2018b776141bb4b7592b6152-dbef5d8ae260c3bb21474ba0e94bcba6.r94.cf2.rackc…coordinated, but if they...

Chief Investment Officer / ai-cio.com/surveys 1©1989-2018 Strategic Insight. All Rights Reserved. No reproduction or redistribution without prior authorization. For information, call (203) 595-3276 or email [email protected]

2018

©1989-2018 Strategic Insight. All Rights Reserved. No reproduction or redistribution without prior authorization. For information, call (203) 595-3276 or email [email protected] Chief Investment Officer / ai-cio.com/surveys / Art by Chris Buzelli 2

Asset owners seek OCIO partnerships to navigate increasingly challenging conditions amid a growing lack of internal

resources and the need for better risk management

I n 2018, our annual outsourced chief investment officer (OCIO) survey shows institutional investors across the board have been working hard to find the right OCIO

partnerships to navigate increasingly challenging conditions. The key challenges for the year: a jump in the lack of internal

resources, even as the need for better risk management also climbs. A lack of internal resources was cited a “critical” reason for outsourcing this year by 71% of respondents, up sharply from 58% the year prior. Better risk management, meanwhile, was cited as

“critical” by 52% of respondents from 32% last year. That follows the trends of 2017, when OCIO services were key

to diversifying investments and helped to navigate returns through the frothy waters of geopolitical risk. In 2016, a bifurcation began between the largest and smallest OCIO firms, as asset owners leaned away from a boutique approach.

As conditions become more challenging, institutional investors are asking for more from the best providers.

In 2018, our annual outsourced chief investment officer (OCIO) survey shows institutional investors across the board have been working hard to find the right OCIO partnerships to navigate increas-ingly challenging conditions.

The key challenges for the year: a jump in the lack of internal resources, even as the need for better risk management also climbs. A lack of internal resources was cited a “critical” reason for outsourcing this year by 71% of respondents, up sharply from 58% the year prior. Better risk management, meanwhile, was cited as

“critical” by 52% of respondents from 32% last year. That follows the trends of 2017, when OCIO services were key

to diversifying investments and helped to navigate returns through the frothy waters of geopolitical risk. In 2016, a bifurcation began between the largest and smallest OCIO firms, as asset owners leaned away from a boutique approach.

As conditions become more challenging, institutional investors are asking for more from the best providers.

“The barrier to entry in a fragmented OCIO market is currently low, but the combination of scale, infrastructure, and results will increasingly matter and differentiate successful firms from marginal players. Providers are building risk management, technology, pricing, and performance capabilities that will ultimately differentiate them along with performance results,” Bryan Weeks, head of Russell Investments’ Americas Institutional business, told CIO. “Increasingly, we hear from clients that OCIO experience really matters, i.e., clients do not want to give their OCIO provider on-the-job training,”

Accountability has been a key theme since the financial crisis. Asset owners are strong believers in hiring OCIOs, sometimes in an

effort to handle larger portfolios, sometimes to add more account-ability and take on more fiduciary responsibility. A growing trend that Russell Investments is seeing: some asset owners are adding internal management structures to improve accountability.

“To improve risk management, institutional investors such as Harvard Management Company are moving from a portfolio of asset class sleeves to a model in which all members of the invest-ment team take ownership of the entire portfolio,” said Weeks,

“for example, near the end of the investment cycle, bond portfolio managers gravitate toward high-yield bonds and equity managers seek out the scarce companies that could grow when the economy slows down.”

The model works smoothly if the investment decisions are well coordinated, but if they aren’t, a portfolio may develop uninten-tional risks. “To meet the need for holistic risk management, OCIOs are offering a multi-asset approach and total-portfolio perspective,” said Weeks.

This year, 36% of respondents said they currently outsource or intend to outsource. Behind the lack of internal resources and better risk management, additional fiduciary oversight was a key driver, with 48% of respondents (up from 43% last year) expressing it as a critical need; 19% expressed a critical need to increase returns (down from 28%).

Most of our respondents were from corporate pension plans (43%), and endowments and foundations (31%), with 23% from DC plans, and 20% from public plans. Most (55%) are outsourcing to de-risk their portfolios. Those with smallest staff and portfolios in the range of $100 million to $500 million tend to outsource the most.

Europe is showing an avid interest in outsourcing, with 50% of respondents planning to, or already using, OCIO services, up from 11% in 2017. In the US, the number rose to 42% from 40% last year. Yet, as the industry faces augmented pressures from institutional investors for increased transparency, reduced fees, and skepticism from lack of hedge fund performance, the number of respondents who outsource or intend to dipped by 4% from 2017. In the UK, other factors are also at play that could lead to an uptick in 2018.

“My view is that the reasons for outsourcing investment management for pension funds remain the same so, to start with, there would be no reason for a reduction in activity,” said Nigel Bottom, FPMI, international pensions manager, Motorola Solu-tions, UK Limited. “However, I can add a personal opinion, which is that the UK-based FCA review, which is currently underway, may have dampened immediate activities as potential participants wait for the outcome. If my view is correct, I would expect a subsequent increase in activity.” —Christine Giordano

2018 Outsourced-CIO Survey



MethodologyResponses from 70 asset owners, aggregated for the charts that follow, were accepted for the survey from January 16 to February 6, 2018. CIO would like to extend a special thank you to all those who submitted responses for the survey, as well as those vendors, asset owners, and consultants who helped the CIO editorial and survey teams construct the survey. For more information, contact [email protected].


Business model/type (see abbreviations) Ye

ar e

nter

ed in

to O

CIO

busin

ess

Relat

ionsh

ip m

grs/

sales

peop

le

Portf

olio

man

ager

s

OCIO

% o

f tot

al fir

m re

venu

e

AUM

full d

iscre

tion

# o

f clie

nts f

ull d

iscre

tion

Discretionary assets by fund type

Defi

ned

Bene

fit

401

(k),

403(

b), o

ther

DC

End

owm

ents

/Fou

ndat

ions

Hea

lth C

are

Oth

er

Aetos Capital, LP OCIO + other 2003 4 18 49% $1.84b 4 $0 $0 $0 $0 $0

Alan Biller and Associates Implemented consulting 2006 9 70% $41b 15 $39.5b $100m $20m $1.08b $300m

Angeles Investment Advisors OCIO + other 2002 9 10 $469.8m $104.1m $1.72b $375.4m $775.1m

Aon Hewitt Investment Consulting Implemented consulting 2009 83 19 44% $98.75b 343 $74.15b $17.19b $360m $3.35b $3.69b

Artemis Wealth Advisors, LLC OCIO only 2009 2 2 100% $600m 10 $0 $0 $110m $0 $740m

BlackRock, Inc. Prop/non-prop 2006 n/a n/a $85.75b 75 $70.88b $0 $3.46b $0 $11.41b

BNY Mellon Fiduciary Solutions Prop/non-prop 1983 10 3 <1% $8.36b 60 $7.76b $20m $80m $220m $280m

Callan LLC OCIO + other 1996 14 * 10% $23.68b 9 $534m $22.57b $576m $0 $0

Cambridge Associates OCIO + other 2001 3 9# 14% $29.92b 108 $13.27b $0 $13.14b $563m $2.94b

Commonfund1 OCIO + other 1971 26 32 40% $11.91b 298 $0 $0 $11.05b $858m $0

DiMeo Schneider & Associates, L.L.C. Implemented consulting 2005 3 11% $3.1b 28

Discretionary Management Svcs, LLC OCIO only 2007 11 3 100% $346m 18 $83.4m $0 $79.8m $0 $182.7m

Fund Evaluation Group, LLC (FEG) OCIO + other 2003 15 7 35% $2.89b 107 $436m $4m $2.18m $68m $205m

Goldman Sachs Other 1995 282 $73.49b 289 $ 47.02b $0 $10.46b $809.5m $15.2b

Hirtle, Callaghan & Co. OCIO only 1988 12 20 100% $21.5b 244 $1.1b $260m $9.9b $3.3b $7b

A total of 34 firms that offer Outsourced Chief Investment Officer (OCIO) services volunteered information this year. For the purposes of this guide, “full discretion” is defined as the OCIO firm having the authority to hire and fire managers without prior client approval. Total full discretionary assets under management represented by these 34 firms is $1.45 trillion among 10,688 clients. Median discretionary assets are $22 billion. An Excel data file, containing more information on each provider, is available by contacting [email protected].

2018 Outsourced-CIO Buyer’s Guide

Abbreviations Full Description

OCIO only Open-architecture (no proprietary products used): Investment outsourcing is only business line.

OCIO + other An open-architecture/manager-of-manager investment outsourcing platform as one of multiple business lines.

Implemented consulting i.e. consulting firm that also has discretion over some assets.

Prop/non-prop An investment outsourcing platform that offers proprietary products alongside non-proprietary products.

* Investment Committees# 9 dedicated OCIO teams1 The Common Fund for Nonprofit Organizations2 100% of SEI’s Institutional Group revenue is represented by OCIO business. SEI’s Institutional Group revenue represented 22% of SEI Investment Company’s 2016 total annual revenue.


Abbreviations Full Description

OCIO only Open-architecture (no proprietary products used): Investment outsourcing is only business line.

OCIO + other An open-architecture/manager-of-manager investment outsourcing platform as one of multiple business lines.

Implemented consulting i.e. consulting firm that also has discretion over some assets.

Prop/non-prop An investment outsourcing platform that offers proprietary products alongside non-proprietary products.

* Investment Committees# 9 dedicated OCIO teams1 The Common Fund for Nonprofit Organizations2 100% of SEI’s Institutional Group revenue is represented by OCIO business. SEI’s Institutional Group revenue represented 22% of SEI Investment Company’s 2016 total annual revenue.

Business model/type (see abbreviations) Ye

ar e

nter

ed in

to O

CIO

busin

ess

Relat

ionsh

ip m

grs/

sales

peop

le

Portf

olio

man

ager

s

OCIO

% o

f tot

al fir

m re

venu

e

AUM

full d

iscre

tion

# o

f clie

nts f

ull d

iscre

tion

Discretionary assets by fund type

Defi

ned

Bene

fit

401

(k),

403(

b), o

ther

DC

End

owm

ents

/Fou

ndat

ions

Hea

lth C

are

Oth

er

J.P. Morgan Asset & Wealth Management Prop/non-prop 1988 1,400 585 $66.64b 392 $22.63b $2.08b $14.41b $0 $27.52b

Meketa Investment Group Implemented consulting 2006 28% $7.4b 34 $5.3b $1b $800m $300m $0

Mercer OCIO + other 1995 274 75 44% $217.75b 1,188 $119b $76.38b $8.4b $25m $13.97b

NEPC, LLC Implemented consulting 2011 14 10% $15.75b 41 $7.2b $5.0b $1.49b $1.67b $383m

Northern Trust Asset Management OCIO + other 1979 75 59 $72.1b 92 $36.8b $5.2b $2.3b $500m $27.3b

Partners Capital Investment Group OCIO only 2001 0 36 90% $8.23b 90 $852m $0 $4.39b $0 $2.99b

PFM Asset Management OCIO + other 2007 20 8 15% $10.88b 201 $2.78b $3.72b $643m $293m $3.45b

Prime Buchholz LLC. Implemented consulting 2011 18 $375m 8 $0 $0 $375m $0 $0

Russell Investments OCIO + other 1980 84 83 75% $224.41b 474 $69.51b $23.23b $2.86b $6.45b $122.36b

SEI Institutional Group OCIO + other 1983 46 21 22% 2 $93.2b 525 $62.72b $6.25b $10.53b $9.43b $4.25b

Spider Management Company OCIO only 2006 100% $4.56b 29 $0 $0 $4.56b $0 $0

State Street Global Advisors OCIO + other 1994 10 61 <3% $109.8b 10 $74.1b $0 $0 $0 $35.7b

Strategic Investment Group OCIO only 1987 8 43 100% $25.25b 29 $11.34b $0 $4.42b $1.58b $7.92b

TIFF Investment Management Other 1995 5 12 100% $9.1b 645 $0 $0 $9.1b $0 $0

U. S. Trust OCIO + other 1853 39 29 7% $25.1b 455 $11.18b $0 $14.72b $0 $0

UBS Asset Management OCIO + other 2007 5 4 <1% $13.08b 12 $12.54b $0 $158m $0 $381m

Vanguard Other 1997 55 36 $36b 979 $11.79b n/a $15.16b n/a $9.05b

Wells Fargo Prop/non-prop 1932 NA NA NA $32.7b 3717

Willis Towers Watson Implemented consulting 1998 85 28 $73.3b 159 $57.6b $12.47b $3.08b $0 $118m

2018 Outsourced-CIO Buyer’s Guide continued

2018b776141bb4b7592b6152-dbef5d8ae260c3bb21474ba0e94bcba6.r94.cf2.rackc…coordinated, but if they...

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