Trends in CIO/Investment Outsourcing: Evaluating the Opportunity in a Recovering Economy

Transcription

1 Trends in CIO/Investment Outsourcing: Evaluating the Opportunity in a Recovering Economy March 14, 2012 Sample Slides This material is for use only by the company or individual purchasing this report. No part of the report may be copied, photocopied, duplicated, displayed, or distributed in print or electronic form to other parties without the prior written consent of Chatham Partners, LLC. Copyright 2012, Chatham Partners, LLC. All rights reserved.

2 2 I. Objectives and Research Methodology II. Executive Summary III. Implications for Service Providers IV. Investment Outsourcing Overview V. Attitudes of Respondents that Outsource a. Respondent demographics b. Characteristics of respondents who have adopted investment outsourcing c. Investment management approach and implementation d. Packaging of the investment outsourcing relationship e. Investment outsourcing drivers f. Provider selection g. Provider satisfaction h. Intent to change CIO/investment outsourcing relationship i. Client service VI. Attitudes of Respondents that Do Not Outsource a. Respondent demographics b. Characteristics of respondents without investment outsourcing c. Investment management approach and implementation d. Responsibility for fund investment management functions e. Barriers to adopting investment outsourcing and likelihood of adoption VII. Provider Research Overview VIII. Appendix (provided under separate cover) Table of Contents

3 I. Project Objectives and Research Methodology

4 4 Introduction The difficult economic environment and volatile investment returns have forced many institutional buyers to reevaluate their investment strategies, assumptions, and expectations. Market volatility, narrowing asset class correlations, and a new, and perhaps better, understanding of risk have left public and private pension plan sponsors, endowments, and foundations falling short of their goals. Endowments are struggling to balance liquidity needs with their long-term investment objectives, public pensions are facing a dismal outlook resulting from the richness of promised benefits, and private pensions continue to seek strategies to improve their funding status. Overcoming these challenges has become increasingly costly and burdensome for institutional investors. Many investors do not have the in-house investment expertise and the resources or the time to overcome these challenges and meet their fiduciary responsibilities. Investment outsourcing and CIO outsourcing are drawing the attention of institutional investors as an appealing solution to their investment and fiduciary needs. The use of outsourced investment providers appears to be on the rise as is the number of providers offering investment outsourcing. The media and leading industry consultants are projecting significant growth in this market over the next five years, especially when compared to growth rates for established and mature market opportunities. However, much of the collective market research and analysis of the investment outsourcing market consists of commentary and studies conducted by active players in the market. For this reason Chatham Partners decided to provide a balanced perspective on the investment outsourcing market based upon institutional buyer and provider perceptions and experiences.

5 5 Project Objectives Chatham Partners launched this study to provide investment managers and consultants with a detailed analysis of institutional buyer needs and motivations driving investment and CIO outsourcing adoption. A deeper understanding of institutional investor drivers will allow managers and consultants to better position themselves to capture outsourcing mandates. The study is segmented into three core areas of inquiry. The first and second areas provide detailed profiles and characteristics of institutional investors that utilize investment outsourcing arrangements and profiles and characteristics of institutional investors who have not adopted CIO/investment outsourcing. The analysis of institutional investors is structured by the following three key segmentations, which help to capture the unique nature of the market: 1. Combined Institutional Investor Analysis Endowments and Foundations (E&Fs) and Corporate DB Funds (CDFs) 2. Individual Client Type E&F vs. CDF 3. Fund size >$250 million AUM and <$250 million AUM The final area of inquiry focuses on the investment providers that compete in this market.

6 6 Terms For the purposes of this analysis, terms are defined as follows: Outsourced CIO (Chief Investment Officer) / investment services: Investment Outsourcing or CIO outsourcing by institutional investors is broadly defined as selecting a third-party (e.g., investment manager or consultant) to conduct a number of functions in the investment management process which could include manager monitoring, manager selection, asset-liability modeling, investment operations, investment policy design or other functions. An investment outsourcing mandate will typically include the granting of some level of discretionary authority to the selected provider which distinguishes the relationship from investment consulting relationships in which investment consultants do not assume discretionary responsibilities or execute upon investment plans or recommendations. All or a portion of an investment portfolio may be outsourced. Partial Discretionary Authority: An outsourced CIO/investment provider evaluates and offers recommendations to clients regarding asset allocation, investment products, manager hiring and firing, etc., but the client remains the final decision maker. The outsourced provider plays a role in implementing the approved strategy, which is a key distinction from traditional investment consultant arrangements. Complete Discretionary Authority: An outsourced CIO/investment provider has full authority to make investment decisions and changes, re-balance, and transact on a client s investment portfolio account per the existing investment policy statement.

7 7 Institutional Investor Data Collection Phase I: Start-Up Discussed information needs and key interest areas with study pre-subscribers Phase II: Field Research Phase III: Analysis August - October November - December January - March Developed customized websites for facilitation of electronic responses Collected, cleaned, and organized data from all surveys received Sent s to institutional investors on 11/17/11 requesting participation in the survey Developed a survey instrument addressing pre-subscribers information needs Segmented data based on client type, assets, and other selfreported information Initiated reminder s to initial non-responders to boost response rates Compiled institutional investor database based on internal and external industry databases Closed website to additional responses on 12/23/11 with 215 surveys completed Present key findings and discuss results with subscribing organizations

8 8 Institutional Investor Data Collection (cont.) Respondent base: 215 institutional investors representing a cross-section of corporate DB plan sponsors and endowments and foundations, with fund asset size categories ranging from less than $25 million in assets under management to greater than $1 billion in assets under management. Respondent data source: Contact data was obtained from internal databases, the S&P Money Market Directories, Judy Diamond King of Pension Funds Database, the Endowment Directory, and Lipper MarketPlace. Survey format: Respondents completed an online survey consisting of both closed- and openended questions. Respondents were segmented based on the use of an investment outsourcing arrangement, type of institutional investor, and fund size. Representative respondent organizations include: -- Thomson, Inc. -- Bose Corp. -- The Glenmede Group -- Blue Cross & Blue Shield of Michigan -- Xerox -- New York Times Company -- Con-Way Freight, Inc. -- Georgia Gulf Corporation -- Intel -- Cooper Tire & Rubber Company -- Sandia National Laboratories -- Hancock Fabrics, Inc. -- Computer Sciences Corp. -- William Beaumont Hospital -- Magee Rehabilitation Hospital -- Mather Lifeways -- Duke University -- Willamette University -- New Mexico State University -- Drury University -- Peace College -- Silicon Valley Community Foundation -- Houston Symphony Society -- The Long Island Home -- Grove City College -- College of the Holy Cross -- Denison University -- University of Richmond

9 9 Provider Data Collection Phase I: Start-Up Phase II: Field Research Phase III: Analysis August - October November - January January - March Discussed information needs with study pre-subscribers Sent introductory s starting on 11/10/11 to investment outsourcing providers outlining research Collected, cleaned, and organized data from all completed interviews Developed a survey instrument addressing pre-subscribers information needs Chatham Partners contacted providers to schedule time to administer the interview and/or to complete the quantitative survey Chatham Partners administered interviews with participating providers and collected written survey responses. Categorized and analyzed provider responses Developed a representative list of investment outsourcing providers Ceased conducting interviews on 1/25/12 with 15 provider interviews/surveys completed Present key findings and discuss results with subscribing organizations

10 10 Provider Data Collection (cont.) Research participants: Chatham Partners collected a combination of written surveys and interviews with 15 investment outsourcing providers. These firms represent a cross-section of leading asset management and consulting providers active in this market. Interview format: Participating providers completed 45-minute telephone interviews and/or submitted written survey responses, which included a mix of open- and closed-ended questions from November 2011 to January Participating firms: The 15 investment outsourcing firms that participated in the research accounted for more than $250 billion of reported investment outsourcing assets under management. A majority of investment outsourcing providers chose to remain anonymous when participating in the research and are thus not individually identified.

11 Respondent Demographics

12 Respondent Demographics Respondent role in making investment decisions for investment portfolio s components: Department that leads the decision making process for investment portfolio s related decisions: 19% 18% 20% 1% 1% 8% 2% 18% 31% 26% 42% 3% 9% 1% 20% 81% 82% 80% 29% 35% 21% 17% 13% 21% Total Endowment / Foundation Corporate DB Plan Total Endowment / Foundation Corporate DB Plan Base: Base*: I have investment decision making authority Human Resources Treasury / Finance Chief Investment Officer I have influence over the investment decisions made Shared (HR and Treasury / Finance) Board of Directors / Trustees Other * Two endowments and one corporate DB Plan respondents did not disclose decision leading department. 12

13 13 Respondents that Outsource: Percentage of Assets Managed Please estimate the percentage of your investment portfolio s assets that are managed by your outsourced CIO/investment provider: Total E&F >$250MM < 25% 25% - 50% 10% 5% 9% 50% - 75% Base: 46 28% 30% 20% 4% 17% Base: 35 34% 23% 23% 9% 11% 100% 54% 22% Corp. <$250MM 75% - 100% 2% 5% 2% 3% 3% 8% 15% Base: % 65% 21% Base: 55 Base: 66 < 25% 25% - 50% 50% - 75% 75% - 100% 100%

14 Respondents that Outsource: Provider Types How would you classify your outsourced CIO/investment provider?* Total E&F >$250MM Dedicated investment outsourcing firm Investment manager with single-asset Other focus 10% 1% 2% 20% Investment manager with multi-asset focus 2% 11% 15% 2% 35% 30% 11% 34% 3% 3% 11% 34% Base: 46 4% Base: 35 3% Consultant 31% Corp. <$250MM Base: 101 Boutique / specialized manager 2% 35% Manager-ofmanagers Base: 55 31% 5% 2% 27% 35% Base: 66 29% 2% 9% 2% 35% 24% Inv. mgr. with single-asset focus Inv. mgr. with multi-asset focus Manager-of-managers Boutique / specialized mgr. Consultant Dedicated inv. outsourcing firm Other * Recordkeeper was not chosen by any respondents. 14

15 15 Respondents that Outsource: Outsourcing Tenure How long ago did you implement your outsourced CIO/investment provider arrangement? Total E&F >$250MM < 1 year 1-2 years 7% 9% 6% 6% 6% 6% 2-3 years 45% 20% 48% 24% 14% Base: 44 18% Base: 33 15% > 5 years 57% 16% Corp. 3-5 years 6% 4% 9% <$250MM 6% 6% 9% Base: 98 67% 15% 62% 17% Base: 54 Base: 65 < 1 year 1-2 years 2-3 years 3-5 years > 5 years

16 16 Respondents that Outsource: Investment Consultant Use Does an investment consultant (without discretionary authority or implementation responsibilities) assist you with the management of your investment portfolio and decisions? Total E&F >$250MM No 33% No 31% No 69% 67% 25% Yes Base: 49 Base: 39 Yes Corp. <$250MM 75% No No Yes 19% 22% Base: % 78% Base: 58 Yes Base: 68 Yes

17 17 Respondents that Outsource: Asset Allocation Please estimate the percentage allocation to the following asset classes for your fund: U.S. Fixed Income 26% Total Real Estate Other Cash 5% 1% 3% Hedge Funds Equivalents 3% 6% 17% Commodities 8% 29% Private Equity 1% 5% 3% Non-U.S. Fixed Income 4% 9% U.S. Equity 32% 16% 4% 13% 14% Base: 73 Non-U.S. Equity Base: 31 Base: 42 E&F Corp. 8% 4% 2% 2% 2% 35% 13% 34% Base: 50 Base: 23 1% 8% 4% 12% 28% >$250MM 5% 1% 3% 21% <$250MM 7% 2% 2% 4% 3% 28% 17% 8% 13% 33% Cash Equivalents U.S. Equity Non-U.S. Equity U.S. Fixed Income Non-U.S. Fixed Income Private Equity Commodities Hedge Funds Real Estate Other

18 18 Respondents that Outsource: Services Performed Internally vs. Externally Please indicate which of the following functions are performed internally, performed with the assistance of a third-party or outsourced as part of your CIO/Investment Outsourcing arrangement: 5% 12% 14% 6% 11% 18% 8% 21% 23% 31% 11% 28% 54% 49% 49% 48% 47% 40% 39% 37% 33% 30% 49% 46% 18% 31% 29% 29% 41% 39% 38% 46% 42% 42% 54% 42% 43% 38% 58% 22% 25% 54% Trust & Custody Services Performance Measurement/ Monitoring Customized Reporting Actuarial Services Asset Liability Analysis Investment Manager Selection Strategic Portfolio Advice Rebalancing/ and Analytics Tactical Asset Allocation Risk Budgeting Legal & Compliance Strategic Asset Allocation Cash Management Base: Pension Payroll Investment Policy Design Performed internally Performed by Outsourced Investment Provider Assisted by 3rd Party

19 Respondents that Outsource: Provider Selection Process Once you decided to pursue an outsourced CIO/investment provider how did you select your current provider? 55% 24% 16% 9% 6% 8% Conducted an RFP Recommendation from colleagues Considered our existing investment consultant Considered our existing asset managers Had an intermediary conduct an RFP Other* Base: 100 * Other includes relationship was previously established (3), conducted an RFI/RFP (2), not yet selected (1), selected through ERISA Committee (1), and selected through TPA (1). 19

20 20 Respondents that Outsource: Provider Selection Criteria (cont.) How important were each of the following factors in the selection of your outsourced CIO/investment provider? Investment Capabilities and Services 84% 82% 71% 49% 46% 44% 41% 39% 45% 39% 44% 34% 41% 27% 42% Avg. base: 99 15% 16% 26% 1% 2% 3% Asset allocation expertise Multi-asset class coverage/expertise Demonstrable outperformance 11% 8% Alternative assets expertise Global assets expertise 17% 14% Asset liability modeling expertise Firm Attributes and Service Models Product agnostic advisory team 24% Open architecture 30% Liability Driven Investing program management expertise 90% 77% 72% 60% 60% 48% 46% 46% 44% 44% 30% Avg. base: % 50% 52% 35% 35% 24% 22% 9% 1% 1% 4% 5% 5% 7% 4% 2% Reputation and financial stability of firm Experience and seniority of staff Experience as an O/S provider Client service model Major reason Operational and administrative capabilities Fiduciary services Minor reason Customized services Cost Not a factor 43% 12% Regulatory and fiduciary education 30% 27% Current or past relationship 64% 6% Size of firm

21 Respondents that Outsource: Frequency of CIO/Investment Provider Review How often do you formally evaluate your outsourced provider? Total E&F >$250MM Other* Quarterly 30% 14% 5% 24% 15% 18% 13% 3% Semi-annually 11% 41% 18% 44% Bi-annually 15% Base: 44 Corp. Base: 34 <$250MM 50% Annually 19% 9% 13% 2% 14% 16% 13% 5% Base: 98 57% 53% Base: 54 Base: 64 Quarterly Semi-annually Annually Bi-annually Other* * Other includes as needed (7), 3-5 years (7), N/A (2), and monthly (1). 21

22 22 Respondents that Outsource: Level of Interaction How would you describe the level of interaction that you have with your outsourced provider? Total E&F >$250MM Too little Too little Too little 14% 15% 9% The right amount The right amount 86% 85% Base: 44 Base: 34 Corp. <$250MM 91% Too little 6% Too little 6% Base: 97 The right amount The right amount The right amount 94% 94% Base: 53 Base: 63

23 Respondents that Do Not Outsource: Demographics Respondent role in making investment decisions for investment portfolio s components: Department that leads the decision making process for investment portfolio s related decisions: 19% 18% 19% 22% 28% 10% 3% 3% 29% 35% 81% 82% 81% 2% 9% 47% 35% 19% 1% 12% 13% 11% 19% Total Endowment / Foundation Corporate DB Plan Total Endowment / Foundation Corporate DB Plan Base: Base*: I have investment decision making authority Human Resources Treasury / Finance Chief Investment Officer I have influence over the investment decisions made Shared (HR and Treasury / Finance) Board of Directors / Trustees Other * Two endowments and one corporate DB Plan respondents did not disclose decision leading department. 23

24 24 Respondents that Do Not Outsource: Investment Consultant Use Does an investment consultant (without discretionary authority or implementation responsibilities) assist you with the management of your investment portfolio and decisions? Total E&F >$250MM No No 43% 57% Yes No 40% 60% Yes 37% Base: 76 Base: 82 63% Corp. <$250MM Yes No 22% No 27% Base: 108 Base: 32 78% Yes Base: 26 73% Yes

25 Respondents that Do Not Outsource: Barriers to Outsourcing Why have you chosen not to outsource any portion of your investment management process to an outsourced CIO/investment provider? 80% 47% 46% 38% 23% 23% 4% 3% 3% 12% Have expertise and resources to handle internally Would result in higher costs Investment consultant provides the necessary support Outsourcing would not result in outperformance Do not believe co-fiduciary services add value Fund is too big Have not had time to consider Not familiar with outsourced investment management services Fund is too small Other* Base: 95 * Other includes currently considering (5), not willing to give up control (2), alumni relations (1), has not been proposed (1), have already tried (1), and satisfied with current situation (1). 25

26 26 Respondents that Do Not Outsource: Thought Leadership What is the most valuable type of thought leadership you receive from your provider? Total E&F >$250MM New asset allocation models 8% 8% 10% 6% New products and solutions 10% 9% Forward looking market perspectives 8% 18% 58% 13% 17% 54% New risk management techniques 13% 53% Base: 62 Corp. Base: 69 <$250MM 16% 13% 21% Base: 93 Investment education 10% 23% 13% 42% 4% 13% 13% 50% Base: 31 Base: 24 Forward looking market perspectives Investment education New risk management techniques New products and solutions New asset allocation models

27 27 For More Information For more information about this study, please contact Peter Starr, CEO of Chatham Partners. Peter Starr, CEO Chatham Partners Tel: (781)