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Laura Levesque, Cerulli Associates

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US outsourced CIOs eyeing alternative assets for diversification and improved returns

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Outsourced chief investment officer (OCIO) clients in the US are increasingly seeking alternative investments to diversify their portfolios and to obtain higher returns than those currently available from public investments.

That’s according to new research from Cerulli Associates which finds that OCIO providers expect allocations to alternative asset classes to grow for nearly all institutional client types while equity allocations are trimmed. When OCIO providers were asked about their anticipated changes to “other” private investment allocations (including real estate, infrastructure, and private debt), almost all respondents indicate that they expect allocations to increase for endowments, foundations, corporate defined benefit (DB) plans, and health/hospital systems. When the same group was asked about anticipated changes to private equity allocations, just over 40 per cent of providers expect private equity allocations to rise for all but corporate DB plans, where 33 per cent of providers expect an increase.

Cerulli believes that one explanation behind this expected shift is investors’ concern about the possibility of a future market downturn. 

“Providers and asset owners are paying close attention to portfolio diversification and the low correlation of many alternative asset classes to public investments, particularly equities,” says Laura Levesque (pictured), senior analyst at Cerulli. “The current capital market environment is also a reason for these expected allocation changes. As persistent single-digit equity returns and relatively low interest rates make it challenging for investors to reach target returns using only public investment opportunities, clients seek private investments in an effort to close the gap.”

The demand for alternative asset investments is intense and competition for the top managers and deals continues to grow. “For smaller clients looking to diversify their portfolio or seeking to increase returns, the benefits of an OCIO provider are twofold. First, they can spend more time on and conduct deeper due diligence into many investment opportunities, often with more expertise, than a limited in-house investment team would,” says Levesque. “Second, because they manage multiple clients, they are often able to access better quality investments than any small asset owner could do on their own.” 

Cerulli expects that OCIO clients will use providers with alternative asset capabilities to a greater extent in the future.

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