Institutional Consultants Anticipate Long-Term Effects Resulting from COVID-19

July 30, 2020 — Boston

Defined benefit (DB) plans face challenges in maintaining funding statuses, operational due diligence teams prepare for greater scrutiny, and outsourced chief investment officer (OCIO) mandates set to rise among consultant-intermediated mandates

The current market environment is likely to have long-term effects on certain aspects of the investment consultant industry. Cerulli expects three aspects of the market will be impacted significantly by the current market challenges: volatility in funding status for defined benefit (DB) plans, increased focus on operational due diligence, and increased adoption of outsourced chief investment officer (OCIO) mandates, according to its latest report, U.S. Investment Consultants 2020: Adapting to the Post-COVID-19 Environment.

For institutional investors such as corporate DB plans, as well as state and local government DB plans, the pandemic has caused further challenges to maintaining funding statuses. Cerulli expects corporate DB clients to increasingly seek help managing their portfolios due to the continued decrease in the discount rate used to value the pension obligation and the increasing difficulty in finding high-yielding returns in the market. This will reinforce the need for derisking services in the corporate sector as companies seek to reduce the burden of properly funding their obligations. “The continuous pressure on these asset pools is likely to drive the need for liability-driven investing (LDI), glidepath services, and multi-asset-class solutions in the near future,” explains Laura Levesque, associate director.

Current market conditions will likely cause more asset owners to seek investment advice, opening the door for an increased volume of request for proposals (RFPs) in late 2020 and 2021. “When asset owners have a better understanding of what the market environment will look like as the pandemic further plays out, there is the possibility that certain conditions will be met in 4Q 2020 if businesses across the United States are able to truly lift restrictions on operations,” says Levesque. According to the report, all organizations expect that RFPs, requests for information (RFIs), and due diligence questionnaires (DDQs) will increase in the coming year. Enhanced scrutiny of operational due diligence has already begun. RFP teams report that the COVID-19 pandemic has created a flood of additional DDQs that specifically address how the organization is managing operations considering office lockdowns, quarantines, and government-mandated stay-at-home orders.

Additionally, the potential for additional asset owners to consider adopting OCIO models has increased in the current market environment. Asset owners that felt comfortable managing assets in the stable market environment over the last 10 years suddenly find themselves far more challenged. The cost of OCIO services now seems a more reasonable expenditure to meet investment goals. “The increase in volatility will present a challenge to both large and small asset owners. It is therefore likely that there will be an increase in OCIO clients of all sizes seeking to elevate their portfolio oversight and risk management,” concludes Levesque.

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