The investment mandate outsourcing industry is booming, delivering significant prizes for asset managers as tough markets, a deluge of compliance and governance requirements and rising costs push large asset owners to ask for their help.
The industry has more than doubled in size since 2016, reaching $2.46 billion in assets under management worldwide.
The pace is unlikely to slow with a flurry of recent large trades. In March, BlackRock was appointed by insurer AIG to manage up to $150 billion in bond and private assets. Last year, British Airways transferred £21.5bn into its two main pension schemes to the US manager. In April, UK fund house Schroders announced a new £10 billion mandate to manage the pension schemes of energy supplier Centrica.
New research from the Chestnut Advisory Group estimates the industry will grow to more than $4 billion in assets by 2026 as more flexible mandates open up the industry to a wider range of clients than smaller pension plans who initially sought outside help to manage their investments.
While the United States led the way in so-called outsourced investment manager (OCIO) transactions, accounting for more than two-thirds of assets, growth in Europe has also been notable.
“More than half of our growth over the last three years in Europe has been in the non-retirement segments – so insurance, endowments, family offices, foundations,” said Jo Holden, global head of investment research at Mercer, one of the largest OCIO Providers in the world with $388 billion in assets under delegated management. “We had an extremely busy period in terms of calls for tenders and new mandates,” she added.
Outsourcing arrangements vary in the level of delegated control and the degree of flexibility has increased significantly over time.
Some clients want the external portfolio manager to take care of everything: asset allocation, selection of funds and individual managers and finally all risk management and back-office functions. Others want to retain veto power over key decisions, or only outsource funds for a particular type of asset, as in the case of the AIG-BlackRock deal, which involves fixed-income assets and private placements.
In order to secure the Centrica mandate, as well as a partnership to manage funds on a new platform with the insurance market Lloyd’s of London, Schroders “has worked with these two organizations for a long time, establishing that we have a common culture, a set of beliefs,” said James Barham, executive chairman of Schroders Solutions, which has £234.5bn of assets under management under OCIO arrangements. “The trustees not only pass on a team of highly recognized and respected individuals, but also the assets of three plans and all of their employees. This is not a decision taken lightly,” he said.
BlackRock had outsourced deals with more than 120 institutional clients to manage more than $200 billion by the end of last year. The world’s largest asset manager also provides similar “full portfolio” services to wealth management clients covering an additional $230 billion in assets. Last year, all of that wallet activity grew 16%, compared to an industry average of 7%, BlackRock said.
For the full service, BlackRock offers a wider range of onboarding options, including helping senior executives report to their boards on key issues and answering questions.
“You have to imagine you’re down the hall from the CEO or the president of the university and what might send them down the hall. You have to serve that stakeholder,” said Ryan Marshall, co-director of multi-asset strategies and solutions at BlackRock.
“Each pension fund must not only support the front office [investment choices] but also the technology and the back office,” he added. “People want something that’s right for them with the benefits of scale that BlackRock can provide.”
OCIO transactions first took off among relatively small clients — typically pension plans with $100 million to $1 billion or even less — who were looking to cut costs and benefit from economies of scale and convenience. technological investments.
But much larger plans have shown interest in the past couple of years. The same goes for mature pension plans that are closed to fresh money and unwilling to hire in-house people to manage them.
Interest has also spread from European defined benefit plans, which were early adopters, to the United States and, more recently, to Asia. Endowments, insurers and family offices are also appropriating the services.
Increased regulatory and compliance scrutiny, and in particular the explosion of environmental, social and governance investments in recent years, has also driven up demand.
“Sustainable investing is a very big driver, especially in the UK and Europe, due to reporting requirements. Non-profits and endowments are [also] particularly focused on that in the United States,” said Greg Calnon, global head of multi-asset solutions at Goldman Sachs, which manages $220 billion in its OCIO business.
But while their popularity has exploded, there is little evidence to demonstrate the performance of outsourced investment mandates compared to their in-house counterparts.
OCIO fees are highly personalized and rarely made public, and they are in addition to the fees paid to the managers of the actual investments.
This means that potential conflicts of interest between the investor and the external manager may arise around the allocation of investments and must be managed.
“You need to have a governance structure in place to ensure that investments made internally are made for the right reasons,” said Rikhav Shah, director of consultancy EY.
Fundamentally, critics question the ability to make money from an outsourced CIO mandate unless the fund manager deliberately directs the investment to their own funds.
“We looked at it and couldn’t get it to work,” said the managing director of a very large asset manager. “My view is that there is a direct conflict of interest. The company will say ‘I’m going to charge you close to zero for the OCIO service, but by the way, 50% of the money goes to my funds. “
Seth Bernstein, managing director of $779 billion asset manager AllianceBernstein, said: “It’s hard to do outsourced CIO well if you’re a store owner, because your preference will always be for your own funds, and customers will have problems with that.”
“For the OCIO provider, this is a concept to be validated commercially because it is difficult to scale and maintain quality service and performance,” he added. “For the OCIO user, the returns are unconvincing. The reason for doing this is risk mitigation rather than returns, as you don’t have the time or resources to do it yourself.