A small number of asset owners in the Asian region have adopted outsourced chief investment officer (OCIO) mandates, but the region possesses many more investors that would benefit from the structure, argue the investment consultants seeking such mandates.
Consultants told AsianInvestor that OCIOs would typically make sense for asset owners with AUMs of less than $1 billion to $5 billion. They can offer value to institutions with more than that too, but those with over $20 billion in AUM are large enough to possess their own dedicated investment teams.
Statutory boards are seen as some potential candidates, following Singapore's Ministry of Home Affairs exploring the use of an OCIO. An investment consultant told AsianInvestor that Singapore has 57 such boards with assets ranging from S$300 million to S$40 billion ($221.3 million to $29.5 billion).
Hong Kong has six or so corporate pension schemes like conglomerate Jardine Matheson, which recently appointed an OCIO, with up to $4 billion in assets, plus a similar number of endowments.
“The challenge with Hong Kong’s endowments is that it’s not always clear exactly where the money originates from or the investment objectives,” he added.
There are potential participants further afield, too. In conversations with consultants, AsianInvestor was told of inquiries and discussions taking place with organisations in Singapore and China, and one live request for proposal for an OCIO contract in Korea.
Jennifer Qin, head of Asia Pacific investment management at Deloitte, is particularly intrigued by the concept spreading in China. She noted that the nation’s introduction of funds-of-funds in 2017 to encourage multi-asset investing could also encourage the creation of OCIOs, at least across parts of portfolios, noting that it makes sense for local asset managers to outsource some of the assets they collect to other fund houses where they lack expertise. This would likely include international investing capabilities.
The potential appeal of OCIOs, or at least more specific delegated investment solutions, could prove quite appealing for several types of asset owner in China, she added.
“Pension funds could be potential users of OCIOs in China, particularly if social security rules are relaxed and more asset classes are seen as an emerging force [for investment]. Asset management arms of insurers could be another, as they have a huge pool of money,” Qin said.
“Municipalities in China are also worth keeping an eye on; each one has its own agenda to develop its own industrial centres and specialities, and I wouldn’t be surprised if governments encouraged some to conduct more activities into investment decisions.”
While OCIOs look set to gain traction in Asia, it’s likely to take years before they gain the same acceptance as they have in other regions.
There is also one particular pitfall that organisations considering an OCIO should beware of, warned a company finance official at an organisation that had considered employing an OCIO for its pension assets.
“Many fund managers that come and talk about fund manager OCIOs basically just want to use them as a mechanism to sell their funds,” he warned. “If you appoint a fund manager and invest all your pension plans into their funds, you might be diversified but you still end up having huge provider risk.” But the ultimate issue preventing more rapid engagement of OCIOs in Asia might simply be a combination of ignorance and conservativism.
“The most typical sticking point I hear from asset owners is ‘not enough of our peers are doing it’,” said Adeline Tan, head of wealth advisory for Hong Kong at investment consultant Mercer. “Clients are interested in exactly what an OCIO or delegated solution can deliver, but tend to be more comfortable if they are not early movers.”
“The OCIO model itself has to become acceptable and service providers need to establish credibility [as providers, in Asia] before they are likely to be engaged by smaller industrial participants,” added Deloitte’s Qin.
It’s worth underlining that OCIOs are not for all smaller investors. Asset owners content to remain conservative might find it easier to invest into more vanilla passive and active equity and bond funds. Similarly, those requiring liquidity might find easier ways to invest.
However, for asset owners wanting some alpha, particularly by locking up some of their assets for years in alternative assets or niche investing strategies, OCIOs might make sense.
At the very least discussing them may help open the eyes of some of Asia’s smaller institutional investors to new investment areas.
This article was adapted from a feature that originally appeared in AsianInvestor December 2018/January 2019 magazine.