Outsourced CIOs Keep Attracting More (and Bigger) Clients

Outsourcing is no longer just for the smallest funds, according to Cerulli Associates.

Illustration by II

Illustration by II

Only the smallest and most under-resourced endowments, foundations, and retirement plans used to opt for an outsourced chief investment officer. Now, the outsourcing trend is moving upmarket — fueling further growth for the ballooning industry.

Recent research from Cerulli Associates indicates an increasing reliance by asset managers’ institutional clients on third-party intermediaries like OCIOs and investment consultants. According to a report from the firm last month, just under half of U.S. client assets were distributed via a third party in 2018, an increase of 5.6 percent from the year before.

“The OCIO space continues to grow at a faster rate than the industry overall,” Daniel Uquillas, a senior Cerulli analyst, said in a phone interview Monday. According to Uquillas, this growth has been due in part to outsourced CIOs — once used by only “very small plans” — finding more clients among larger endowments and foundations, corporate defined benefit plans, and public pensions.

This was the first year that “the percentage of endowments reporting that they outsource at least some elements of their portfolios reached 50 percent,” he said, citing a study by the National Association of College and University Business Officers. Although sub-$25 million endowments and foundations “still do most of the outsourcing,” Uquillas noted that larger funds have started to outsource as well, following the example of institutions like Syracuse University.

“OCIOs have become more creative with how they work with institutional investors,” Uquillas said. “LDI quarterbacking” — implementing the liability-driven investing programs favored by corporate pensions through hedging and active trading — is one service that he’s seen pitched by OCIO providers.


Another factor driving the outsourcing trend upmarket is larger allocations to alternative asset classes, which require “lots of due diligence and effort to invest in effectively,” Uquillas said. “Institutional asset owners might decide they are better off outsourcing that portion of the portfolio to an OCIO.”

[II Deep Dive: The No. 1 Reason Institutions Fire Their Outsourced CIOs]

As more institutional investors choose to outsource at least part of their portfolios, asset managers are having to rethink their investor relations efforts in order to secure OCIO assets. In a Cerulli statement this month, senior analyst Laura Levesque noted that winning an OCIO mandate requires “far more than a sales pitch from the sales team.”

“OCIO providers place high importance on finding asset management partners that fully understand their client base and how any investment solutions they provide will benefit a portfolio for these clients,” she said in the statement.

These OCIO providers are also likely to use their increasing leverage to get prospective managers to lower fees, according to Brendan Powers, associate director of product development at Cerulli.

“One of their bargaining chips for their clients is their ability to negotiate,” he said by phone Monday. “Consultants and OCIOs have really played into the pressure on fees.”