., Wilton, Conn.-based president and CEO of Commonfund OCIO. "They are looking to OCIOs to provide these functions and support," he said via email.

"While there are few, if any, truly new asset classes in the world, there is increased complexity within asset classes and a huge number of strategies and managers globally to track and evaluate, which also requires significant resources — this is another place where investors are looking to OCIOs for help," Mr. Yates said.

Commonfund reported $12.2 billion in outsourced AUM as of March 31, down approximately 17% from a year prior.

Asset owners are drawn to OCIO providers for support in diversifying their portfolios outside of the public markets, TIFF's Mr. Brenan said.

"The demand for alternatives, particularly in private markets, remains significant," he noted. "Asset owners don't believe they have the appropriate level of expertise to identify these managers or the network to gain access — as such, they turn to OCIOs for support."

The use of complex asset classes and investment strategies is a strong point in favor of the OCIO approach, concurred Ryan Lennie, Pittsburgh-based managing director at Wilshire Advisors LLC.

"It is difficult for many investment committee members to gain the familiarity required to evaluate and manage these strategies through a typical quarterly meeting cycle, so an OCIO team that specializes in these strategies will likely be in a better place to make decisions," he said via email.

Wilshire had $21.5 billion in outsourced AUM as of March 31, down 6.9% from a year earlier.

Demand for alternative assets — including real assets, infrastructure, hedge funds, real estate and private equity — will remain high for a wide spectrum of asset owners due to their risk management benefits and total-asset-pool return potential, predicted John J. Delaney, Philadelphia-based portfolio manager and senior investment consultant at Willis Towers Watson PLC.

WTW reported outsourced AUM of $165 billion as of Dec. 31 , making it the fifth-largest OCIO in P&I's database, down 8.9% from March 31, 2022.

Russell's Mr. Corippo asserted that the OCIO business is becoming "more upmarket."

"Mandates are getting bigger and bigger," he said. "Asset owners, especially pension plans, are allocating more dollars to outside management of their assets."

Jennifer Kruse, New York-based U.S. OCIO leader at Mercer, agreed mandates are growing. "We are seeing OCIO mandates for larger asset pools either because of the complexity of these programs or the need for expertise that teams don't have in-house," she observed. "This has been driven largely by retirements among in-house teams, departures, or M&A activity that adds to plan oversight complexity."

Mercer is the largest OCIO in with discretion in P&I's database with $337.7 billion in outsourced AUM as of March 31, down 8.8% from a year prior.

Midsize plans, in particular, are facing a "war for talent" and considering OCIO services as a result, said Amanda Nelson, New-York based principal at Casey Quirk, Deloitte's asset management strategy consulting business.

"The inability to get the talent they want internally is forcing them to look externally for providers that can fill the gap," Ms. Nelson said.

Indeed, a recent Casey Quirk survey, conducted earlier this year in partnership with P&I, found that looking across the various plan sizes — small, midsize and large — midsize plans, defined as having between $2 billion and $10 billion in assets, reported the greatest planned usage of OCIO in the next one to two years at 18%, vs. 11% for small plans and 9% for large plans.

Roughly 80 asset owners and consulting firms were surveyed between February and April.

Midsize plans tend to have the investment complexity of large plans without the resources, Casey Quirk's survey report said.

Bailey McCann contributed to this story.