An ever-increasing number of institutional investors are choosing to hand over their assets to fiduciary managers and Outsourced Chief Investment Officers (OCIOs), rather than managing their investments in-house.
An ever-increasing number of institutional investors are choosing to hand over their assets to fiduciary managers and Outsourced Chief Investment Officers (OCIOs), rather than managing their investments in-house.
Total assets managed under OCIO mandates have shot up by more than 90 per cent to USD2.46 trillion globally in the past five years alone, according to a survey by Pensions & Investments.
This includes 23 per cent growth in assets managed with full or partial discretion by OCIOs in the year to the end of March 2021.
Simon Partridge, head of fiduciary management solutions at Russell Investments, says there has “definitely been an increase in activity” already since the end of 2020.
Russell Investments has USD272.5 billion assets under management in outsourced portfolios, as of 30 June 2021, and Partridge expects outsourced assets to grow by upwards of 20 per cent or more in the next year.
This growth is reflected both in the number of deals that are being struck, and also the size of the mandates. “We’re seeing multibillion pound schemes now going into some form of outsourcing,” says Partridge.
In June, British Airways selected asset manager BlackRock to manage more than GBP20 billion of its pension assets, in one of the biggest OCIO deals ever.
A recent survey by IC Select finds that UK pension funds choosing outside fiduciary managers are getting larger. In the first half of 2021, the average pension fund size with an OCIO increased 79 per cent, to GBP270 million.
One of the drivers of the outsourcing trend has been the experience of market volatility during the Covid-19 pandemic.
According to Partridge, the pandemic “really focused trustees’ and sponsors’ minds on the need for dynamism, and being able to make and implement decisions quickly”.
“The market shifts and the investment market dynamics over this last year has really focused the mind on the fact that, actually, in-house teams may not be able to make and implement decisions in a quick enough timeframe,” says Partridge.
“Without having to consult trustees and sponsors, and working with a professional partner who’s in the markets day-in, day-out, this can very much increase their chances of reaching the end-game.”
Cutting down costs is another key reason many institutions are looking to outsource investment management.
“A lot of the economies of scale come from the buying power of the underlying OCIO manager,” explains Partridge. “It’s about the pressure that we can apply on the underlying managers and the funds in terms of fees.”
He adds: “It’s also around the implementation of movements between funds and between asset classes and strategies. Having an outsourced partner manage that whole transition can save significantly in terms of costs of running the scheme.”
The growth of outsourcing has also started to raise concerns in the asset management industry, as this trend may accelerate growth for the largest managers who are able to offer OCIO services.
Major managers including BlackRock, Amundi, BNY Mellon, are in the midst of plans to expand their OCIO teams.
Offering fiduciary management solutions can create conflicts of interest for asset managers who also offer their own investment products, says Partridge.
This is because asset managers may prefer to invest client money in their own products, rather than those that best accord with the interests of their clients.
“The key thing when it comes down to conflicts is, is that provider more likely to choose their own internally managed offering over another’s? Are they choosing more expensive active strategies, and, if they get chosen, are they more likely to outperform net of fees?” says Partridge.
This could also end up making it harder for small to mid-sized asset managers to access investment by reducing the number of mandates available from institutions.
OCIO providers must make sure these conflicts are well-managed. “Most OCIO providers manage open-architecture mandates, so ones where they go out to the whole market and don’t just use internal strategies,” says Partridge.
‘Open-architecture’ allows fiduciary managers to offer their own in-house funds alongside external managers’ funds.
A survey by Cerulli Associates in 2020 found that a third of fiduciary managers in the UK run up to 50 per cent of their clients’ assets in proprietary products.
Nearly 38 per cent of the fiduciary managers Cerulli surveyed said that they manage less than 25 per cent of their clients’ assets in their proprietary solutions.
“Most often, although they offer this ‘open-architecture’, most of the assets end up in the in-house funds, and specifically, if the fiduciary manager offers LDI solutions then most likely, that pensions’ assets will be invested in-house LDI solution,” says Justina Deveikyte, who heads up the European Institutional Research team at Cerulli Associates.
“For the remaining portfolio, they may choose some external funds that are not necessarily the fiduciary manager’s funds.”
Russell Investments’ Partridge says that high-quality active managers and boutiques that specialise in niche areas of the market will still have a large role to play in OCIO portfolios in the future.
Within the world of outsourcing, demand is expected to grow particularly for those offering a wider range of ESG options and an increased focus on private market solutions, says Partridge.
He does not expect that OCIO will help drive consolidation in the asset management industry, which he calls a “broader industry trend”.
“I think that the growth of OCIO is actually going to encourage more innovation, and that the wider asset management world should be excited, not fearful,” says Partridge.
