A new report from Cerulli Associates, “U.S. Outsourced CIO Function 2016: Opportunities for Providers to Support Institutions Across Client Segments,” highlights the very strong growth experienced by outsourced chief investment officer (OCIO) providers in recent years.
The informative publication is actually Cerulli’s “first report focused on the OCIO market,” a fact that in itself suggests change in the OCIO landscape, including in market sizing, forces of growth, and demand and needs across client segments. In particular, Cerulli finds the segment of the market in which the OCIO provider actually takes discretion over client assets—as oppposed to just offering advice—has grown impressively, with such mandates doubling in volume to reach nearly $1.3 trillion over the past five years.
“The growth of the outsourcing market stems from increasingly complex and volatile capital markets, regulatory changes, resource constraints, and demand for improved governance,” Cerulli explains. “As a result, institutions seek timelier decision-making, deeper manager due diligence, and greater oversight of portfolio risks.”
According to Cerulli Associates, the vast majority (85%) of OCIO providers surveyed expect significant new business opportunities from institutions looking to move from an advice-only advisory relationship to a more discretionary OCIO solution.
NEXT: Much wider use of OCIO
“Institutions of all size cohorts are using the OCIO model,” adds Michele Giuditta, associate director at Cerulli. “To date, smaller investors with less than $250 million in assets have been the most frequent adopters of an OCIO solution; however, several OCIO providers indicated there is a trend of outsourcing mandates moving upmarket.”
In fact, Cerulli says some providers believe that this is partly due to new client segments, such as defined contribution (DC) plans and health care institutions showing greater interest in OCIO services.
“Others have cited an increase in demand from nonprofits with greater than $100 million in assets," Giuditta explains. “Cerulli's propriety survey data also identified a greater use of the OCIO model by larger institutions.”
Compared to last year's survey results, OCIOs have increased their proportion of clients with greater than $1 billion in assets under management, the Cerulli data shows. While corporate defined benefit (DB) plans and nonprofit institutions have been the greatest users of the outsourcing thus far, the OCIO service arrangement clearly has a lot to offer other groups of clients as well.
“It can work for nearly any pool of assets,” Giuditta concludes. “Health care institutions, for example, are grappling with many challenges and relying more heavily on investment performance to meet their goals … Anticipated outsourcing growth for DC plans is also high, primarily due to the expected implementation of the Department of Labor (DOL) Conflict of Interest Rule in 2017; the 'DB-ization' or institutionalization of DC plans; and the prominence of 401(k) fee-related lawsuits in recent years.”
Additional information about obtaining Cerulli research reports is available here.
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