On June 2, BlackRock announced that it had won a £21.5 billion ($30.5 billion) outsourced chief investment officer mandate from British Airways.
Two things were curious about the deal — its size, and the fact that such a large pension fund chose to outsource its investments, rather than the other way around.
BlackRock’s Ryan Marshall confirmed that British Airways is now the firm’s largest client in the United Kingdom, and one of its largest globally.
“I don’t know of anything larger or close to it in the OCIO business,” one industry expert told Institutional Investor.
While the sheer size of the deal is impressive, Marshall, BlackRock’s co-head of multi-asset strategies and solutions, said he expects to see more like it — and believes BlackRock is poised to meet those needs.
“Covid has accelerated a lot of trends,” Marshall said. “This continuing trend toward multibillion-pound/dollar schemes is definitely one that’s in place. I would expect to continue to see it moving forward.”
A British Airways team will be joining BlackRock solely to manage the pension scheme’s assets, he added.
So why would a massive pension scheme decide to outsource in the first place?
“This agreement is the necessary next step in the evolution of the schemes as they look to enhance their respective investment strategies, working toward their funding goals,” Roger Maynard, chair of trustees at the British Airways pension schemes, said in a statement.
He added that BlackRock would “ensure the continued focus on delivering enhanced oversight, investment management, and long-term value” for the funds.
BlackRock’s Booming OCIO Business
The mandate is the latest for BlackRock’s OCIO business: As of March 31, 2020, it had $250 billion under management, which excludes the British Airways deal and any other fresh mandates signed since then, according to Marshall.
The OCIO division operates as a part of the firm’s multi-asset strategy business, which is made up of about 300 employees. In 2018, the company announced in an internal memo that it would be growing its pension and outsourced chief investment officer teams, Institutional Investor previously reported.
At the time, Blackrock hired Martin Jaugietis, a Russell Investments alum, to co-lead its client portfolio solutions pensions team. The company also hired Matthew Weinstein to be a director for the firm’s pensions OCIO team. Weinstein joined from Goldman Sachs Asset Management.
According to Marshall, each BlackRock client has a lead chief investment officer, but can also access the company’s service businesses as well.
“The constant need to reinvest and invest in technology, risk management systems, and keep up with changing regulations — those costs are not static,” Marshall said. He added that when clients pay “as a percentage of AUM,” costs are more manageable.
Why the British Airways Deal Makes Sense
Industry consultants tend to raise their eyebrows when a large asset manager takes on an OCIO mandate. They worry that hidden costs may arise, especially if a provider invests the assets it manages in its proprietary products.
According to these industry watchers, though, BlackRock’s OCIO business is best positioned to serve corporate pension clients, rather than other traditional OCIO customers.
Outsourced pension plans are “very different than endowments, foundations, nonprofits, hospitals, and others,” said Brad Alford, founder of search consultancy Alpha Capital Management.
Here’s why: “Liabilities drive the asset allocation,” Alford said. “The glidepath and the actuaries are really big players in that as well.”
According to Alford, BlackRock and other asset managers-cum-OCIO providers tend to be attractive to corporate funds. “They’re good on the pension fund side,” Alford said of BlackRock. “They’re primarily in fixed income, so having a good bond manager is important.”
There are difficulties in managing a mandate of this size. “The limitation would be privates,” according to one source. “You just are not going to be able to fill your bucket of VC.”
But BlackRock may have a solution for that, according to the source. “BlackRock has been trying to do some innovative things in the private equity area like creating their own funds or individual deals,” they said.
“A lot of this will be doing the asset allocation work, the holistic view relative to the company,” the source added. “BlackRock would be very capable of doing that.”