New Greenwich Report on OCIO Kicks Off New Research Product Focused on Small and Mid-Sized Asset Managers
A growing number of small and mid-sized U.S. institutions are considering a step that just a few years ago would have seemed radical: outsourcing discretionary control of part or even all of their investment portfolios. That trend could have profound implications for the businesses of asset managers competing for institutional assets.
Greenwich Associates today released a report entitled, “Outsourced CIO Model Carries Risks and Opportunities for Asset Managers.” This report is the first in a new, quarterly thought leadership series offered through a subscription to the Greenwich ACCESS™ tool for asset managers.
The study identifies several trends that will likely push an increasing number of institutions to consider the outsourced CIO model in coming years:
- The steady increase in the share of assets invested by endowments and foundations in alternatives has made tasks such as allocating funds, performing manager due diligence and monitoring existing managers increasingly complex and time consuming.
- The relatively large allocations to alternative asset classes only serve to compound the challenges facing all institutional investors in an era in which markets are becoming increasingly complicated, volatile and fast, and decisions must be made at a rapid pace.
- Most investors expect investment returns in the next decade to fall short of those achieved in the years prior to the global financial crisis, and some are seeking external help in building portfolios for a low return environment.
These trends are posing a significant challenge to small and mid-sized endowments and foundations that often operate on a much smaller budget than that available to larger institutions. Maintaining an experienced chief investment officer and investment staff equipped to handle new market challenges is expensive. In addition, many endowments and foundations have investment committees made up of volunteers who may or may not have extensive knowledge and experience in financial markets. The committees also might not meet regularly enough to provide robust oversight and quick decision making.
Even among small and mid-sized endowments and foundations that maintain full-time investment staffs, many plan sponsors believe budgetary constraints and lack of compensation competitiveness limits their ability to hire and retain top-notch investment professionals. Some of these institutions welcome the opportunity to transfer discretionary control to sophisticated external providers through the OCIO model, and also see the potential to realize cost-savings through outsourcing.
Implications for Asset Managers
The most immediate risk to institutional asset managers ranking outside the industry’s top 100 in terms of assets under management is that virtually all new OCIO arrangements result in manager terminations. More generally, by aggregating the assets of small institutions, the OCIO will reduce the number of asset management mandates available from small and mid-sized institutions. Some smaller asset management firms will be unable to accept the large mandates awarded by OCIO providers; others will be excluded from consideration by OCIO providers who mitigate risk by avoiding awarding mandates that would constitute a relatively large share of an individual manager’s total AUM.
Despite these risks, the proliferation of OCIO could present a significant new opportunity for smaller asset managers able to demonstrate their ability to consistently generate alpha. “One of the best ways managers can position themselves to reap the enormous benefits of landing a spot on a large OCIO provider’s platform is to view the OCIO sales process more as relationship development than as product sales,” says Greenwich Associates consultant Andrew McCollum. “OCIO providers are always in need of new ideas and innovative solutions that can be applied to the portfolios of their many clients. As a result, asset managers who can position themselves as trusted advisors could gain an invaluable advantage.”
About Greenwich ACCESS™
Greenwich ACCESS is a tool for the asset management community. It includes a subscription to an online portal with Greenwich Associates proprietary research of hundreds of research reports and thousands of data tables documenting client demand, product usage, fund flows and other key metrics. Subscribers receive quarterly Greenwich Reports covering best practices in the asset management community and are invited to participate in roundtable discussions with their peers and industry experts hosted by Greenwich Associates consultants.