OCIO Business Expected To Increase by 54%

Investment consultants expect their outsourced CIO business will comprise 18.5% of their total assets by 2016, Cerulli Associates’ research has found.

(November 21, 2013) — The outsourced chief investment officer (OCIO) movement is becoming the fastest growing segment of investment consultants’ business, according to research from Cerulli Associates.

The Boston-based analytics firm found consultants expect that OCIO business would comprise 18.5% of total assets in 2016, up from an average of 12% at the end of 2012.

“Over the past decade, institutional investors have been seeking more proactive advice and ceding portfolio decision-making, as investment options have grown increasingly complex and markets have become more volatile,” Michele Guiditta, associate director at Cerulli, said.

“A number of institutional investors have opted for an OCIO arrangement, delegating oversight and decision-making for all or part of their investment portfolios.”

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The growth of OCIO business is also considered to be among the biggest pressures facing consultants, with 73% of them believing that the increased competition due to new entrants in the OCIO space was a major or moderate threat to their future.

The full Cerulli report can be found here.

Cerulli’s conclusions about growth in the sector has been supported by the growth in size of fiduciary pots within investment consultancies. Aon Hewitt announced in October that 145 employers and their 220 pension funds are now run by Aon in a fiduciary capacity, totalling $40 billion of assets under advisement.

Mercer too had embraced the OCIO trend: its UK fiduciary management business has grown by 31% in terms of assets over the year to June, while Towers Watson reported that two-thirds of its new business in the last year has been fiduciary.

Elsewhere Cardano published some strong results this month: the fiduciary manager published its first five-year results, showing its clients outperformed their peers on a liability base by 30 percentage points. It has challenged other OCIO firms to now publish their clients’ results for comparison.

The Anglo-Dutch firm works with more than 40 major European pension funds and insurance companies and in the UK alone, Cardano works with pension funds with assets totalling £50 billion, of which £10 billion is managed on a fiduciary basis.

And KPMG’s annual report into the UK fiduciary management industry found the assets under fiduciary advisement topped £29 billion this year—equating to 2.6% of the pensions market. Interest has particularly grown among smaller pension funds, with 91% of the market now made-up by mandates less than £250 million in size.

Can OCIO’s unstoppable rise continue? aiCIO’s European edition, published in December, tackles what could bring the growth of outsourced investment to a halt.

Home > News > Asset Allocation > A New Approach to TDFs (and Why the Old One Doesn’t Work)

Asset Allocation November 21, 2013

A New Approach to TDFs (and Why the Old One Doesn’t Work)

Investment managers need to realise the old TDF theory is defective and needs replacing, a paper has claimed.

(November 21, 2013) — Target-date funds are fundamentally flawed and are failing defined contribution retirees, according to a paper by Research Affiliates, who have created a new model for the industry to try out.

The objectives of a traditional “glidepath” approach, namely maximising the real value of nest eggs and minimising uncertainty around prospective retirement income, are actually not met, the authors said and tested a range of alternatives.

“First, rebalancing to a static mix beats a gradual shift to bonds (or equities for that matter, because the solutions are not linked to expected market environments),” the paper began. “Second, adjusting the risk profile within stock and bond portfolios rather than across asset classes reins in risk more constructively than the classic glidepath solutions. Third, incorporating valuation-indifferent equity strategies improves the historical performance of the solutions relative to alternatives built using cap-weighted indexes.”

The paper showed the authors’ working on these points and offered an argument for more time to be spent on constructing funds. It argued that the basic idea of younger workers buying equities for their pension portfolio then moving into bonds as retirement approaches had been proved to be a flawed idea, yet many in the industry have bought—and continue to buy into—the idea.

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“Our alternatives are deliberately simple, so that they illustrate our points vis-à-vis existing target-date alternatives; we acknowledge (and believe) that skilled active managers can achieve superior results, particularly when they customise these solutions for an individual investor.”

The authors called on the asset management industry to do more to create strategies that help the end investor attain their retirement income goals and to think outside the box. Clients need help in realising what level of income would be attainable and framing their objectives, the authors added.

Finally, the industry must realise that it needs to question current approaches when empirical evidence is produced to disprove their efficacy.

“Our illustrative strategies are no recipe for replacing the classic glidepath strategies; they merely illustrate how easy it is to improve our clients’ prospective retirement income and wealth.”

The authors said a more sophisticated solution might add a whole spectrum of additional asset classes—outside the traditional equities and bonds—that could offer higher yields, growth, or both, than the current glidepath portfolio.

The authors concluded: “These represent avenues for future research, which we invite others to join us in pursuing.”

To read the full paper, click here.

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