Outsourced CIO at an Inflection Point

Outsourced CIO at an Inflection Point
New findings from a Cerulli research survey reveal strong OCIO growth ahead, but institutions are demanding more

March 14, 2019, Boston MA - After a decade of robust growth, the outsourced chief investment officer (OCIO) industry is at an inflection point, according to findings from recent Cerulli Associates research, OCIO at an Inflection Point: Strong Growth Ahead, but Institutions Are Demanding More. While the OCIO industry is expected to continuing growing, asset owners are demanding more from providers and conducting replacement searches to ensure the quality and fit of their existing OCIO. Uncertain market conditions could accelerate the movement.

Driven by institutional investor demand for timelier decision making, deeper manager due diligence, and greater oversight of portfolio risks, the OCIO model has flourished and investors are broadly satisfied with the model and governance structure. Cerulli predicts continued strong growth in the OCIO industry—from approximately $1.1 trillion in U.S. assets under management currently to nearly $1.7 trillion by 2023.

“Clients are seeking help at a whole-portfolio level in the face of low returns from traditional asset classes, greater complexity and uncertainty, and rising regulatory scrutiny,” said Sarah Melvin, Head of the Institutional Client Business for the U.S. and Canada at BlackRock. “OCIO providers that can truly partner with clients to understand their needs and can provide comprehensive solutions will continue to grow in today’s environment.”

At the same time, the industry has evolved and uncertain market conditions have asset owners looking to the future. While 89% of organizations believe that their OCIO is well positioned to meet their performance goals and objectives over the next three to five years, nearly one-fifth of institutions are unsure whether their OCIO will meet their performance goals in a down market. Cerulli believes future market turbulence will fuel continued growth in OCIO adoption as more institutions are likely to seek the help of a provider when returns become harder to generate.

“A market downturn will provide a new set of challenges for OCIO providers that have largely grown their business in an extended bull market,” said Michelle Giuditta, Director at Cerulli Associates. “For this reason, we expect replacement searches will continue to grow along with assets under management.”

According to the white paper, 57% of organizations have initiated or plan to conduct a replacement search or market check since hiring their OCIO provider. Of those organizations that have completed a search, exactly half have replaced their OCIO. The reasons for replacement vary and include a desire for greater flexibility, stronger investment capabilities, better performance, broadened asset class coverage, proactive client service, and better fit with the OCIO.

“Institutions have a larger, more diverse pool of OCIO providers from which to choose, and many early adopters are conducting due diligence to see whether their OCIO is keeping up with the market,” said Giuditta.

The Cerulli white paper, which is sponsored by BlackRock, is Cerulli’s first dedicated research initiative exploring the perspectives of asset owners, and captures feedback from 45 institutions, including nonprofits, corporate defined benefit plans, healthcare organizations, public defined benefit plans, and family offices, representing more than $25 billion in assets under management.

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