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.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
