Small and mid-sized managers may be considering the switch to outsourced chief investment officers, and a new report shows that this practice may prove a mixed blessing.
According to a new research series from Greenwich Associates, outsourcing discretionary control over investment portfolios could pose several critical risks. But despite the risks, the opportunity to develop relationships through an outsourced CIO system could prove valuable to smaller managers.
In the first of a new, quarterly thought leadership series, the Stamford, Conn.-based consulting firm reports that small and mid-sized companies face significant challenges that they are limited by budget to solve. These challenges include the increasingly complex and time-consuming task of allocating funds, performing manager due diligence and monitoring existing managers due to the steady increase in the share of assets invested by endowments and foundations in alternatives.
In such an environment of complicated and volatile markets, fast decision-making is imperative. In addition, investors expect lower investment return than pre-crisis, and many are seeking external help in building portfolios to suit a low return environment.
Also, maintaining an experienced CIO is expensive. Budgetary constraints and the inability to provide competitive pay may inhibit the ability to hire and retain top candidates. Meanwhile, relying on investment committees made up of volunteers may also prove problematic, given that members may not lack sufficient investment experience, and they may not meet regularly enough to provide strong oversight and quick decision making.
But even outsourcing CIOs may not solve for such issues. First and foremost, virtually all new such arrangements result in manager terminations. In addition, outsourced CIOs may limit the number of asset management mandates available from small and mid-sized institutions. Smaller asset management firms may be unable to accept the large mandates made available to them by outsourced CIOs, while others will be excluded from consideration, given that some outsourced CIO providers may want to mitigate risk by avoiding mandates that would require a large share of the individual manager's total assets under management.
Even so, outsourced CIOs may provide an opportunity for smaller asset managers to show they can consistently generate alpha.
"One of the best ways managers can position themselves to reap the enormous benefits of landing a spot on a large OCIO provider's platform is to view the OCIO sales process more as relationship development than as product sales," consultant Andrew McCollum said.
"OCIO providers are always in need of new ideas and innovative solutions that can be applied to the portfolios of their many clients. As a result, asset managers who can position themselves as trusted advisors could gain an invaluable advantage."