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.”
Here's why investors like Warren Buffett don't like gold as an investment – CNBC
But not all investors are in love with gold. Warren Buffett has spoken out numerous times on his doubts, calling it an asset with “no utility.”
“It doesn’t produce anything and that’s why from a long-term perspective, it’s a hard asset to invest in,” Odyssey Capital Advisors chief investment officer Jason Snipe said. “It’s prudent portfolio management to have maybe a small allocation there but this is not an asset that you want to be heavily entrenched into if you’re looking for long-term yield.”
Since 2011, the S&P 500 has returned more than 16% on an annualized basis. The annualized return for the 10-year Treasury note sat at just over 2% in that time period. Gold, meanwhile, has fallen slightly over the past 10 years.
“Early on, you see strong performance, strong return or yield from commodities such as gold. Generally, as we move into a different cycle, gold is not as great a performer as we move into a normalized environment,” Snipe said.
Whether gold is an effective hedge against market volatility is also widely debated among experts.
“Gold is not necessarily a perfect hedge against inflation but it can be a strategic hedge against inflation,” according to Suki Cooper, executive director of precious metals research at Standard Chartered Bank.
“Various studies have shown us that if gold is held for 12 to 18 months before inflation takes higher and then it’s held for an additional 12 to 18 months while inflation moves higher, it can be a good inflation hedge,” Cooper said. “But if it’s just bought for a short period, let’s say a month, it may not prove to be an effective inflation hedge.”
Watch the video to find out more about how gold performs as an investment.
Ontario supports investment of $31.5M in Wellington, Perth county businesses – CTV News London
London, Ont. –
Ontario supports $31.5 million surge within the Southwestern Ontario economy with $2.6 million being invested in Wellington County through the Regional Development Program.
The investment by Wellington County manufacturers, which will build on domestic manufacturing is being supported by the Ontario government, will help to create 71 jobs and retain 150 jobs.
“Through the Regional Development Program, our government is making targeted investments in local manufacturers to help them create good, local jobs,” said Vic Fedeli, Minister of Economic Development, Job Creation and Trade in a statement.
“These projects are making a significant impact in communities and economies across the Wellington County region and Southwestern Ontario by helping to secure the private-sector investment that will support strong regional growth.”
The investments are as follows:
- Weberlane Manufacturing is investing $4.8 million to build a new 115,000 square foot manufacturing facility in Listowel.
- Nieuwland Feed & Supply is investing $16.2 million to consolidate its production facilities as well as build a second feed mill on the property.
- Bold Canine is investing $6.5 million to expand and renovate its facility, purchase equipment, and invest in research and development.
- Wellington Perforated Sheet and Plate is investing $3.9 million to develop new products, and produce more steel parts in-house.
The Regional Development Program for Eastern and Southwestern Ontario was launched by the government in November of 2019.
U.S. equity portfolio manager explains seven-step investment process – Wealth Professional
The third step is identifying growth drivers. Sanders carries with him words from an old mentor – ‘always understand what drives top-line revenue’. For example, when Sanders first invested in Amazon back in 2003, when it was $17 a share, online penetration of retail sales in the U.S. was only 3%, but he believed that number was going to grow substantially over time. He met with Jeff Bezos who explained his competitive advantages – widest selection, lowest prices and convenience – completed his analysis and bought the stock. Sanders said: “That’s an example of a company that had a clear growth driver – penetration of its end market with offline retail going online.”
The fourth step is a financial statement analysis, getting into the nitty gritty of the balance sheets from a cash-flow perspective, while the fifth step is a management team assessment. Sanders is not interested in a company’s latest shiny product but instead wants to understand the key assumptions that go into his team’s investment process. ESG factors are also analysed at this stage, including how the board is made up and the compensation model.
Step six is critical and involves Sanders laying out four scenarios – best case, base case, bear, and worst, which are all five-year minimum discounted cash-flow models. The base case is what he thinks the stock is worth today, an estimate of cents on the dollar or intrinsic value. If Sanders believes a stock is worth $100 and it’s trading at $70, it’s 70 cents. He said: “We have this list of companies we’re following, and it’s ranked by cents on the dollar every morning. When stocks get to 70 cents, we recheck the analysis and we buy, and when stocks get up to 100 cents, we sell. That, in a nutshell, is our process.”
Every quarter these values are updated, in step seven, so it’s a moving target, underpinned by deep fundamental research that involves a 10-person team looking at one stock at a time before presenting it the team for debate.
While many investors focus on what is happening that quarter, Sanders told WP he thinks longer term, an approach illustrated by the crash of March 2020. He saw a health crisis, not an issue with the consumer, who ultimately drives the economy. Now in his third market cycle of managing money, the portfolio manager recognized that many elements were actually in good health, from millennials with no mortgages, a housing market at steady levels in the U.S. as it continued its recovery from the 2008 Global Financial Crisis, and a banking system that was doing well after 10 years of Federal Reserve stress tests.
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