Tuesday, April 10, 2018 Stamford, CT USA — As institutional investors combat an increasingly complex and expanding list of strategic issues, a growing number are turning to outsourced CIO (OCIO) providers to access investment expertise and secure better investment outcomes. This shift has major implications for asset management industry—and for institutional investment portfolios.
OCIO was once limited to small or mid-sized institutions that felt they lacked the size and resources needed to effectively manage their investment portfolios. However, a new report from Greenwich Associates, Winning in the New World of Outsourced CIO, finds that larger institutional investors are now embracing OCIO.
“OCIO converts are getting larger and more complex. We expect this trend to continue,” says Christopher Dunn, Greenwich Associates Vice President and author of the new report. “Also, greater regulatory oversight is a distinct possibility in the future, and the topic of fee compression is never far away.”
The Greenwich Associates report analyzes the evolution of the OCIO market, identifies the three major types of OCIO providers—independent OCIO firms, investment consultants and asset managers—and provides detailed advice to each group about how to achieve long-term success in the fast-changing world of OCIO.
More Sophisticated Portfolios
Greenwich Associates research confirms that funds change their asset allocation considerably when turning to OCIO. This presents an opportunity for managers who are able to bring greater sophistication to the table. In comparing the allocation decisions of current OCIO users to more independent, like-sized peers with under $500 million in assets, there are several notable differences. For one, OCIO users show a noteworthy shift away from the most liquid asset classes. In fact, average active U.S. equity allocations for OCIO funds are 27%, compared to 32% for peers of similar size.
Likewise, OCIO funds are reallocating these assets up the risk-return spectrum, as evidenced by their more globalized portfolios. Greenwich Associates research shows that mean active international equity and fixed-income allocations within OCIO portfolios sit near 25%, while like-sized institutions average only 17%.
New Channel, New Opportunities
For many asset managers, the OCIO channel is becoming too attractive to ignore. However, to increase distribution through OCIO providers, asset managers must be able to navigate the organizational complexity of the channel, increase the sophistication of their engagement, and deliver top-notch, client-centric service. “This difficulty is certainly exacerbated by the various shapes and sizes taken by OCIO providers,” says Christopher Dunn. “Between independent platforms, investment consultants and competing asset managers, there is no one-size-fits-all approach to engaging with these providers.”