There are many reasons institutions choose to outsource investment management functions, explains Michele Guiditta, associate director at Cerull, but the vast majority of those springing for full outsourced chief investment officer (OCIO) services cite a lack depth of internal expertise to manage assets across a broad spectrum, especially as it pertains to alternatives exposure and global assets portfolios.
The OCIO service model has evolved significantly in recent years, according to Cerulli and other research providers. Back in the 1980s, for example, companies often chose to outsource activities like 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 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 finds. 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 around global portfolios.
“Asset allocation has become increasingly complex for both public and private DB plans,” explains James Tamposi, analyst at Cerulli. “Compared with 20 years ago, when a pension could meet a return target by merely investing in corporate bonds, pensions today must consider equities and alternatives. Corporate DB plans are regulated differently than public plans and face varying obstacles as a result.”
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