There are many reasons institutions choose to outsource investment management functions of their defined benefit (DB) plan, says Michele Guiditta, associate director at Cerulli. The vast majority of companies paying for full outsourced chief investment officer (OCIO) services cite a lack of depth of internal expertise to manage assets across a broad spectrum, especially as pertaining to alternatives exposure and global asset portfolios.
The OCIO service model has evolved significantly in recent years, according to Cerulli Associates research and that of other research providers. Back in the 1980s, for example, companies often chose to outsource activities such as pension fund management, primarily because they hoped to get fee concessions by aggregating their assets. Initially, they were satisfied if the fees were lower and the manager performed above the benchmark.
But plan sponsors today want more interactive and rapid assistance in managing their pension plans, among other mandate themes for OCIO providers. “Now, nearly 32% of asset managers polled have an alternative investment mandate for a corporate defined benefit [DB] plan that is currently adhering to a de-risking strategy,” Guiditta notes. “These plans are looking to better diversify their portfolios and enhance returns.”
OCIOs are also increasingly popular among public pension plans looking to narrow their funding gaps, Cerulli has found. These sponsors are increasing their holdings in risky assets and are looking for guidance on managing risk holistically and building alternative asset portfolios. Another theme cutting across OCIO demand is the expectation of efficient and timely decisionmaking concerning global portfolios.