The market for outsourced investment teams is “red-hot” thanks to the darkening outlook for future returns, with allocators of capital increasingly delegating entire multibillion-dollar mandates to outside money managers.
Big corporate or public pension plans, endowments and foundations usually have in-house investment divisions, and only hand out specific mandates to external money managers.
However, smaller entities lacking the scale to employ expensive internal investment teams often outsource the entire management to investment consultants such as Mercer or asset managers such as BlackRock, which have specialist “outsourced chief investment officers”, or OCIOs.
The OCIO industry is now growing in size and scope, as bigger companies and institutions outsource pools of money to these specialists given the increasingly treacherous investment landscape.
“It’s red-hot,” said Michelle Seitz, chief executive of Russell Investments, an asset manager with a big OCIO business. “There’s a lot of activity. It’s one of the fastest, if not the fastest growing spaces in the industry.”
Globally, there was about $2tn of assets managed with full or partial discretion by OCIOs by the end of March 2020, according to an annual survey by Pension & Investments, an industry magazine. That is nearly twice the size of the industry in 2013, and its growth is accelerating.
Industry executives say the business has become increasingly competitive. Fees can vary widely — both in scale and structure — but are generally healthy and growing at a time when many other corners of the investment industry are under pressure. As a result, big banks, money managers and dedicated OCIOs are expanding to fight for mandates.
“It’s such a competitive battlefield,” said Stan Miranda chair of Partners Capital, an OCIO firm. “You’ve got the banks, you have the consultancies, you have the asset managers and you have specialists like us.”
Although the economics vary between institutions, the typical OCIO mandate has usually been less than $1bn — a size where it often does not make sense for a university endowment or small pension pot to hire their own investment staff.
More than half of all OCIO mandates in the US are for less than $100m, according to Cerulli Associates. Russell Investments estimates that 76 per cent of institutional investors with assets under $10bn have not yet outsourced their investment activities — leaving plenty of room for the industry to grow.
However, there has also been a recent flurry of mandates for $10bn or more, according to industry executives, and many expect the trend towards bigger OCIO deals to pick up in pace.
“The trend towards outsourcing will only continue to accelerate,” Larry Fink, BlackRock chief executive, said on the asset manager’s recent earnings call. “More clients are looking to outsource their entire portfolio as regulations intensify, operating cost-wise and investing grows more complex.”
BlackRock recently won a $30bn OCIO mandate to manage British Airways’s pension plan — the biggest such deal record in the UK, according to the asset manager — and Fink predicted that this would become “a catalyst for more transformational change in the industry”.
John Waldron, president and chief operating officer of Goldman Sachs, recently said that its asset management division was also seeing a “very strong” pipeline for OCIO services.
Industry executives say that one of the major drivers is the increasingly gloomy return expectations for the coming decade, given how high valuations are across the board today. While buoyant markets have swelled the size of many pools of capital, the trickier outlook makes it tempting to outsource investment management to bigger specialists.
Based on long-term patterns of market valuations and subsequent returns, researchers at investment group AQR estimate that a traditional portfolio split between 60 per cent in stocks and 40 per cent in bonds will in the coming 5-10 years return 2.1 per cent annually after inflation.
GMO, the asset manager founded by Jeremy Grantham, is even more bearish. Given how frothy markets currently are, it forecasts that every major asset class except certain corners of emerging market stocks will lose money in real terms over the coming seven years.
While the vast majority of institutions with $10bn or more have in-house investment teams to manage the money, a growing acceptance of outsourcing across the board is likely to change that, industry executives argue.
The interest in hiring OCIOs is particularly strong among corporate pension plans — where running sometimes sizeable pools of money can be a troublesome distraction from business’s core focus — but public retirement programmes, foundations and university endowments are also increasingly looking to do so, industry executives say.
A lack of internal resources and “better risk management” are the main reasons to use an OCIO, according to a 2020 survey by Chief Investment Officer, an industry magazine.
“It’s not their main business, and they don’t have all the tools necessary in-house to maximise the opportunities,” Seitz said. “In a low interest rate environment, ensuring that you’re able to meet long-term liabilities has become more complex.”
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
