Increasing complexity of assets. A need to move quickly to adjust to volatile markets and uncertainty. Those are just a few of the reasons why industry experts and consultants say demand for outsourced CIO managers will only continue to grow.
According to data compiled by Pensions & Investments, OCIO assets managed for institutional investors worldwide with full or partial discretion surged to about $2.66 trillion as of March 31, up 5.4% from 2021 and 86.1% from 2017.
“Looking at (asset owners’) cost structures and resources, it just makes more sense for them to outsource their investment management,” said Michael Cagnina, Oaks, Pa.-based vice president and managing director of the institutional group at SEI Investments Co. “Plus, the market has more esoteric asset classes like private equity, cryptocurrency, infrastructure, real estate, etc., that OCIOs are more likely to have expertise in and familiarity with.”
SEI had $100.7 billion in worldwide outsourced institutional AUM with full or partial discretion as of March 31, making it the eighth-largest OCIO manager, down 5.3% from $106.3 billion in the prior survey.
Kane Brenan, Radnor, Pa.-based CEO of TIFF Investment Management, agrees that one of the principal reasons behind the growing popularity of OCIOs is that more asset owners have realized using outside experts can lead to better investment outcomes and improved governance, particularly important right now given the current state of the markets and the overall economy. TIFF Advisory managed $7.81 billion in outsourced assets as of March 31, up 5% from a year earlier.
“Organizations have to focus on the core of their businesses, and many simply do not have the time nor expertise to focus on their investments,” he said. “And as we now have entered a period of extreme volatility in the markets, in conjunction with rising demand for higher-returning alternative assets, I expect the demand for OCIO services will accelerate.”
Volatile markets rattled by rising inflation as well as interest rates can test even the largest asset owners.
The S&P 500 Total Return index was up 15.6% in the year ended March 31; AlphaNasdaq OCIO Broad Market index, up 3.3%; and the Bloomberg U.S. Aggregate Bond index, down 4.2%. That’s in sharp contrast with the prior year, when the S&P 500 Total Return index was up 56.4% in the year ended March 31, the AlphaNasdaq OCIO Broad Market index was up 30.7% and Bloomberg U.S. Aggregate Bond index was up 0.7%.
One OCIO cited another factor contributing to the rise of industry: the Great Resignation whereby millions of Americans either quit their jobs or retired due to the pandemic.
“This phenomenon has also hit asset owners and institutions,” said Samantha Davidson, New York-based senior partner and U.S. leader of Mercer LLC’s OCIO business. “Key investment staff and board committee members have either left or retired and this has placed a greater burden on entities which manage assets. They find it increasingly more viable to shift asset management to OCIOs amid all this confusion and uncertainty.”
The Great Resignation, she added, has been particularly challenging for human resource teams, prompting more defined contribution plans to seek out OCIOs.
According to data compiled by P&I, Mercer had $370.2 billion in worldwide institutional outsourced AUM with full or partial discretion as of March 31, placing it first among OCIO firms, up 0.9% from a year earlier. Mercer also ranked No. 1 among OCIO managers of DC assets, with $72.3 billion.