INVESTMENT OUTSOURCING MARKET SURVEY: Attitudes and Perceptions of Institutional Asset Owners Part I: Study Findings and Implications y g p Part II: Question by Question Responses
Table of Contents- Part I: Study Findings and Implications I. Project Objectives and Research Methodology II. Respondent Demographics a) Endowments, Foundations, and Corporate DB Plans b) Insurance Companies III. Endowments, Foundations, and Corporate DB Plan Findings a) Executive Summary b) Implications for Service Providers IV. Insurance Findings a) Executive Summary b) Implications for Service Providers V. Next Steps A Provider To Do List 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 2013, Chatham Partners, LLC. All rights reserved. 2
Table of Contents-Part II: Question by Question Reponses Section I: Endowments, Foundations, and Corporate DB Plans I. Investment Outsourcing Overview II. Attitudes of Respondents that Outsource a. Respondent demographics b. Characteristics of respondents who have adopted CIO/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 III. 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 f. Potential outsourcers 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 2013, Chatham Partners, LLC. All rights reserved. 3
Table of Contents Section II: Insurance Companies IV. Investment Outsourcing Overview V. Attitudes of Respondents that Outsource a. Respondent demographics b. Characteristics of respondents who have adopted CIO/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 4
I. Project Objectives and Research Methodology
Project Objectives This research study is the second iteration of a study conducted by Chatham Partners in 2011 in which Chatham surveyed 215 institutional investors with the goal of providing an un-filtered perspective from institutional buyers on the utilization of investment outsourcing arrangements. Though the 2011 survey confirmed market indicators portending an increase in institutional buyers appetite for investment outsourcing, the results suggested growth in addressable markets may be more evolutionary than revolutionary. As a follow-up to the 2011 research effort, in Q3 2013 Chatham Partners surveyed 259 institutional investors, including 209 corporate defined benefit plans, endowments, and foundations and 50 insurance companies to assess attitudes and perceptions of institutional asset owners regarding investment outsourcing and changes in perceptions of investment outsourcing compared to 2011. The research focused on the following key areas of inquiry: Characteristics of respondents who have adopted CIO/investment outsourcing versus characteristics of those who have not Investment management approach and implementation Packaging of the investment outsourcing relationship Investment outsourcing drivers Provider selection Provider satisfaction Intent to change CIO/investment outsourcing relationship Client service Barriers to adopting investment outsourcing and likelihood of adoption. 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 g 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
Data Collection Phase I: Start-Up Phase II: Field Research Phase III: Analysis Developed survey instrument Sent emails to institutional investors requesting participation in the survey Cleaned and organized data from all surveys received Compiled institutional investor database based on internal and external industry databases Initiated reminder emails to initial non-responders to boost response rates Segmented data based on adoption of CIO/investment outsourcing, entity type, assets, and other self-reported information Developed customized websites for facilitation ti of electronic responses Received 259 completed surveys from institutional investors 209 surveys from endowments, foundations, and corporate DB plans and 50 surveys from insurance companies Present key findings and discuss results with subscribing organizations 8
Institutional Investor Data Collection: E&F and Corporate DB Plan Base Respondent base: 209 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. Data was also obtained by surveying Pensions & Investments panel of institutional investors. Survey format: Respondents completed anonlinesurvey consisting of both closed- and open- ended questions. Respondents were segmented based on the use of an investment outsourcing arrangement, type of institutional investor, and fund size. Representative respondent organizations include: -- Aetna, Inc. -- Rite Aid Corporation -- Alfred P. Sloan Foundation -- Aon Corporation -- Boston College -- California Institute of Technology -- Central Bank & Trust Co. -- The Ohio State University -- Duke University -- Genesco, Inc. -- George Washington University -- Harvard University -- IBM Retirement Funds -- Northeastern University -- Reed Elsevier, Inc. -- Richard M. Fairbanks Foundation, Inc. -- Silicon Valley Community Foundation -- The American National Red Cross -- The James Irvine Foundation -- The Nature Conservancy -- The Philadelphia Foundation -- University of Alabama System -- University of Chicago -- University of Michigan -- Virginia Tech Foundation -- Wake Forest University -- Western National -- Yale University 9
Institutional Investor Data Collection: Insurance Base Respondent base: 50 insurance companies, with fund asset size categories ranging from less than $10 billion in assets under management to greater than $10 billion in assets under management. Respondent data source: Contact data was obtained from internal databases. 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 and fund size. Representative respondent organizations include: -- AEGIS Insurance Services, Inc. -- Allied World Assurance Holdings, Ltd. -- Allstate Insurance Company -- American Fidelity Corporation -- Amerisafe, Inc. -- Amerisure Mutual Insurance Co. -- Arbella Mutual Insurance Co. -- Auto-owners Insurance Group -- Axis Capital Holdings, Ltd. -- CIFG Assurance North America, Inc. -- Cigna Corporation -- CUNA Mutual Group -- EmblemHealth, Inc. -- EMC Insurance Company -- Fidelity Life Insurance -- Genworth Financial, Inc. -- John Hancock Financial Services -- Knights of Columbus -- Mutual of Omaha Insurance Company -- New York State Insurance Fund -- North Star Mutual Insurance Co. -- Pacific Mutual Holding Company -- Sagicor Life Insurance Company -- The Baltimore Life Insurance Co. -- Trustmark Insurance Company -- UnitedHealth Group, Inc. -- Wellpoint, Inc. -- XL Capital Limited 10
II. Respondent Demographics
Endowments, Foundations, and Corporate DB Plans Endowments, Foundations, and Corporate DB Plan Demographics
Endowments, Foundations, and Corporate DB Plans Respondent Demographics Outsourcing Status Type of Entity Outsource 45% 50% Endowment / Foundation 49% 58% Do not outsource 55% 50% Corporate DB Plan 51% 42% 2013 2011 Base: 209 215 Asset Size Base: 2013 2011 209 215 Regions Firm Conducts Business <$250 MM $250 MM - $500 MM $500 MM - $1 B >$1 B 33% 28% 44% 37% 11% 15% 8% 15% 14% 16% 14% 15% 41% 42% 27% 41% United States Only United States and Globally 54% 46% 43% 57% 65% 35% 43% 57% 2013 2011 Endowment & Foundation Corporate DB Plan 2013 2011 Endowment & Foundation Corporate DB Plan Base: 209 215 103 106 Base: 208 213 103 105 13
Endowments, Foundations, and Corporate DB Plans Respondent Demographics (cont.) Human Resources Treasury / Finance Chief Investment Officer Shared (HR, Treasury / Finance) Board of Directors / Trustees Other Base: Leader of Inv. Decision Making Process 2% 1% 7% 4% 15% 18% 24% 31% 26% 43% 20% 13% 9% 26% 28% 29% 41% 16% 10% 17% 10% 10% 2013 2011 Endowment & Foundation Area of Work Corporate DB Plan I have investment decision making authority I have influence over the investment decisions made 209 212 103 106 Base: Role in Making Type of Investment Entity Decisions 26% 74% 19% 81% 26% 25% 74% 75% 2013 2011 Endowment & Foundation Corporate DB Plan 209 215 103 106 Organizational Role Human Resources Treasury / Finance Board of Directors / Trustees Investment Management Other 14% 18% 37% 10% 38% 6% 23% 12% 59% 27% 51% 34% 30% 9% 5% 8% 6% 10% 4% 2013 2011 Endowment Corporate & Foundation DB Plan Chief Investment Officer Investment Staff Board of Directors / Trustees HR Professional Treasury / Finance Professional Other 23% 20% 9% 12% 27% 15% 21% 5% 16% 28% 30% 34% 7% 19% 15% 7% 11% 24% 35% 9% 15% 10% 8% 2013 2011 Endowment Corporate & Foundation DB Plan Base: 207 215 103 104 Base: 208 213 103 105 14
Respondent Demographics: Corporate Defined Benefit (DB) Plans Endowments, Foundations, and Corporate DB Plans Type DB Plan of Entity Status Number of DB Plan Participants Frozen to all future pension accruals Frozen to new employee pension accruals Reduced benefits formula Converted to cash balance Active 39% 37% 25% 27% 1% 7% 4% 28% 30% 2013 2011 <500 500-1,000 1,000-10,000 10,000-20,000 20,000 15% 8% 36% 31% 14% 13% 32% 32% 10% 8% 2013 2011 Base: 106 90 Base: 106 90 Percent Funded Level of DB Plan Over-funded 100% 5% 5% 1% 8% 26% 21% 90% - 100% 80% - 90% 70% - 80% 46% 43% 60% - 70% 19% 14% <60% 4% 1% 6% 2013 2011 2% Base: 103 86 15
Endowments, Foundations, and Corporate DB Plans Respondent Demographics: Endowments Type of Endowment 24% 30% Public Private 76% 70% 2013 2011 Base: 70 81 16
Insurance Company Demographics Insurance Companies
Insurance Companies Demographics: Total Outsourcing Status Assets Outsource 58% 71% >$10 B 42% 44% Do not outsource 42% 29% <$10 B 58% 55% 2013 2011 Base: 50 56 2013 2011 Base: 50 56 Regions Firm Conducts Business Type of Insurance Company* 44% 42% 38% United States Only 60% 59% 52% 66% 22% 20% 20% 18% United States and Globally 40% 41% 48% 34% 2013 2011 >$10 B <$10 B Base: 50 56 21 29 Property Life Casualty Health Auto Liability Accident, sickness, and unemployment Base: 50 * Not on 2011 survey. 18
Insurance Companies Demographics: Total (cont.) Leader of Inv. Decision Making Process Role in Making Investment Decisions Human Resources Treasury / Finance Chief Investment Officer Shared (HR, Treasury / Finance) Board of Directors / Trustees Other 24% 18% 19% 28% 60% 68% 67% 55% 2% 3% 8% 5% 10% 7% 6% 9% 5% 7% 2013 2011 >$10 B <$10 B I have investment decision making authority I have influence over the investment decisions made 60% 40% 43% 57% 62% 59% 38% 41% 2013 2011 >$10 B <$10 B Base: 50 56 21 29 Base: 50 56 21 29 Area of Work Organizational Role Human Resources Treasury / Finance Board of Directors / Trustees Investment Management Other 28% 2% 70% 20% 14% 75% 86% 38% 3% 59% 5% 2013 2011 >$10 B <$10 B Chief Investment Officer Investment Staff Board of Directors / Trustees HR Professional Treasury / Finance Professional Other 26% 30% 46% 14% 45% 81% 34% 21% 3% 2% 31% 20% 11% 6% 14% 5% 10% 2013 2011 >$10 B <$10 B Base: 50 56 21 29 Base: 50 56 21 29 19
Sample Slides
Endowments, Foundations, and Corporate DB Plans Lack of internal investment expertise is the top driver of CIO/investment outsourcing 65% of outsourcers cite lack of internal investment expertise as a driver of their decision to pursue an outsourced CIO/investment arrangement, the highest proportion of any area. Other common reasons include concerns over risk management (55%) and concerns over portfolio performance (46%). Compared to larger organizations (>$250 MM in assets), smaller organizations (<$250 MM) are more likely to outsource because they lack internal expertise and want to reduce costs. On the other hand, DB outsourcers appear more concerned with performance and risk management than E&Fs. What prompted you to pursue an outsourced CIO/investment arrangement? Overall Type of Entity Asset Size Lack of internal investment expertise 65% 66% 65% 53% 76% Concerns over portfolio risk management 55% 49% 60% 53% 58% Concerns over portfolio performance 46% 40% 50% 42% 49% Desire to reduce costs 20% 20% 21% 11% 29% E&F DB >$250 MM <$250 MM 21
Endowments, Foundations, and Corporate DB Plans Asset allocation expertise and staffing limitations are the dominant decision factors Limited internal staff time (76% top 2 box rating) and improving risk management (71%) are the most important governance factors in the decision to outsource. Among investment expertise and access areas, asset allocation expertise (80%), thought leadership (75%), and improving performance (75%) are most critical. Interestingly, cost savings receives the lowest importance rating (37%). How important were the following factors in the decision to outsource? (7 = most important; 1 = least important) Governance Investment Expertise and Access %7,6 %7,6 Limited internal staff time 76% Asset allocation expertise 80% Improve risk management 71% Thought leadership 75% Fiduciary i services and oversight 63% Improve performance 73% Quicker reaction to market conditions 62% Alternative assets expertise 69% Improve operational efficiencies 57% Global assets expertise 66% Quicker manager hire and fire decisions 43% Expand access to asset classes 65% Cost savings 37% Asset-liability modeling services 54% 22
Satisfaction scores in key areas suggest opportunities for improvement Endowments, Foundations, and Corporate DB Plans Although overall satisfaction is strong, results suggest providers can do a better job of executing in the areas that outsourcing clients deem to be the most important evaluation criteria. More specifically, providers achieve the lowest satisfaction levels for the top 2 areas of importance, investment performance (64%) and risk management (63%). Year-to-year, score changes are modest, although investment performance has improved 5 percentage points (64% vs. 59% in 2011) and client service has declined 8 percentage points (68% vs. 76%). Performance Criteria (% most important) Execution: Satisfaction Ratings %(7,6) 2013 2011 High Investment performance (77%) 19% 45% 20% 13% 4% 64% 59% Risk management (71%) 23% 40% 19% 15% 4% 63% 64% Importance Meeting fund / plan goals (71%) 25% 41% 21% 11% 2% 65% 66% Client service (70%) 31% 36% 25% 5%3% 68% 76% Moderate Reporting (60%) 26% 41% 19% 11% 4% 67% 68% 7 (Very Satisfied) 6 5 4 3,2,1 (Very Dissatisfied) 23
Endowments, Foundations, and Corporate DB Plans Performance and service are the most impactful determinants of client satisfaction Regression analysis suggests that satisfaction with investment performance is the top driver of outsourcing clients overall satisfaction. Reporting and communication also influence overall satisfaction, but to lesser degrees. Similarly, investment performance is the most correlated attribute to overall satisfaction, followed by client service, communication, and reporting. Drivers of Overall Satisfaction: Regression Analysis 6.5 Importance vs. Execution: Correlation Analysis Adhering to investment policy Investment performance 46% Reporting 30% 6 Avg. Score (1-7) Risk management Fiduciary protection Meeting fund or plan goals Reporting Client service Communication 25% 5.5 Access to research Improved ROE and market valuation Fees Operations Thought leadership Communication Investment performance Drivers are based on a multiple linear regression model where r 2 =.67. Percentages represent the standardized beta coefficients divided by the sum of the coefficients. Least Correlated Most Correlated 5 0.3 0.4 0.5 0.6 0.7 0.8 Correlation to Overall Satisfaction with Outsourced CIO / Investment Provider 24