The outsourced chief investment officer model has prospered in the US, with family offices and other organizations farming out business. With client demands rising, the model cannot presume easy growth in future.
The outsourced chief investment officer business model has expanded in the North American market, winning clients such as family offices, but clients are likely to force some providers to up their game, a report says.
The OCIO model is at an "inflection point" according to research from Boston-based analytics firm Cerulli Associates.
Driven by institutional investor demand for timelier decision making, deeper manager due diligence, and greater oversight of portfolio risks, the OCIO model has flourished and investors are broadly satisfied with the model and governance structure," the organization said.
Cerulli predicts that the business model will move from overseeing about $1.1 trillion in US assets under management today to almost $1.7 trillion by 2023.
However, there is a gentle warning in the report that growth is not a sure-fire proposition.
While 89 per cent of the organizations that Cerulli questioned think their OCIO is well positioned to meet their performance goals and objectives over the next three to five years, nearly one-fifth of institutions are unsure whether their OCIO will meet their performance goals in a down market. Cerulli said that future market turbulence will fuel continued growth in OCIO adoption as more institutions are likely to seek the help of a provider when returns become harder to generate.
“Clients are seeking help at a whole-portfolio level in the face of low returns from traditional asset classes, greater complexity and uncertainty, and rising regulatory scrutiny,” Sarah Melvin, head of the institutional client business for the US and Canada at BlackRock, said. “OCIO providers that can truly partner with clients to understand their needs and can provide comprehensive solutions will continue to grow in today’s environment," she said.
“A market downturn will provide a new set of challenges for OCIO providers that have largely grown their business in an extended bull market,” Michele Giuditta, director at Cerulli Associates, said. “For this reason, we expect replacement searches will continue to grow along with assets under management," she continued.
This news service has spoken to outsourced CIO firms such as Hirtle Callaghan about this space and its investment views. With family offices and other entities squeezed by costs and the need for more expertise, the outsourcing route offers appeal. (But as Hirtle Callaghan noted when it spoke to FWR, an important issue is ensuring that the OCIO is genuinely independent.) Another OCIO business, for example, is Silvercrest Asset Management.
According to the Cerulli report, 57 per cent of organizations have initiated or plan to conduct a replacement search or market check since hiring their OCIO provider. Of those organizations that have completed a search, exactly half have replaced their OCIO. The reasons for replacement vary and include a desire for greater flexibility, stronger investment capabilities, better performance, broadened asset class coverage, proactive client service, and a better fit with the OCIO.
“Institutions have a larger, more diverse pool of OCIO providers from which to choose, and many early adopters are conducting due diligence to see whether their OCIO is keeping up with the market,” Giuditta said.
The Cerulli white paper, which is sponsored by BlackRock, captures feedback from 45 institutions, including nonprofits, corporate defined benefit plans, healthcare organizations, public defined benefit plans, and family offices, representing more than $25 billion in assets under management.