“What do you mean by ‘multi-asset’?” Fund Evaluation Group’s Gary Price asked, awaiting an answer I wasn’t sure I knew. What did I mean by multi-asset?
Since being plucked out of journalism school to join CIO’s team of pension fanatics, I’ve had to learn on the job this strange new investment language of ‘LDI’ and ‘smart beta.’ Seven months into the Grown-Up Financial Journalist role, I liked to think I’d learned the lingo—until I’m stumped by multi-asset.
My first encounter with the elusive term came two months ago, when proofreading the February cover story for CIO Europe. “Control Freaks”—an investigation into whether asset owners are willing to cede control of their portfolios to multi-asset managers—framed the strategy as handing over manager selection and asset allocation duties to an outside firm. The more I read, the more multi-asset sounded like another hot-button industry trend: Outsourced-CIO (OCIO).
Both involve outsourcing key asset-owner responsibilities. Both entail giving up at least partial discretion over a portfolio. Like ‘engineered equity’ to ‘smart beta’, ‘multi-manager platform’ to ‘hedge fund-of-funds’, or ‘product’ to ‘solution’, was multi-asset actually OCIO dressed up in another name?
To prove my new theory, I needed to consult the experts—which is how I ended up in Cincinnati, Ohio, for Fund Evaluation Group’s (FEG) annual client conference. Price, the consulting/outsourcing firm’s head of managed portfolios, was scheduled to present on the many ways to implement OCIO. Armed with a reporter’s notebook and a studious set of glasses, I endeavored to find out where multi-asset ended and FEG’s OCIO offerings began.
“Back in 2004, when we first started doing OCIO, there was a vigorous debate about who should be doing what,” Price explained to the crowd of institutional investors. “Asset owners had a role; consultants had a role; asset managers had a role—and they didn’t overlap.”
Art by Dingding HuNow, Price said,
those roles are changing. FEG’s own function as a consultant/CIO-for-hire
ranges widely depending on the client. For the $1 billion Evangelical Covenant
Church, among others, the firm delivers what it calls a “hybrid” OCIO model:
back-office support including daily account monitoring and investment strategy
implementation, plus limited portfolio management. FEG might source
alternatives managers that the church lacks the expertise to evaluate—but at
the end of the day, the evangelists control their asset allocation.
In other words, it’s not multi-asset.
But my hypothesis might still hold water. Asset owners could retain full allocation control in FEG’s “hybrid” offering, but what about in what the relationships consultants dub “fully outsourced-CIO”?
“Think about what you might consider ‘pure’ OCIO,” Price told me after the conference. “For the asset owner, it’s a single choice whether or not to give a firm your money.” All the other major choices—including how much and where the money goes—are delegated to the OCIO, which decides based on the client’s investment goals, liquidity constraints, and risk tolerance.
In other words, it’s totally multi-asset.
My suspicions thus confirmed, I left the FEG conference to question managers that offer both services about the dichotomy’s purpose (beyond confusion, that is). First up: Russell Investments’ Peter Corippo, who immediately dismissed the notion that multi-asset and OCIO are at all comparable.
“They’re a little bit apples and oranges,” said Corippo, an outsourcing strategist specializing in corporate pensions.
According to Corippo, OCIO is strictly about who is running the investment program—a responsibility that includes myriad operational and administrative functions, but not necessarily freedom to allocate. That decision can remain with the asset owner.
“If you go external, that doesn’t mean you’re necessarily multi-asset—though we think that’s the right way to do it,” Corippo said.
Whether or not a portfolio counts as multi-asset, he continued, depends on the allocation strategy mandated by the asset owner: Is the portfolio specified by single asset classes or by the outcomes it should achieve?
“Historically, folks used to think about their asset allocation as x% to large-cap US equities, x% to small cap, etc.,” Corippo explained. “Where our thinking has evolved has been into a multi-asset class definition that’s guided by the outcome or role that we expect the multi-asset portfolio to play.” In the world of corporate pensions, for example, a multi-asset mandate might include a growth bucket for closing a funding gap, and a liability-hedging bucket to offset shortfall risk. For both portfolios, the manager could set the allocations most likely to achieve those targets.
An OCIO agreement might very well include this kind of multi-asset mandate—see: FEG’s “fully outsourced” offering—but it doesn’t have to. “It depends on how much discretion within that OCIO relationship the asset owner wants to maintain within his committee, and how much he wants to delegate,” Corippo said.
Now that Russell had torn my theory to shreds, I turned to Goldman Sachs Asset Management (GSAM) for a second opinion. “We think of OCIO as a subset of the multi-asset class,” said strategy head Kane Brenan.
So… not the same thing, but not quite Russell’s “apples and oranges,” either.
According to Brenan, OCIO is just one way to implement multi-asset—a term he defined as “using multiple asset classes to try to achieve a particular objective. In our view, the best OCIO providers have the ability to customize the portfolio to the client’s unique objectives, the ability to offer open architectures, and the ability to be in the markets—to react if markets are volatile, asset classes change, or the economic landscape changes.”
Some degree of allocation discretion is therefore a necessary to a functional OCIO relationship, he argued, but institutions don’t have to go all in. Instead, one might delegate, say, 25%, to a single multi-asset class fund. The manager gets a smaller slice of the pie, but freer rein to invest it.
“Clients are okay leaving that portion of their portfolio fully discretionary to a single asset manager, just like if they decided to give 25% of their portfolio to a core fixed-income manager,” Brenan explained. “The big decision was allocating a portion of their portfolio to core-plus, within certain guidelines and to a certain manager, and from there they don’t need to be involved in the individual security selection decisions. But they do need to provide oversight and monitoring of the manager.”
So in GSAM terminology: OCIO is a form of multi-asset, but perhaps a less potent one.
Which brings us back to Gary Price of FEG’s question. What did I mean by multi-asset? As I struggled to come up with a concise definition, Price offered one of his own.
“Do you mean a mandate to invest in multiple asset classes?”
Sure. Let’s go with that.