Institutional investor interest in farming out the job of chief investment officer to third parties is growing in Asia as the region’s wealth accumulates and more asset managers begin offering the service.
On Thursday (September 26), for example, Global CIO Office was launched by Singapore-based Purple Asset Management to provide external portfolio management solutions for the wealth management industry across Asia and the Middle East.
But investor reservations remain, highlighting some of the shortcomings of the outsourced chief investment officer (OCIO) model and why its adoption could be a slow burner for many family offices.
In theory, aggregating the assets of its clients could give an OCIO provider greater bargaining power to negotiate lower asset-management fees.
In practice, it's unclear whether the difference would be significant, one single-family office executive in Hong Kong told AsianInvestor.
Cost anyhow is only one factor, he added.
Using an OCIO is “probably cheaper and certainly easier than building a fully functioning family office, at least initially,” but cost alone “wouldn't and shouldn't be a (major) reason for allocating to an OCIO in any case,” the executive said on condition of anonymity.
To a great extent the decision could rest on the asset owner's chosen investment mandate.
“If it’s something very passive then there is little value in having a full-time 10-person committee looking into it,” a Singapore-based multi-family office executive told AsianInvestor.
As with most things, there are tradeoffs.
“I think the cost is you lose some control and direction. Equally if you want to create a low-risk balanced, long-term portfolio it possibly makes some sense,” the single-family office executive noted.
And for Pieter Steyn, head of delegated investment services in the UK at Willis Towers Watson, the potential tradeoff could prove particularly inhibitive for some active investment mandates “if the skill is not there”.
“For index-tracking mandates, lower fees are better and you always keep more of the return. For active mandates, the ideal is high skill at a low-as-possible cost,” Steyn said.
EVOLUTION NOT REVOLUTION
In view of the competing factors, a family office stampede into OCIO services providers is seen as unlikely. It'll be more evolution than revolution, if anything.
“Most organisations don't go out finding outsourced CIO but rather have a positive experience with somebody that slowly evolved the relationship into an OCIO,” the Singapore-based executive said. And these positive experiences with external experts require time to develop.
“In our daily routine, we do rely on each other's expertise quite often -- some more than the others. Over time, some individuals just stand out and the organisation or family starts relying on these individuals to make good calls,” he said.
Naturally, when managers and consultants have rolled out the OCIO model, investors have questioned whether conflicts of interest might emerge.
“There always the lingering concern of whether the investments made are done so with your best interests front and centre,” said the Hong Kong single-family office executive. “There can be conflicts of interest, which we have certainty seen with some of the private banks.”
As previously reported, for example, the malpractice of “churning” is a common tactic among Taiwanese banks that distribute funds in Asia.
When asked whether the OCIO model would clash with Willis Towers Watson’s capacity as an adviser, Steyn said a delegated CIO works in the same way as an in-house one, providing strategic advice on asset allocations as an adviser for the investor’s board to review and sign off.
“And then the board would ask the chief investment officer and his or her team to go and execute the details underneath that. OCIO is the same,” he said.
As for the consultant’s advisory capacity, he added that the client “can choose whether it wants to access investment content through an advisory framework or through a delegated or outsourced framework.”
A GROWING FIELD
Having said that, the multi-family office executive acknowledged the OCIO model is a “growing field”.
The UK is a prime example of a country in which the model is gaining traction. The total assets under management using an OCIO grew to £142 billion ($176.7 billion) in the UK last year, while the number of OCIO mandates in the country reached 862, according to a 2018 survey by KPMG.
The firm’s clients in the Asia-Pacific region under the OCIO model also went up to more than 50 as of March this year.
Jardine Matheson, for example, appointed Willis Towers Watson as an OCIO to invest its pension funds.
In Asia, some investors have also shown interest in delegating the fixed-income portion of their portfolios.
Johan Jooste, managing director at Purple Asset Management, told AsianInvestor that they have previously approached the firm to construct model portfolios for both investment grade and non-investment grade fixed income allocations, often with some form of nominal yield target.
It's why Purple Asset Management has now formed Global CIO Office.
“Most of the prospects we have been talking to are looking to delegate assets of $50 million and upwards,” Jooste said.
Story updated to clarify the total usage of OCIOs in the UK and the information source of this information.