Managers see demand for innovation

In response to strong client demand, outsourced CIO managers are developing new investment strategies or enhancing existing approaches to improve diversification for defined benefit and defined contribution plans and other asset owners.

Among the investment innovations for OCIO portfolios, executives of outsourcing firms pointed to their addition of more alternative investment strategies to pump up returns; commingled investment trust funds for use in both defined benefit and defined contribution portfolios; adding annuities within defined contribution plan OCIO portfolios and target-date funds; and partnering with money managers to create customized funds for client portfolios.

OCIO managers said they have seen very healthy interest and inflows in their strategies amid a tough investment environment in 2022 from all sizes of corporate defined benefit and defined contribution plans, and generally smaller public defined benefit plans, endowments, foundations and sovereign wealth funds.

When it comes to innovation, Wilshire Advisors LLC, Santa Monica, Calif., has a long legacy of building customized investment portfolios for investors, but launched the firm's first collective investment trust funds in 2021, said Ryan L. Lennie, Pittsburgh-based managing director, portfolio management, in an interview.

Users of the commingled funds include corporate DB and DC plans as well as public pension plans, but the funds also are used by Wilshire in building OCIO portfolios.

"We can build OCIO portfolios across the spectrum of CIT funds," Mr. Lennie said, adding that Wilshire is also adding alternative investment CIT funds with the recent launch of a long-credit fund. A diversified real assets CIT including real estate, commodities and global infrastructure will go live in the third quarter.

Wilshire ranked 23rd in worldwide institutional ranking with OCIO assets managed with full/partial discretion totaling $23.1 billion as of March 31, up 13.2% from the same date in 2021.

As for asset owners' interest in OCIO solutions," there's no question that we are seeing more demand for OCIO assignments from all sizes of investors from very small to the larger end of the scale," said Suzanne Bernard, OCIO not-for-profit lead at Northern Trust Asset Management, Chicago, in an interview.

Ms. Bernard said Northern Trust has seen more interest in OCIO assignments from asset owners with large allocations than in the past.

Ms. Bernard said some of the demand is from "second generation" CIOs who are interested in rebidding their OCIO providers and from defined contribution plans.

She added that endowments, foundations and other non-profit organizations increasingly are turning to turnkey solutions that include private equity, real estate, infrastructure and other alternative investments as well as traditional strategies, noting that these portfolios "have performed exceptionally well in current markets."

Northern Trust Asset Management managed $98.7 billion in OCIO worldwide institutional assets managed with full/partial discretion as of March 31, down 1.7% compared with the prior year, according to Pensions & Investments data, placing it as the ninth-largest OCIO manager.

BlackRock Inc., New York, also expects more large asset owners to move to OCIO investment arrangements, said Ryan Marshall, managing director and co-head of the New York-based firm's multiasset strategies and solutions unit, in an interview.

"We will see some of the largest OCIO mandates joining our platform in 2022," to some extent because "OCIO arrangements are very cost competitive compared to an in-house investment team," he said, noting that he could not identify potential investors or provide details about cost.

One of the problems for many corporate DB plans is that for in-house investment teams focusing on the plan's funded status, handling investments in a volatile market is challenging, which is leading to employees leaving sooner than expected, and these experienced employees are not easy to replace, Mr. Marshall said.

One of BlackRock's innovations is to bundle an annuity offering in its LifePath Paycheck target-date offering, Mr. Marshall said, noting that it may be attractive to retirement plan participants. He described the LifePath target-date DC plan series as "a different expression of OCIO."

BlackRock ranked fourth on P&I's ranking of OCIO managers by worldwide institutional assets under management with full/partial discretion with assets of $184.5 billion as of March 31, up 16.3% from the prior year.

A focus on adding more diversification to defined contribution target-date portfolios and other DC plan OCIO portfolios also led WTW Investment Services, New York, "to begin to build a multiasset fund with a broader range of real asset strategies beyond real estate investment trusts, including alternative credit and infrastructure," said Jonathan Pliner, senior director of investments and U.S. head of delegated portfolio management, in an interview.

The WTW team also will focus on investment beyond retail real estate properties to include senior, student and single-family housing, life sciences properties and essential data infrastructure in the fund, he said.

Another innovation for the OCIO team is the development of partnerships with individual money managers to create customized strategies for WTW, Mr. Pliner said.

"When we're looking at strategies we're interested in, increasingly, we're partnering with money managers to be sure that we get the specific exposure we want" in various asset classes, he said.

WTW Investment Services held the sixth position in P&I's ranking of OCIO managers by worldwide institutional assets under management with full/partial discretion, with AUM of $181.1 billion as of March 31, an increase of 7.9% from the prior year.

Boston-based State Street Global Advisors is increasingly bringing together public and private market strategies to its mostly customized defined contribution plan target-date OCIO practice, said Daniel Farley, chief investment officer of the investment solutions group, in an interview. He declined to provide specifics.

He noted that like BlackRock, SSGA now also offers both a deferred annuity and an immediate fixed index annuity in OCIO target-date defined contribution plans.

SSGA managed $181.7 billion as of March 31, up 0.3% from a year earlier and the fifth largest OCIO manager ranked by worldwide institutional assets.

Sources said there has been somewhat less innovation in OCIO portfolio investments for corporate defined benefit plans because many are using liability-driven approaches.

Mr. Farley said the firm's OCIO team crafted active strategic allocation overlays for some corporate DB plans using LDI, which were "very important" because they underweighted equity and fixed-income allocations, added hedge funds for diversification and commodities and infrastructure for returns over the past six to seven months.

Other OCIO managers also are seeing interest from corporate defined benefit plan sponsors seeking OCIO LDI arrangements.

"We're seeing very strong demand from corporate defined benefit plans on the LDI track that continue to move from open to closed to frozen," said Peter Corippo, managing director for retirement fiduciary solutions for Russell Investments, Seattle, in an interview.

Because there is an increased need for corporate DB plans for better governance, strong staffing levels and additional technology to track funded status, Mr. Corippo predicts that more corporate defined benefit plans will move to an OCIO solution.

Russell Investments managed $175.9 billion in worldwide institutional AUM with full/partial discretion as of March 31, down 4.3% from a year earlier.