Infovest21\'s Current Issue of Investor Focus: Outsourced Investment Offices

Outsourced investment offices say it makes economic sense for an endowment to build its own investment office when assets exceed $1.0 billion.

Cambridge Associates says institutional investors with assets between $100 million and $1 billon are most likely to use outsourced solutions.

“As the assets under management get smaller and smaller, they reach a point where the organization cannot, or chooses not to, afford an in-house office. They need it, but they just have a problem with the cost,” says Michael Bunn of The Endowment Office. “If you can afford to use an investment office, whether it is shared or by yourself, that makes sense. You get a better quality of service and a more customized portfolio. You now see the boards that do it themselves looking for alternatives to the consultants.”

For smaller institutional investors, Bunn highlights two options: outsourcing the CIO approach or using the shared office approach.

The number of US institutional investors outsourcing their chief investment officer functions has doubled in recent years and is expected to grow quickly due continuing internal institutional staff and budget cuts, the desire for institutions to simplify internal operations, a possible need for a quick temporary solution, fiduciary fatigue caused by limited time and resources conflicting with new valuation methodologies and increasing allocation to more complex alternative investments.

A Casey Quirk study predicted that the investment outsourcing market will grow to $510 billion by 2012, representing about 13% of institutional assets and 25% of institutional investors.

With investment outsourcing, the consulting or investment firm assumes responsibility for asset allocation and implementation, acting in the same capacity as a professional investment staff of the largest institutions.

Cambridge Associates says each outsourced CIO relationship they’re involved with is tailored to meet the specific needs of each institution. Some clients have a CIO in place and look to them to act as the outsourced investment staff and support to the work of the CIO and investment committee. Other clients have no CIO or staff in place and hire the outsourced provider to act as the outsourced investment office. While some clients seek to retain authority over manager hiring and firing, others look to the outside provider to provide very directive recommendations.

NewProvidence’s Andrew Vogelstein says, “It is important to understand each institution’s particular and unique set of circumstances including everything from … its finances to limitations set forth in its investment policy statement…We expect and want constructive feedback. Depending on the client, this back-and-forth process can happen quickly, or take time. In the end, the client will have a portfolio designed to suit its unique circumstances.”

Shared office
The shared office is The Endowment Office’s primary business. “The shared office is like any other investment office for any large university endowment. Each investment strategy is different because the investment committees want it customized. The shared office customizes investment strategy across all asset classes, and is a separate account or managed account with its unique custodian, separate relationships with managers. Not all the managers or asset classes are the same for each organization, it depends on the organization,” says Bunn.

Bunn says the shared office is a little more expensive than an outsourced CIO approach but the cost is spread out among multiple organizations at a reduced rate. There are a limited number of endowments that can share an office.




Infovest21\'s Just Released Issue of Investor Focus – Outsourced Investment Offices



Interviews with Cambridge Associates, Partners Capital, New Providence and The Endowment Office Issue also includes:

Side bar: Casey Quirk Outsourcing Survey
Who’s Who: Outsourced Investment Offices
Quarterly sentiment indicator: Marketers

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