July 22, 2020
Among the many difficult decisions organizations have faced during the novel coronavirus (COVID-19) pandemic is how best to deploy their resources and make the most of their capital.
The pandemic is inspiring companies across industries to rethink standard modes of operating and make new decisions about their futures. Meanwhile, other organizations might be short-handed, with key individuals ill or caring for sick loved ones. Others might face new challenges for which they simply lack expertise. Some might be looking to make the best use of the resources they do have.
Effectively managing an organization’s investment portfolio can be challenging in the best of times — especially when the task is not a business leader’s only responsibility. But doing so in times of crisis, in the face of market volatility and strains on resources, while juggling and trying to prioritize other important tasks, increases those challenges dramatically.
“At the start of the pandemic, most corporations and endowments were consumed with simply managing their organizations through the healthcare aspects of the pandemic and caring for their people. They didn’t have time to focus on protecting other assets,” says Heather Myers, partner and Non-Profit Solutions leader at Aon. “They were saying, ‘I can’t take the time to focus on managing this important investment pool.’”
Some business leaders attempting to manage their organizations’ investment portfolios are finding they lack the expertise needed to navigate markets in an environment like COVID-19. Others, relying on a consultant and an investment committee model, find they aren’t nimble enough to move quickly as markets change. These challenges raise strategic questions about which business operations are best managed in-house and externally.
Many institutional investors were opting for the outsourced chief investment officer (OCIO) model before the pandemic. Now, as many organizations are stretched thin coping with COVID-19, the option of hiring an outside expert to manage investments might become even more attractive.
Even before the pandemic, assets managed by OCIOs were increasing. In 2019, worldwide OCIO assets reached $1.82 trillion — a 4.7 percent year-over-year jump.
In the year ended March 31, 2020 worldwide, OCIO assets reached $1.96 trillion – a 5.8 percent year-over-year rise.
The COVID-19 pandemic looks set to accelerate that trend, as investors grapple with the added challenges posed by the crisis. Executives with diverse responsibilities are recognizing how difficult it is to get the right outcomes from the investment function as they tackle the other hurdles facing the organization, says Bryan Ward, senior partner and North America head of solutions and sales at Aon Investments.
Outsourcing the investment function could help address such pandemic-related demands as the need to rebalance portfolios more frequently due to current market volatility. In some cases it can produce cost savings, freeing up resources that might be applied to other needs.
“Many organizations that didn’t use an OCIO when the pandemic hit are realizing that there is a lot more to managing a portfolio during times of stress than they may be equipped to do,” says Myers.
“Once advisory clients began to emerge from the initial phase of the pandemic, we started to see increased interest in the OCIO approach,” says Ward. “The crisis magnified the benefits as it freed up critical resources so they could be focused on the core business.”
NEW APPROACHES, NEW OPPORTUNITIES
Taking a new approach to certain tasks, such as outsourcing investment operations, can yield other benefits. In some cases, it can provide an opportunity to identify and seize new opportunities.
Some organizations have found that an OCIO brings fresh perspectives and can allow them to recognize new investment opportunities and move quickly to take advantage of them.
“There have been investment strategies as a result of the market turmoil such as private credit, real estate and strategies that capture mergers and acquisitions’ trends,” says Myers. “The TALF [Term Asset-Backed Securities Loan Facility] program was another interesting opportunity. Some of these strategies have opened and shut rapidly because of asset flows. Getting on board depends on your awareness of the opportunities and how quickly you can move.”
That speed of decision making and taking action has shown to be an advantage of outsourcing models, Ward says. Many investment committees have built systems to evaluate and act on a quarterly basis — something that was standard during everyday life but too slow in times of crisis. And if a committee can reconvene faster, coming to consensus about how to act can be another challenge, says Ward.
In some areas of the business, an outside expert might also help organizations spot risks they might not otherwise have seen coming. On the investment side, a dedicated investment expert’s constant presence in the market can provide rapid recognition of potential credit and liquidity issues.
Early in the pandemic, liquidity became an issue in some investment sectors. “In the first few weeks of March, fixed income assets experienced illiquidity, including Treasurys, and significant spread widening in the credit markets,” says Myers. “By having someone monitor and know the portfolio and manage through that period of illiquidity, an OCIO could help an investor achieve a better outcome.”
CLEARING OUTSOURCING HURDLES
With the move to an OCIO, as with many other outsourcing activities, there are often hurdles organizations must confront. Like many changes, for investment management models, there may be resistance within the organization. For example, at endowments or foundations, investment committees often consist of volunteers who may fear that outsourcing means surrendering their responsibilities. “That isn’t at all the case,” says Myers. “For instance, these committees will now have time to focus on large issues such as asset allocation and what’s best for the mission of the institution. You never give up your fiduciary responsibility as an investment committee member.”
For corporations, managing investments might be one responsibility of many on the plate of chief financial officers — and one that they might enjoy, even if they can’t dedicate as much time to it as they would like. In cases like this, it can be helpful to revisit ultimate investment outcomes and employee growth plans. Can the CFO’s time be freed up for more focus on managing investments, and what would be the resourcing implications? Are there hybrid outsourcing models that would allow the desired flexibility between in-house and outsourced leadership? Meanwhile, organizations facing downsizing because of the pandemic may have already lost crucial in-house investment team members. Outsourcing may offer guidance for the employees who have taken over.
Greater flexibility today means companies making this outsourcing shift are able to iterate on models once they’ve piloted them, says Ward.
“We’re seeing an interesting evolution,” says Myers. “Companies may say: ‘You know what, I think we’re at the right place, but I’m not with the right provider. What else is out there and how can I shift responsibilities a little bit, get a little more hands-on in a particular area, take back some of this other responsibility?’”
These relationships still come down to trust. “At the end of the day, companies want to partner with an outside expert that is culturally aligned, that understands them and with whom they feel comfortable,” says Myers.
LOOKING OUTSIDE FOR HELP IN THE FACE OF A CRISIS
As organizations emerge from the initial challenges of the COVID-19 pandemic, many will look for tasks and functions that might better be conducted by an outside partner. On the investment side, an increasing number will likely consider the OCIO model.
“Now that organizations are coming up for air and getting off the wild ride of the past few months, many are looking at their investment approach and thinking, ‘I can do better. I need to do better. And I think the OCIO will be the better solution,’” says Myers.
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