Investment outsourcing is the process whereby institutional investors and high-net-worth families engage a third party to manage all or a portion of their investment portfolio. This arrangement can include functions such as establishing the asset allocation, selecting investment managers, implementing portfolio decisions (both strategic and tactical), providing on-going oversight, performing risk management and other areas of portfolio management. Investment outsourcing goes by many names including fiduciary management, outsourced chief investment officer (OCIO), CIO in a box, and implemented consulting.
Outsourced investment management is a large and growing market segment with over a trillion dollars currently managed by outsourced managers."The New Gate Keepers," Casey Quirk Associates, 2008 Retrieved 2012-07-31"Cerulli: OCIO assets expected to reach $1.7 trillion by 2023," Pensions & Investments, March 21, 2019 Retrieved 2019-08-28 According to a survey of outsourcers by aiCIO magazine, the volume of outsourced assets increased 200% between 2007 and 2011."2012 Investment Outsourcing Buyers Guide," p 54, available at http://www.ai-ciodigital.com/ai-cio/20120102#pg54
The outsourcing trend began with smaller institutions that could not or did not want to build an internal investment team. According to a study by the Family Wealth Alliance, approximately four in ten wealthy families have outsourced discretionary investment authority. The trend is even clearer among families with less than $500 million in assets where two-thirds have outsourced management.Inaugural 2009 Single-Family Office Study, Family Wealth Alliance Retrieved 2012-07-31 Similarly, just 11% of college endowments between $100 and $500 million internally manage their portfolios and instead rely on outsourced managers.2009 NACUBO/Commonfund Study of Endowment Results Increasingly, however, it is not just small investors seeking to outsource. There has been a marked increase in the number of multibillion outsourcing engagements since the 2008 financial crisis as firms grapple with increasing complexity and the need for better risk management."CIO in a Box Gaining Popularity: Business Booms as More Institutions Outsource Investment Management," Pensions & Investments, June 14, 2010 Retrieved 2012-07-31
History Donald E. Callaghan and Jonathan Hirtle, Chief Executive Officer for Hirtle, Callaghan & Co., pioneered the outsourced Chief Investment Officer (OCIO) model, which serves family groups and organizations that do not employ fully staffed investment departments. For his OCIO innovations, Hirtle has been dubbed the "Oracle of Outsource."
Outsourcing models
The model by which outsourced CIOs service clients is still evolving in this nascent business. One common model is to outsource all decision making including asset allocation, manager selection and monitoring. The OCIO reports back to the client but the burden is largely lifted from the client and placed on the new provider. Among OCIOs utilizing this approach, there is a "continuum of outsourcing approaches and providers: manager-of-manager programs; funds-of-funds; former CIOs offering a diversified model portfolio."Urie, Sandra. "CIO Outsourcing: Questions Investment Committees Need to Ask" Forbes, June 30, 2010. Viewed June 20, 2013. The common thread amongst these approaches is the use of commingled funds or model portfolios which creates economies of scale for the OCIO.
A different model is pursued by a growing subset of the OCIO universe. The members of this group work alongside the client's staff – not as a replacement to them. According to investment industry newsletter FundFire, "An increasing number of CIOs see outsourcing not as a threat to their job, but as a source of complementary expertise and advice, as well as investment opportunities." Many of the firms offering this more customized model also offer traditional investment consulting services to institutions and see OCIO as a natural extension of these services. Four of the five largest OCIOs as of March 31, 2019 have roots in investment consulting: Cambridge Associates, Mercer, Russell Investments, and Aon.
Fees
The management fees charged by outsourced managers vary widely based upon a number of factors, but are generally between 0.1% and 1%, with some firms also charging an incentive fee in addition to their base management fee.See page 27 of "San Jose Police and Fire Board Retreat", presentation by investment committee chairman Vincent Sunzeri, available at http://www.sjretirement.com/uploads/PF/3_aitemPFSpecMtgMar12.pdfConsulting firm RV Kuhns reports fees range from 30-100 bps based on a number of factors, "Considering the OCIO Option: Not an Everyday Decision for Fiduciaries", February 2013, available online at http://www.iiforums.com/cfr/presentations/cfr13-ocio.pdf, viewed April 24, 2013Additional fee data was obtained from various sources including filings with the Securities & Exchange Commission. In a panel discussion organized by CIO magazine, representatives for three different firms discussing the rise in investment outsourcing gave ranges of between 0.25% and 0.65%, with some of the difference explained by the use of internal or proprietary funds or a purely open-architecture approach. In some quarters, discontent has been voiced about investment outsourcing firms which allocate client capital to proprietary products charging a second layer of fees.Jones, Lillian. "Outsourced CIO Services a Big Fat Scam?" Emerging Manager Blog, May 25, 2011. Viewed March 12, 2013.
Investment outsourcers by assets
The next two tables use data from Charles Skorina & Company's "Ultimate Outsourcer’s List" and is divided into two categories: 1) outsourcers who advise on a diverse set of mandates including pensions, non-profits and family trusts and 2) university endowment-style outsource managers.The Skorina Letter, No 29, August 11, 2011 Retrieved 2012-07-31 The list curated by Skorina & Company is more expansive than the other most commonly referenced list prepared by Pensions & Investments (P&I). The P&I list counts only the top 25 and is available only to paid subscribers.
Firm name Assets under management Russell Investments $96.0 billion SEI $64.7 billion Mercer $51.0 billion Willis Towers Watson $50.0 billion State Street Global Advisors $41.0 billion BlackRock $55.0 billion Northern Trust $20.0 billion Clearbrook Financial $30.0 billion Strategic Investment Group $21.2 billion PFM Asset Management $1.6 billion Hall Capital Partners $30.0 billion Morgan Stanley (Graystone Consulting) $22.0 billion Hirtle Callaghan $22.0 billion NEPC $17.0 billion Partners Capital Investment Group $48.0 billion Marquette Associates $13.0 billion UBS $12.8 billion Wilshire Associates $9.7 billion Pyramis Global $6.7 billion Spruce Private Investors $3.2 billion Spider Management Company $3.1 billion Angeles Investment Advisors $2.1 billion FEG Investment Advisors $20 billion Post Rock Advisors $1.1 billion Balentine $1.4 billion Goldman Sachs $25.0 billion JPMorgan Chase $23.0 billion Athena Capital Advisors $5.8 billion BNY Mellon Asset Management unknown Fortress Partners Funds $1.8 billion New Providence Asset Management $2.4 billion Rockefeller Financial $10.0 billion Salient Partners $17.0 billion Fiduciary Asset Management $2.0 billion SECOR Asset Management $7.5 billion Pacific Global Advisors $20.0 billionVerger Capital Management $2.2 billion
Consultants push into outsourcing
In the general investment outsourcing area, where outsourcers serve a variety of clients including pension funds, non-profits and families, the business grew out of investment consulting firms and to a lesser extent large banks and money managers. In the early 1970s, as corporate pension plans were implementing ERISA, investment consulting firms came of age. Large organizations often had both in-house investment staffs and investment committees populated by sophisticated professionals. These groups wanted to make all important decisions themselves, and therefore they looked to the consultants only for recommendations, especially regarding asset allocation and manager selection. "In other words, investment consulting began, and remained for many decades, a non-discretionary, advisory-only model for delivering investment advice. The consultants made recommendations, but the clients decided what to do.""The Outsourced CIO Model," Whitepaper No. 49, Greycourt, 2010 Northern Trust was the first firm to offer an outsourced model in 1979 followed a year later by Russell Investments.
Investment consultants have been eager to exit the "largely unsatisfactory, low-margin, and litigious business" and "keen to move into what is perceived as a significantly better business model, where fees are asset-based." These consulting firms typically have large staffs and experience consulting on a large (multibillion-dollar) scale. On the other hand, "critics assert that consultants suffer from a lack of competence as portfolio managers, and that their experience with the administration of a fund is nonexistent.""Consultant Corner: Investment Outsourcing," aiCIO magazine, June 13, 2011 Retrieved 2012-07-31 Others have raised concerns about the possibility for conflicts of interests when consultants attempt to move into the outsourced CIO business."In Search of an Honest Man," Balentine, November 2010"Institutional Investors Using Boutique Consultants for Advice on outsourcing: Because large consulting firms offer outsourcing, most are referring clients to smaller peers for searches", Pensions & Investments, May 14, 2012 Retrieved 2012-07-31 British advisory firm Allenbridge Epic, after surveying 11 OCIOs, concluded that several lacked transparency and suffered from conflicts of interest.Sullivan, Ruth. "Fiduciary management minefield for trustees," Financial Times, June 9, 2013. Viewed August 27, 2013.
Pension investment outsourcing
One of the first institutional scale investment outsourcing arrangements occurred in 1986. Three investment managers who had worked for IBM's pension fund left the company and formed SASCO Capital. They managed a portion of the IBM pension plan but IBM also kept a large portion of the assets and investment team in-house. Another early example of pension fund investment outsourcing involved General Dynamics. In November 1994 General Dynamics became the first client when its treasurer formed a new outsourced investment firm, Fiduciary Asset Management. At the time of General Dynamics’ initial allocation, this was a $2.5 billion mandate."General Dynamics Spin-Off, Plan Sponsor magazine, November 1994 Retrieved 2012-07-31 In 2001 another of the early large pension outsourcing arrangements occurred when Xerox hired General Motors Asset Management (GMAM) to manage its $4 billion defined benefit pension plan. This move was prompted, in part, by the departure of two senior Xerox professionals to run other investment plans. As part of the arrangement, Xerox's chief investment officer joined GMAM. Following GM's bankruptcy, in 2010 Xerox took back the management of its pension assets.Second Client: Xerox signs on with GM Asset," Pensions & Investments, October 29, 2001 Retrieved 2012-07-31
Other early examples of pension fund investment outsourcing included Brown & Williamson, Weyerhauser, Maytag, ADM and K-Mart."Upfront: Anatomy of an Outsourcing Deal," Plan Sponsor magazine, January 2002 Retrieved 2012-07-31
In the United States, movement toward outsourcing by state, county or municipal pension plans has been slower than corporate pensions. This is despite the difficulty that many public pension funds have recruiting and retaining qualified staff, particularly in alternatives such as hedge funds, private equity and real assets such as real estate, oil & gas and infrastructure."Public Fund Salaries Remain Skimpy," Plan Sponsor magazine, November 1998 Retrieved 2012-07-31