Demand for investment solutions by outsourced CIO (OCIO) firms have kept pace with soaring OCIO assets under management. But asset managers may find OCIO expectations different than traditional asset pools and revising marketing and sales techniques may be required.
Three OCIO representatives spoke at eVestment’s recent EI3 conference in Atlanta: Vanguard’s Brian Binkley, T.J. Kistner from Segal Marco Advisors and Mike Sebastian from Aon. Below are key takeaways asset managers may find helpful as they seek to gain share in this rapidly growing sector.
Active Management Returns
In some senses, the OCIO model can be more accommodative to actively-managed products than traditional consulting, the panelists noted. For Sebastian, investor behavioral biases leading to manager turnover can be minimized through the OCIO model.
“You might have the best manager in the world, but if they underperform over a three-year period, you may fire them and we know empirically that you are going to have a bad outcome. If you’re an OCIO, you have a better chance with oversight to be able to avoid bad behavioral decisions. If you look at OCIO versus advisory portfolios, you will see more active managers because we believe that we can help get over some of the biases that explain why people do poorly with active management,” he said.
Binkley agreed that OCIO portfolios tend to overweight active management versus traditional advisory structures, “if you look at the data, OCIO firms seem to heavily weight active management.” But, he added, OCIO clients will vary depending on their appetite for risk: “If they don’t have the patience to ride out cycles or can’t stomach the variability of having active management, then we’re going to encourage a passive approach.”
For Kistner, asset managers should stress the role their active strategies can play in downside protection. “The reality is that we haven’t seen a down market in eight or nine years, so we haven’t had to discuss downside management. Believe it or not, I think the discussion around active management now is focused on using it as a risk management tool.”
Traditional asset management marketing relies on a multi-pronged approach of meeting with consultants, plan sponsors, board members and other interested parties. Managers seeking to grow OCIO assets, by design, should confine themselves to only the OCIO prospect firm and its manager research team.
“One of the major differences with OCIO shops goes back to the governance process in place,” Kistner said. “The approach of reaching out directly to an asset owner or a client is less effective in this construct because any manager or strategy that makes its way into our discretionary client portfolios has to go through our research process and approved through our legal process. This internal policy is due to the fact that we open ourselves up to more risk due to the increased fiduciary responsibilities of being OCIOs.”
Because managers can focus their efforts on OCIO research teams, “they don’t have to attend quarterly or monthly meetings with our clients. They don’t have to go through the entire legal process for multiple plans and platforms. They deal with us – we’re effectively the client,” Kistner added.
Segal Marco Advisors
Fees and Partnerships are Key
The flip side to any cost-savings managers may accrue from calling directly on OCIOs is that fee pressure, already significant in the traditional advisory space, is even higher in the OCIO segment.
“You have to be willing to do performance-based fees. We want alignment of interest with our clients, and so we believe in performance-based fees for our investment managers,” Binkley noted.
For Kistner, performance and negotiated fees are part of an effort to align interests with manager partners. “From our perspective, it’s not in our client’s best interest to just kick the door down at an investment manager and say, ‘lower your fees or else.’ We recognize that there are costs associated with managing an investment program. From our perspective, our main goal is making sure that we align the interest of our clients with our investment managers.”
“We’re looking for long-term strategic relationships with the sub-advisors that we hire,” said Binkley. “The good thing is that we have very long tenures with these managers because we’re preaching patience to clients and we want to have patience with our managers as well. The downside is we don’t have a lot of turnover for those that are trying to get in.”
Key to forming long-term relationships, the panelists noted, are making all the resources of the asset manager, including senior management, available and taking the time to understand the OCIO’s clients, investment philosophy and product needs. Transparency is also a must.
“I’m all about transparency, so I want to know, ‘how can we better work together’? We obviously expect a lot of data from our managers, but I also want to know how the partnership can get better. We’re partners in this together to make it all work for the end client,” Sebastian concluded.