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By John D. Antona Jr., Pensions&Investments
December 8, 2008, 12:01 AM ET
Outsourced assets are expected to exceed $500 billion in the next three years, creating a broad pool of cash for both traditional and alternative asset managers to tap, according to a research paper scheduled to be released today.
But it will also mean a world of change for managers of institutional assets, according to the paper from Casey, Quirk & Associates LLC, Darien, Conn.
Money managers will need to recognize that these new intermediaries (the outsourcing platforms) will become increasingly important clients to them going forward, said Kevin P. Quirk, partner at the firm. Recognizing that critical decision-making is happening at the outsourcing provider level will be a new dynamic for many managers.
In the paper, The New Gatekeepers: Winning Business Models for Investments Outsourcing, CQA researchers estimate the investments outsourcing market will grow to $510 billion by 2012 from $195 billion at year-end 2008, representing 13% of all assets and 25% of all investors in the U.S. institutional market. (The report defines the institutional market as U.S. corporate defined benefit plans, Taft-Hartley defined benefit plans, endowments, foundations and other non-profit institutional investors.)
Outsourcing of either entire portfolios or only portions of a fund's assets has long been the domain of managers of managers. But the CQA report shows this is changing as new competitors, such as investment consultants and dedicated outsourced investment managers, enter the marketplace. (For this paper, CQA defined outsourcing as delegation by an investor of 100% of assets and some level of investment discretion.)
According to CQA data, traditional managers of managers have seen their market share of U.S. institutional assets under management decrease to 58% as of Dec. 31, 2007, from 67% as of Dec. 31, 2004. Investment consultants' market share, meanwhile, rose to 17% from 4% during the period. Assets under management for dedicated outsourced investment platforms, such as Strategic Investment Group, Washington; or Investure LLC, Charlottesville, Va.; also rose in the three years, to 14% from 9%.
Aggressive challenge
The manager of managers are being aggressively challenged by select investment consultants and dedicated outsourcing platforms who have brought innovative value propositions to the market, Mr. Quirk said. These firms have brought a stronger expertise in alternative investments and customized solutions.
The growth and change in the market have been prompted by institutional investors' interest in alternatives and desire to diversify their portfolios away from high concentrations in equities and fixed income to less correlated asset classes.
When you're thinking about alternatives' role in a portfolio, the ability to make tactical decisions quickly, an outsourcing relationship can achieve this quicker than the traditional consultant educating the investment committee model, Mr. Quirk said.
The central tenet of this process, though, is shifting investment decision-making power to the management firm and away from the client. This transfer out of the hands of investment committees, internal managers and traditional consultants can enable pension plans and other institutional clients to rapidly shift investments much quicker than before. In most cases, investment committees will still approve major, strategic decisions like policy asset allocations, but in some cases all critical investment decisions are delegated to the outsourcing provider as per agreement.
The increasing influence of outsourcing providers will be felt across the asset management arena, and will affect the asset-gathering strategies of traditional and alternative money managers, according to the paper. Outsourcing managers will demand more information from the subadvisers they select, making institutional sales more technical and requiring sales and distribution professionals to have a greater degree of product knowledge and expertise.
Investment outsourcing firms, and other professional buyers, will be no longer secondary servicing targets but critical primary targets, further reshaping the relationships between asset managers and their institutional clients, according to the paper.
We're moving to an environment where asset managers are spending less time with end-user investors and more time with the professional buyers that represent them namely the investment outsourcing providers, said Benjamin F. Phillips, partner at CQA.
Big boom for small plans
While the paper predicts outsourcing will grow across all investor segments, the biggest increase is expected among small plans those between $250 million and $750 million, because these plans don't have the financial clout to count themselves among the elite.
Small to midsize investment programs will continue to get squeezed in this market environment, as they struggle to find and retain talent. Concurrently, they lack the scale of larger institutions, which prevents access to the most attractive investment strategies and pricing power, the paper said.
These are the real beneficiaries here, the smaller and midsize investors who can get access into alternative markets by pooling assets through an outsourcing platform, Mr. Quirk said.
If you're (an institutional client) with under a half-billion dollars in assets, you may have trouble gaining access to alternative opportunities, Mr. Phillips said. Traditionally, larger asset managers have been looking for big anchor institutional buyers. Outsourced vendors can tap into relationships with these larger asset managers and help smaller firms gain access.
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