The industry for outsourcing investment mandates is booming, offering large prizes for asset managers as challenging markets, a deluge of compliance and governance requirements and rising costs push big asset owners to seek their help.

The industry has more than doubled in size since 2016, growing to $2.46tn in assets under management worldwide.

The pace looks unlikely to let up with a flurry of recent chunky deals. In March BlackRock was appointed by insurer AIG to manage up to $150bn in fixed income and private assets. Last year, British Airways transferred £21.5bn in its two main pension schemes to the US manager. In April UK fund house Schroders announced a new £10bn mandate managing energy provider Centrica’s pension schemes.

New research from Chestnut Advisory Group estimates the industry will grow to more than $4tn in assets by 2026, as more flexible mandates open the industry to a wider range of clients than the smaller pension schemes who initially sought out external help managing their investments.

While the US has led the way in what are dubbed outsourced chief investment officer (OCIO) deals, accounting for more than two-thirds of assets, growth in Europe has also been notable.

“More than half of our growth over the past three years in Europe has been in the non-pension segments — so insurance, endowments, family offices, foundations,” said Jo Holden, global head of investment research at Mercer, one of the largest OCIO providers globally with $388bn in assets under delegated management. “We’ve had a phenomenally busy time in terms of tenders and new mandates coming in,” she added.

Outsourcing agreements vary in the level of control that is delegated and the amount of flexibility has increased significantly over time.

Some clients want the external investment manager to handle everything: asset allocation, selection of individual funds and managers and finally all risk management and back-office functions. Others want to maintain a veto over key decisions, or only outsource funds earmarked for a particular type of asset, as with the AIG-BlackRock deal, which involves fixed income and private placement assets.

In order to secure the Centrica mandate, as well as a partnership to manage funds on a new platform with insurance marketplace Lloyd’s of London, Schroders “worked with both of those organisations for a long time, establishing that we have a common culture, a common set of beliefs,” said James Barham, executive chair at Schroders Solutions, which has £234.5bn in assets managed under OCIO deals. “The trustees are not just passing over a very well recognised and regarded team of individuals, but also the assets of three schemes, and all of their employees. It’s not a decision which is taken lightly,” he said.

British Airways outsourced management of £21.5bn in its two main pension schemes to BlackRock last year © REUTERS

BlackRock had struck outsourcing deals with more than 120 institutional clients to manage more than $200bn at the end of last year. The world’s largest asset manager also provides similar “whole portfolio” services to wealth management clients covering another $230bn in assets. Last year this whole portfolio business grew 16 per cent, compared to a 7 per cent average for the industry, BlackRock said.

For the full service, BlackRock provides a wider range of hand-holding options, including helping top executives report to their boards of trustees on key issues and respond to questions.

“You’ve got to imagine you are down the hallway from the CEO or the president of the university and what might send them down the hallway. You have to serve that stakeholder,” said Ryan Marshall, BlackRock’s co-head of multi-asset strategies and solutions.

“Every pension fund has to support not only the front office [investment choices] but also technology and back office,” he added. “People want something that is bespoke to them with the advantages of scale that BlackRock can provide.”

OCIO deals initially took off among relatively small clients — usually pension schemes with $100mn to $1bn, if not even less — who were looking to cut costs and benefit from economies of scale and technology investments.

But much larger plans have shown interest in the last couple of years. So have mature pension schemes that are closed to new money and do not wish to hire people in-house to run them.

Interest has also spread from European defined benefit plans, who were early adopters, to the US and more recently Asia. Endowments, insurers and family offices are also picking up on the services.

Increased regulatory and compliance scrutiny, and especially the explosion of environment, social and governance investing in the past few years, has also pushed up demand.

“Sustainable investing is a very important driver especially in the UK and Europe because of the reporting requirements. Non-profit and endowments are [also] especially focused on this in the US,” said Greg Calnon, global head of multi-asset solutions at Goldman Sachs, which has $220bn under management in its OCIO business.

But while their popularity has exploded, there is scant evidence to demonstrate how outsourced investment mandates perform compared to their in-house peers.

OCIO fees are highly bespoke and rarely made public, and they come on top of fees paid to the managers of the actual investments.

That means potential conflicts of interest between the investor and the external manager can arise around investment allocation, and need to be managed.

“You need to have a governance structure in place to make sure that investments made in-house are being made for the right reasons,” said Rikhav Shah, director at consultancy EY.

Crucially, critics question the ability to make money from an outsourced CIO mandate unless the fund manager deliberately steers investment to its own funds.

“We looked at it and could not make it work,” said the chief executive of a very large asset manager. “My view is there is a direct conflict of interest. The firm will say ‘I’m going to charge you close to zero for OCIO service but by the way 50 per cent of the money is going to my funds.’”

Seth Bernstein, chief executive of $779bn asset manager AllianceBernstein, said: “It’s hard to do outsourced CIO well if you’re a proprietary shop because your preference will always be for your own funds, and clients will have issues with that.”

“For the OCIO provider, it’s a concept looking for commercial validation as it is hard to scale and retain quality service and performance,” he added. “For the OCIO user the returns are not compelling. The reason to do it is risk mitigation rather than returns, because you don’t have the time or resources to do it yourself.”

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