Ten years ago, outsourcing was merely seen as a solution for small institutions with limited resources. But now, a wide range of long-term investors, such as those with diverse asset pools, are now turning to the outsourced CIO model because of the great benefits that it can bring.
According to a recent survey conducted by Goldman Sachs, about 80 per cent of the CIOs today outsource a large portion of their investment management to a third party. All in all, about $1.4 trillion of insurance assets are now managed by professional asset managers – a whopping $500 billion increase since 2006.
Asked about the primary reason behind this transition, executive vice president and CFO of Kennametal, Inc. Catherine Smith said that “Outsourcing has almost become a ticket to the game.”
“We have to be competitive on every front, and outsourcing is one way to get there. If a process is not core and strategic to our success, someone else can do it for us, and do it better,” Smith added.
Aside from being competitive, Russell Investments reported that many organizations now consider an outsourced CIO because today’s volatile markets require dynamic portfolio management. In line with this, there is a higher demand for an access to an expanded opportunity set or specialized strategies including rigorous risk management analytics, asset allocation modeling, robust back-office services and relationship management.
Meanwhile, Forbes mentioned that “fiduciary fatigue” could also be one of the forces behind the outsourcing trend. This covers different set of challenges faced by investment committees as they navigate a period of severe stress.
“For many, maintaining current spending in the face of sharp declines is a huge hurdle. Some investment committees are realizing they just can’t meet often enough to provide sufficient day-to-day oversight to position their portfolios in a high-volatility environment and take advantage of market dislocations,” states Forbes. Higher ROI and budget constraints are also some of the drivers, the report adds.
With these challenging scenarios, an outsourced CIO (OCIO) aims to enhance the decision making process, cost savings and implementation of ideas.
When it comes to overall performance, on the other hand, the OCIO can help construct a cost-efficient portfolio that targets to strike an optimal balance between risk and return, and further improve net-of-fee to increase wealth overtime, according to StrategicInvestmentGroup.
To maximize positive returns, look for an outsourced CIO that offers not only the best-of-breed proprietary technology, tools and strategies, but also a team of experts that can thoroughly assess the alignment of different investment strategies with your financial goals.
