2018 Outsourced-CIO Survey

2018

Asset owners seek OCIO partnerships to navigate increasingly challenging conditions amid a growing lack of internal resources and the need for better risk management

n 2018, our annual outsourced chief investment officer effort to handle larger portfolios, sometimes to add more account- (OCIO) survey shows institutional investors across the ability and take on more fiduciary responsibility. A growing trend that board have been working hard to find the right OCIO Russell Investments is seeing: some asset owners are adding internal partnershipsI to navigate increasingly challenging conditions. management structures to improve accountability. The key challenges for the year: a jump in the lack of internal “To improve risk management, institutional investors such as resources, even as the need for better risk management also Harvard Management Company are moving from a portfolio of climbs. A lack of internal resources was cited a “critical” reason for asset class sleeves to a model in which all members of the invest- outsourcing this year by 71% of respondents, up sharply from 58% ment team take ownership of the entire portfolio,” said Weeks, the year prior. Better risk management, meanwhile, was cited as “for example, near the end of the investment cycle, bond portfolio “critical” by 52% of respondents from 32% last year. managers gravitate toward high-yield bonds and equity managers That follows the trends of 2017, when OCIO services were key seek out the scarce companies that could grow when the economy to diversifying investments and helped to navigate returns through slows down.” the frothy waters of geopolitical risk. In 2016, a bifurcation began The model works smoothly if the investment decisions are well between the largest and smallest OCIO firms, as asset owners coordinated, but if they aren’t, a portfolio may develop uninten- leaned away from a boutique approach. tional risks. “To meet the need for holistic risk management, OCIOs As conditions become more challenging, institutional investors are offering a multi-asset approach and total-portfolio perspective,” are asking for more from the best providers. said Weeks. In 2018, our annual outsourced chief investment officer (OCIO) This year, 36% of respondents said they currently outsource or survey shows institutional investors across the board have been intend to outsource. Behind the lack of internal resources and better working hard to find the right OCIO partnerships to navigate increas- risk management, additional fiduciary oversight was a key driver, ingly challenging conditions. with 48% of respondents (up from 43% last year) expressing it as The key challenges for the year: a jump in the lack of internal a critical need; 19% expressed a critical need to increase returns resources, even as the need for better risk management also (down from 28%). climbs. A lack of internal resources was cited a “critical” reason for Most of our respondents were from corporate pension plans outsourcing this year by 71% of respondents, up sharply from 58% (43%), and endowments and foundations (31%), with 23% from DC the year prior. Better risk management, meanwhile, was cited as plans, and 20% from public plans. Most (55%) are outsourcing to “critical” by 52% of respondents from 32% last year. de-risk their portfolios. Those with smallest staff and portfolios in That follows the trends of 2017, when OCIO services were key the range of $100 million to $500 million tend to outsource the most. to diversifying investments and helped to navigate returns through Europe is showing an avid interest in outsourcing, with 50% of the frothy waters of geopolitical risk. In 2016, a bifurcation began respondents planning to, or already using, OCIO services, up from between the largest and smallest OCIO firms, as asset owners 11% in 2017. In the US, the number rose to 42% from 40% last year. leaned away from a boutique approach. Yet, as the industry faces augmented pressures from institutional As conditions become more challenging, institutional investors investors for increased transparency, reduced fees, and skepticism are asking for more from the best providers. from lack of hedge fund performance, the number of respondents “The barrier to entry in a fragmented OCIO market is currently who outsource or intend to dipped by 4% from 2017. In the UK, low, but the combination of scale, infrastructure, and results will other factors are also at play that could lead to an uptick in 2018. increasingly matter and differentiate successful firms from marginal “My view is that the reasons for outsourcing investment players. Providers are building risk management, technology, pricing, management for pension funds remain the same so, to start with, and performance capabilities that will ultimately differentiate them there would be no reason for a reduction in activity,” said Nigel along with performance results,” Bryan Weeks, head of Russell Bottom, FPMI, international pensions manager, Motorola Solu- Investments’ Americas Institutional business, told CIO. “Increasingly, tions, UK Limited. “However, I can add a personal opinion, which we hear from clients that OCIO experience really matters, i.e., clients is that the UK-based FCA review, which is currently underway, may do not want to give their OCIO provider on-the-job training,” have dampened immediate activities as potential participants wait Accountability has been a key theme since the financial crisis. for the outcome. If my view is correct, I would expect a subsequent Asset owners are strong believers in hiring OCIOs, sometimes in an increase in activity.” —Christine Giordano

Methodology

Responses from 70 asset owners, aggregated for the charts that follow, were accepted for the survey from January 16 to February 6, 2018. CIO would like to extend a special thank you to all those who submitted responses for the survey, as well as those vendors, asset owners, and consultants who helped the CIO editorial and survey teams construct the survey. For more information, contact [email protected].

©1989-2018 Strategic Insight. All Rights Reserved. No reproduction or redistribution without prior authorization. For information, call (203) 595-3276 or email [email protected] Chief Investment Officer / ai-cio.com/surveys 5 2018 Outsourced-CIO Buyer’s Guide A total of 34 firms that offer Outsourced Chief Investment Officer (OCIO) services volunteered information this year. For the purposes of this guide, “full discretion” is defined as the OCIO firm having the authority to hire and fire managers without prior client approval. Total full discretionary assets under management represented by these 34 firms is $1.45 trillion among 10,688 clients. Median discretionary assets are $22 billion. An Excel data file, containing more information on each provider, is available by contacting [email protected].

Discretionary assets by fund type

Business model/type

(see abbreviations) Year entered into OCIO business Relationship mgrs/salespeople Portfolio managers OCIO % of total firm revenue AUM full discretion # of clients full discretion Defined Benefit 401(k), 403(b), other DC Endowments/Foundations Care Health Other

Aetos Capital, LP OCIO + other 2003 4 18 49% $1.84b 4 $0 $0 $0 $0 $0

Alan Biller and Associates Implemented consulting 2006 9 70% $41b 15 $39.5b $100m $20m $1.08b $300m

Angeles Investment Advisors OCIO + other 2002 9 10 $469.8m $104.1m $1.72b $375.4m $775.1m

Aon Hewitt Investment Consulting Implemented consulting 2009 83 19 44% $98.75b 343 $74.15b $17.19b $360m $3.35b $3.69b

Artemis Wealth Advisors, LLC OCIO only 2009 2 2 100% $600m 10 $0 $0 $110m $0 $740m

BlackRock, Inc. Prop/non-prop 2006 n/a n/a $85.75b 75 $70.88b $0 $3.46b $0 $11.41b

BNY Mellon Fiduciary Solutions Prop/non-prop 1983 10 3 <1% $8.36b 60 $7.76b $20m $80m $220m $280m

Callan LLC OCIO + other 1996 14 * 10% $23.68b 9 $534m $22.57b $576m $0 $0

Cambridge Associates OCIO + other 2001 3 9# 14% $29.92b 108 $13.27b $0 $13.14b $563m $2.94b

Commonfund1 OCIO + other 1971 26 32 40% $11.91b 298 $0 $0 $11.05b $858m $0

DiMeo Schneider & Associates, L.L.C. Implemented consulting 2005 3 11% $3.1b 28

Discretionary Management Svcs, LLC OCIO only 2007 11 3 100% $346m 18 $83.4m $0 $79.8m $0 $182.7m

Fund Evaluation Group, LLC (FEG) OCIO + other 2003 15 7 35% $2.89b 107 $436m $4m $2.18m $68m $205m

Goldman Sachs Other 1995 282 $73.49b 289 $ 47.02b $0 $10.46b $809.5m $15.2b

Hirtle, Callaghan & Co. OCIO only 1988 12 20 100% $21.5b 244 $1.1b $260m $9.9b $3.3b $7b

Abbreviations Full Description OCIO only Open-architecture (no proprietary products used): Investment outsourcing is only business line. OCIO + other An open-architecture/manager-of-manager investment outsourcing platform as one of multiple business lines. Implemented consulting i.e. consulting firm that also has discretion over some assets. Prop/non-prop An investment outsourcing platform that offers proprietary products alongside non-proprietary products.

* Investment Committees # 9 dedicated OCIO teams 1 The Common Fund for Nonprofit Organizations 2 100% of SEI’s Institutional Group revenue is represented by OCIO business. SEI’s Institutional Group revenue represented 22% of SEI Investment Company’s 2016 total annual revenue.

Discretionary assets by fund type

Business model/type

J.P. Morgan Asset & Wealth Management Prop/non-prop 1988 1,400 585 $66.64b 392 $22.63b $2.08b $14.41b $0 $27.52b

Meketa Investment Group Implemented consulting 2006 28% $7.4b 34 $5.3b $1b $800m $300m $0

Mercer OCIO + other 1995 274 75 44% $217.75b 1,188 $119b $76.38b $8.4b $25m $13.97b

NEPC, LLC Implemented consulting 2011 14 10% $15.75b 41 $7.2b $5.0b $1.49b $1.67b $383m

Northern Trust Asset Management OCIO + other 1979 75 59 $72.1b 92 $36.8b $5.2b $2.3b $500m $27.3b

Partners Capital Investment Group OCIO only 2001 0 36 90% $8.23b 90 $852m $0 $4.39b $0 $2.99b

PFM Asset Management OCIO + other 2007 20 8 15% $10.88b 201 $2.78b $3.72b $643m $293m $3.45b

Prime Buchholz LLC. Implemented consulting 2011 18 $375m 8 $0 $0 $375m $0 $0

Russell Investments OCIO + other 1980 84 83 75% $224.41b 474 $69.51b $23.23b $2.86b $6.45b $122.36b

SEI Institutional Group OCIO + other 1983 46 21 22% 2 $93.2b 525 $62.72b $6.25b $10.53b $9.43b $4.25b

Spider Management Company OCIO only 2006 100% $4.56b 29 $0 $0 $4.56b $0 $0

State Street Global Advisors OCIO + other 1994 10 61 <3% $109.8b 10 $74.1b $0 $0 $0 $35.7b

Strategic Investment Group OCIO only 1987 8 43 100% $25.25b 29 $11.34b $0 $4.42b $1.58b $7.92b

TIFF Investment Management Other 1995 5 12 100% $9.1b 645 $0 $0 $9.1b $0 $0

U. S. Trust OCIO + other 1853 39 29 7% $25.1b 455 $11.18b $0 $14.72b $0 $0

UBS Asset Management OCIO + other 2007 5 4 <1% $13.08b 12 $12.54b $0 $158m $0 $381m

Vanguard Other 1997 55 36 $36b 979 $11.79b n/a $15.16b n/a $9.05b

Wells Fargo Prop/non-prop 1932 NA NA NA $32.7b 3717

Willis Towers Watson Implemented consulting 1998 85 28 $73.3b 159 $57.6b $12.47b $3.08b $0 $118m