With such attractive growth prospects, it is no surprise that all sorts of firms are entering the market to offer institutional OCIO solutions. Alpha Capital Management tracks nearly 100 different firms offering OCIO services. Many of the OCIOs who have been most successful in attracting clients are consultants.
In this blog post, Alpha Capital Management offers our thoughts on the three primary reasons investment consultants are embracing OCIO. Our next blog post will cover three challenges that consultants-turned-OCIOs face.
Reason #1: Clients Want It
A $200M frozen pension plan finally saw their funded status top 90%. The CFO was thrilled. But by the time they went to lock it in, the markets moved against them. When we were called in to do a search, the funded status was back in the mid-80s. This number was so important to the CFO that he asked finalists if it could be pushed to him daily via text message. They went OCIO.
Pensions like our search client are a huge part of the OCIO market. This was true five years ago, and it is still true today. As Pensions & Investments reported in June 2018: “Large managers of discretionary OCIO assets said one of their biggest sources of new business in the past year and expected to be going forward is from corporations contemplating the fate of their defined benefit plans.” Defined benefit plans have kept pace with the massive growth of OCIO and still represent a third of the global OCIO marketplace, as shown below:
Chart Data Sources:
Total OCIO assets under management (AUM) data from Pensions & Investments (P&I). Corporate pension AUM based on Casey Quirk % breakdown applied to P&I total AUM figures. See BlackRock’s report, “Pension OCIO Buyer’s Guide” for more details.
It has been a tough market cycle for diversified investors like our non-profit client. The S&P 500 has beaten InvestmentMetric’s entire institutional universe, as shown here:
We believe that OCIO has benefited from two massive tailwinds: pension plan sponsors who seek an improved governance model, and clients struggling with underperformance issues who seek stronger returns.
Reason #2: Increased Revenue Potential
Consultants may not charge enough for advisory work (although our clients disagree). Try going to your advisory clients and asking for a 100% fee increase – you’re more likely to get fired than to get a client to agree. OCIO, though, has given consultants the opportunity to reset the market perception of value. An institution may be willing to pay twice as much for OCIO. This is an important factor in the explosion of OCIO offerings by consultants.
Reason #3: Scalability
No Wonder Consultants are Embracing OCIO
Still, we believe consultants are finding OCIO to be a two-edged sword. With the benefits of higher fees and a more scalable service model come several key challenges.
In our next blog post, we will focus on three main ones: performance, operations, and conflicts of interest.
This blog post is adapted from our research report, "Clients Give Consultants a Green Light for OCIO."