2019 Outsourced-Chief Investment Officer Survey

With New Volatility, Asset Owners Outsource to Seek Returns

2019’s markets present a new volatility, with geopolitics and interest rates taking center stage. Our 2019 OCIO Survey showed that most of the outsourcers are in the corporate and endowment and foundation spaces. The largest surge of interest in outsourcing is in the defined contribution (DC) plan space, with 33% outsourcing or planning to outsource within the year, up from 20% in 2018. Top reasons this year for outsourcing are for absolute returns (70%); to increase returns (63%); and for better risk management (52%).

One such outsourcer is Timothy Dykstra, vice president and corporate treasurer of Smithfield Foods, whose $1.7 billion open plan is now 90% funded, having grown in his seven years of tenure from a funded level of 70% and $900 million. 

Dykstra, like many plan sponsors, was seeking to improve the plan’s funded status while minimizing contributions.  Smithfield has most of its DB assets outsourced to OCIOs, although they still manage private investments in house, including the company’s private real estate, private debt, and private equity portfolios.

 “We needed growth and needed to maintain a large percentage in return-seeking assets,” he told CIO. “We actually shifted the return-seeking assets strategy to a low volatility strategy to minimize risk of a larger return-seeking allocation.” 

The return-seeking portfolio has its sights on low volatility, with about half of its assets in global equities and the remainder in various credit products, hedge funds and infrastructure investments. Smithfield’s liability-driven investing portfolio represents 40% of the total DB assets. Smithfield is now planning on increasing its hedge ratio from 40% to 50%. The low volatility strategy for return-seeking assets saved 160 basis points over its benchmark for 2018.

Funds below $5 billion are the most active of outsourcers, according to our OCIO survey respondents.  In outsourcing, Dykstra, originally from the larger $25 billion DaimlerChrysler fund, was well-familiar with the negotiating power of a larger fund, and sought to outsource to use an OCIO firm’s ability to pool investors and increase bargaining power to lessen the impact of fees on returns.

“Our OCIO’s process for selecting managers is much more robust and also, the ultimate fees we pay managers is less, so there’s less leakage there. And that’s worth a meaningful amount,” said Dykstra.

The top regions for those outsourcing, or planning to, were Europe and the Pacific regions. Still battling negative interest rates and slowly stopping quantitative easing, Europeans are  watching who will replace European Central Bank (ECB) President Mario Draghi, due to retire in October. A person from southern Europe might be more inclined to keep interest rates low, which would put Europe in a predicament without wiggle room to stimulate the economy by lowering rates during a recession. A replacement from northern Europe will likely raise interest rates, try to reduce the ECB balance sheet, and focus on the debt of less-affluent countries such as Italy and Spain, which carry debt that is 138% and 98% of their GDP, respectively, compared to Norway’s 29%, according to Eurostat.

After the debt crisis, countries such as Norway trend toward smaller, in-house investment teams, occasionally outsourcing to find managers or to buy strategic research. The strongest concerns are regarding their allocations to China, reducing costs, and passive versus active investing. They are also considering ways to use environmental, social, and governance (ESG) investing practices with fixed income investments. “That’s the next step,” Eelco Ubbels, director of the data analytics and consulting firm Alpha Research, told CIO. “I think for the next coming two, three years it will be a rush.”

Oddly, overall, not many have been approached for outsourcing services. Of our respondents, 64% said no OCIOs attempted to win their business in the past 12 months, up from 56% last year. The targeted crowd seems to be those with funds of less than $500 million, where 74% were approached. —Christine Giordano

Methodology

Responses from 108 asset owners, aggregated for the charts that follow, were accepted for the survey from January 14 to February 6, 2018. CIO would like to extend a special thank you to all those who submitted responses for the survey, as well as those vendors, asset owners, and consultants who helped the CIO editorial and survey teams construct the survey. For more information, contact surveys@strategic-i.com.