2021 Outsourced Chief Investment Officer Survey
A lack of internal resources is the biggest reason why CIOs farm out investing chores to third parties.
The overwhelming reason that institutional investors outsource investment management is a lack of internal resources. That’s the key finding in our 2021 Outsourced Chief Investment Officer (OCIO) Survey, with 79% of outsourcers saying that factor is important or very important in their decision.
Consider the Fred Hutchinson Cancer Research Center, which has a $125 million endowment and a $500 million strategic pool, which it uses to power its programs. The small Seattle-based medical research organization, named after a major league baseball player and manager who was with the Detroit Tigers and the Cincinnati Reds before his death from lung cancer in 1964, has a one-person investment operation. That would be Herbert Bone, its corporate treasurer.
“I’m it. There’s no staff,” said Bone, who enlisted JPMorgan to help Fred Hutch, as his organization is known. This relationship has given his small shop a reach that it otherwise wouldn’t possess. “We wouldn’t have the capacity to invest in hedge funds” without the Wall Street giant’s assistance, he noted. He outsources the endowment to JPM; the strategic pool is lodged in index mutual funds and thus needs no manager.
The dispersion of funds that opt for an OCIO tilts toward the smaller ones. According to the survey, 31% of the respondents using an OCIO have assets of less than $500 million. Those between $500 million and $5 billion make up 46%, with the larger plans, over $5 billion, at 24% (these are rounded figures).
What’s the chief investment function that institutions hire an OCIO to perform? Absolute return, with 64% saying they sought that goal. That outpaces de-risking (36%), which shows that a desire for gains towers over caution.
This comes during a spectacular bull market, which took off in late March 2020. Our survey, conducted from early February to mid-March of this year, illustrates how riding surging investments overshadows any qualms about the pandemic. Still, caution does have a place in investors’ thinking. Some 76% believe that better risk management is important or very important to hiring an OCIO—only 3% said it was not important.
The bulk of OCIO clients (72%) farm out all of their portfolios, versus 7% who outsourced less than 25% of their holdings. And those that give their OCIOs the authority to hire and fire managers and select investments, known as “full discretion,” are in the majority, with 54%. But 46% opt for only “partial discretion,” which retains them some say.
Our survey presents a thorough scan of the OCIO universe. Corporate pensions made up 44% of respondents, and public pension programs were at 39%. Most of them pay a flat fee, and none pay performance fees. —Larry Light
Methodology
Responses from 85 asset owners, aggregated for the charts that follow, were accepted for the survey from February 8 to March 16, 2021. 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.