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Cerulli Press Release • The Cerulli Edge―U.S. Edition, April 2017 Issue

U.S. Defined Benefit Plan Sponsors Looking to the Canadian Model For Insight April 2017, Boston. The latest research from Cerulli Associates, a global research and consulting firm, finds that larger pension plans in the United States are increasingly looking beyond borders for ideas and best practices in institutional investing. No model for defined benefit (DB) plan investment resonates more with U.S., and even global, institutions than the so-called Canadian model, which highlights the benefits of investment “in-sourcing,” strategic partnerships with outside investors, and a greater desire for illiquid alternative investments.

“Large Canadian DB plans typically exhibit three distinct characteristics: an emphasis on cost savings, a well-diversified investment portfolio, and a large appetite for illiquid alternative investments,” says Chris Mason, senior analyst at Cerulli. “As with institutions around the world, U.S. pension plans, particularly public plans, are taking a few pages where they can from the Canadian model.”

Mason continues, “U.S. public and corporate plans have very distinct differences that show up in how they invest assets. Therefore, each type of plan is taking different ideas and best practices from an investment standpoint. Nevertheless, there are different best practices to be learned from Canadian plans, which today are considered some of the most sophisticated institutional investors in the world.”

According to Cerulli’s proprietary institutional market sizing, U.S. DB corporate and public plans held approximately $6 trillion in assets as of 2015. In comparison, the approximately 9,800 registered DB plans in Canada represented assets of only $1.02 trillion over the same time period.

These findings and more are from the April 2017 issue of The Cerulli Edge – U.S. Edition, which explores the benefits of strategic partnerships, explains why small institutions need to outsource due to a lack of internal resources, and how U.S. DB plans are looking to the Canadian model for insight.

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Cerulli Press Release • The Cerulli Edge―U.S. Edition, April 2017 Issue

NOTES TO EDITORS:These findings and more are from The Cerulli Edge―U.S. Edition, April 2017 issue.

About Cerulli AssociatesHeadquartered in Boston with offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business developments. Our analysts blend industry knowledge, original research, and data analysis to bring perspectives to current market conditions and forecasts for future developments.

Cerulli’s research product line includes the Cerulli Report series, the Cerulli Edge series, and Cerulli Lodestar.

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Collaboration Drives Institutional Investing As complexity grows, so do opportunities for outside managers and consultants

No single investment committee or manager can grasp all the nuances associated with an institutional portfolio. Strategic partnerships, outsourced chief investment officers (OCIOs), and the “Canadian Model” of pension investing offer insight as institutional managers fulfill their responsibilities and pursue target returns.

y Strategic partnerships are more comprehensive than a traditional investment management mandate because the institution seeks a transfer of investment knowledge and insight from the manager.

y Partnerships are highly customized to an institution’s needs, but with real discretion over investment decisions within a larger sleeve of the institution’s assets than the manager would otherwise have.

y Cerulli believes there are three defining characteristics of the Canadian Model of pension investing—an emphasis on cost control, a sophisticated and well-diversified portfolio, and strong interest in illiquid alternative assets.

y Canadian plan sponsors view their in-house teams as valued investment professionals, and compensate them accordingly, which reduces reliance on outside investment managers. U.S. sponsors are much leaner, leading many to rely on third-party managers and consultants.

y OCIO assets more than doubled from approximately $600 billion in 1Q 2011 to nearly $1.3 trillion in 1Q 2016. While the market shows signs of maturity, growth potential is substantial.

y The greatest acceptance of OCIO services has occurred in the corporate defined benefit and nonprofit segments. As capital market, regulatory, and demographic forces change, a wider range of institutional client sectors are adopting OCIO solutions.

Source: Cerulli Associates

Asset Managers: Firms with a Dedicated Consultant Relations Team, 2016As the OCIO model becomes more prevalent, asset managers are increasingly relying on consultant relations teams.

Has a dedicated team65%

No dedicated team35%

CeRulli AssoCiATes | [email protected] | www.cerulli.com

insTiTuTionAl sTRATegies issue

U.S. EDItIonApril 2017, Issue #236

Industry Analysis

Strategic Partnerships ....................2

Big institutions are bringing more investment management inside, but opportunities remain for outside asset managers

Defined Benefit .................................7

Many defined benefit plan sponsors look to large Canadian investors for new insights

Small Institutions ........................... 12

Lack of internal resources is the top reason why institutions outsource

Quantitative Insights

OCIO Service Offerings .................17

OCIO Market Outlook ....................18

OCIO Client Composition ..............19

OCIO in the Retirement Segment .....................20

2 | The CeruLLI edge—u.S. edITIOn // APrIL 2017

Prevalent among the world’s top institutional asset owners—including those that have made big commitments to moving much of their asset management in-house—is the notion of strategic partnerships with outside asset managers and other types of investors. In a strategic partnership, larger institutions engage major outside institutional asset managers with the expertise and resources to source specific investments that an institution may not be able to capture on its own. This situation is truly a partnership as opposed to a traditional investment management mandate for a single asset class or strategy because the institution seeks a transference of investment knowledge and insight from the manager related to public, private, and alternative investments.

Additionally, in some cases, the institution seeks to capitalize on a manager’s skill set, such as tactical asset allocation, that the institution can then incorporate into its own internal investment process. For the outside manager, the partnership is quite customized to the needs of the institution, but with real discretion over investment decisions within a larger sleeve of the institution’s assets than the manager would otherwise have.

There are relatively few institutions with the assets and resources to engage in strategic partnerships. In Cerulli’s 2016 Institutional Custom Solutions research, however, investment professionals report a greater prevalence of larger institutions (e.g., public plans, sovereign wealth funds, and a handful of nonprofits) allocating segments of their portfolios to outside managers for custom strategies (mainly alternative strategies) that “release the liquidity constraint,” as one manager put it. These strategies seek non-correlated sources of return or novel sources of consistent income—a major challenge for all institutional investors struggling with the ongoing low-return/low- interest-rate environment.

summaryWhile more large-scale institutional asset owners seek to bring investment management in-house, there is also an increasing interest in forming strategic partnerships with outside asset managers. These complex engagements represent more customized investment solutions of growing interest to different types of larger institutions, especially as the “buy versus build” question may not be as straightforward as once believed.

Key Points y A strategic partnership goes beyond traditional single-asset-class investment mandates to encompass investment knowledge transfer and resources between an outside asset manager and an institutional client.

y The low-return investment environment is driving larger institutions to seek the benefits of strategic partnerships.

y Cerulli maintains that asset managers should evaluate their resources and be more flexible with how they can serve larger institutions, including with various types of multi-asset-class solutions and with liability-driven investing programs for derisking corporate defined benefit pension plans.

In-Sourcing for Large Institutional InvestorsBig institutions are bringing more investment management inside, but opportunities remain for outside asset managers

Strategic partnerships demand a sharing of investment knowledge and best practice with an institutional

client, services that go well beyond traditional investment management mandates.

ANALYST COMMENTARYStrAtEgIC PArtnErShIPS

The CeruLLI edge—u.S. edITIOn // APrIL 2017 | 3

Implementing Strategic PartnershipsOne example of the increasing adoption of strategic partnerships among larger institutions is the $56.4 billion Alaska Permanent Fund Corporation (APFC), the largest sovereign wealth fund in the United States and a major global institutional investor. In 2016, APFC implemented a number of changes and amendments to its strategic plan, investment policy, long-term target returns, and target asset allocation. Among the modifications, the fund revised its target allocation from simple asset class buckets to a grouping of asset classes by investment objective and liquidity, including growth tradeable liquid (public equity) and illiquid (private equity, growth opportunities, absolute return, semi-liquid hedge fund strategies); income tradeable liquid (fixed-income plus), and illiquid (real estate, infrastructure, income opportunities). Additionally, in an effort to reduce investment management costs, investments with hedge fund-of-funds managers were eliminated in favor of direct investments in various hedge fund strategies and greater emphasis over time on internal investment management capabilities.

Currently, close to one-third of APFC’s investment portfolio is managed in-house, but there are limits to internal resources in targeting more complex investments, which can be accomplished more efficiently by tapping outside investment sources. Hence, in laying out its investment strategy and goals to the fund’s board last year, a publicly available investment presentation outlined the path to strategic partnerships for the institution: “determine the optimal mix of in-house (build) versus external management (buy) capabilities, but also partner with institutional investors and asset managers to achieve cost-effective access to compelling opportunities” via “compelling international investment partnerships.”

It is difficult to know how many strategic partnerships exist in north American institutional markets or the amount of assets devoted to them in the aggregate. There is no specific classification in third-party databases beyond the asset class level, and there are either relatively few requests for proposal (rFPs) issued (beyond those in the public funds sphere), or it is not clear whether the rFPs reflect a true strategic partnership. Many times, especially in the


Top-10 institutional Capabilities used in Custom solutions, 2016Institutional asset managers cite one of the most complex investment relationships, strategic partnerships, as the top strategy or capability to have on a custom solutions platform.

47%

47%

47%

53%

53%

68%

68%

74%

79%

84%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Subadvisory

Tactical asset allocation

Responsible investing/ESG

Custom target-date funds

Risk managed

Asset-liability study

Multi-strategy/multi-manager

Completion management

Overlay strategies

Strategic partnerships


sovereign wealth fund world, the strategic partnership is a direct relationship between the institution and the manager in which the institution will add or withdraw funds in the partnership over the years, thus making client asset flows in the area challenging to determine.

A group of institutions, including APFC, Teachers retirement System of Texas, CPPIB (Canada), and a host of internationally based sovereign wealth funds, are known for their use of strategic partnerships. respondents to Cerulli’s 2016 Institutional Custom Solutions Managers Survey (including long-only and alternatives managers) cite strategic partnerships as the top (84%) strategy or capability to have as part of an institutional custom solutions platform—truly the most in-depth and complex investment relationship. At the same time, however, relatively few (37%) of the same respondents indicate their institutional clients seek “a deeper strategic relationship with a manager,” most likely reflecting the scarcity of large institutions compared with a relative preponderance of smaller institutions.

the Build versus Buy QuestionLarge public pension plans and nonprofits are incrementally lowering return targets to adjust annual payout rates in the face of muted expected asset returns and relatively low interest rates. As one asset manager describes to Cerulli, institutions build strategic partnerships to seek new investment ideas to achieve return targets. These institutions are “becoming more open-minded about collaboration” with outside managers, as one asset manager put it to Cerulli in a research interview, with the goal of incorporating those ideas into their overall investment process.

The changes that APFC enacted represent the ongoing dilemma that larger institutions face when deciding on in-sourcing or outsourcing investment management. Institutions from CalPerS to harvard Management Company (manager of the harvard university endowment) wrestle with the need to reduce costs associated with outside investment and managers—especially if those investments are underperforming on a net-of-fee basis—against the significant costs of attracting and retaining internal investment talent and building resources. Often in more esoteric or private asset classes, even the largest institutions cannot gain the scale necessary to make internal management cost-effective.


Reasons institutions seek Custom solutions, 2016Because there are relatively fewer large institutions seeking strategic partnerships at any given time, asset managers’ client demand for partnerships will be comparatively less than the need for other services or capabilities.

The Alaska Permanent Fund Corporation is a larger institutional investor known for both fostering

more in-sourcing of investment resources and seeking strategic partnerships.

Customized reporting/benchmarks

Need for customized target-date glidepaths

5%

Comprehensive risk analysis

11%

Access to open architecture

21%

Greater cost efficiencies21%

A deeper strategic relationship with a manager

37%

Better asset/liability matching

42%

Volatility and complexity of markets

47%

Strategic advice

47%

Traditional board/investment committee model doesn'tfit with the speed of modern financial markets

47%

Lack of internal resources

53%

Delegation of fiduciary responsibility

63%

Need for specific outcomes

63%


Source: Alaska Permanent Fund Corporation

Alaska Permanent Fund Target Allocation structure, 2016In 2016, Alaska Permanent Fund moved to a target (strategic) asset allocation based on investments’ objectives and liquidity.

After closing internally managed hedge fund strategies and moving to a larger outsourced investment model in January 2017, harvard Management Chief executive Officer n.P. narvekar was quoted as saying, “We can no longer justify the organizational complexity and resources necessary to support the investing activities of these portfolios.”

the Cost of AlphaA January 2017 report in the european trade publication Investments & Pensions Europe quotes the chief investment officer of two large British defined benefit (dB) pension schemes on the trade-off between using a strategic partnership rather than internal investment professionals to source productive investments, “We are evaluating the persistence of alpha in a world of low returns. In general, I believe, you have to come to a view as to whether it is worth chasing it. Alpha chasing takes time and physical resources, and it is not for free. It needs to be monitored constantly.”

opportunities remain for ManagersClearly, so-called insourcing among larger institutions in north America is a real trend felt first hand by many long-only and alternative managers as they lose client relationships. however, Cerulli advises managers that in-sourcing may not be a zero-sum game. For example, for every institution seeking a private equity co-investment (which has no management fee or carry paid to an external manager), there are three smaller ones seeking pooled vehicles or other more cost-effective means provided by external managers to get private equity exposure.

There are relatively few institutions with the size and resources to cost effectively capture all of their portfolio investments using internal resources. Even for those that can, often times the institution still seeks the advice and best practice for sourcing certain kinds of investments from its peers, global asset managers, and other professional investors.

Cerulli maintains that asset managers should evaluate their own resources to be more flexible in how they can continue to serve larger institutions. Multi-asset-class solutions (MACS) typically combine many different institutional strategies with the objectives of lowering asset

even for the largest institutions, it may be more cost-effective to capture private, illiquid alternative

investments via outside managers rather than in-sourcing those capabilities.

growth income

• Tradable/Liquid • Tradable/Liquid

• Public equity (Stocks) • Fixed-income plus (Bonds, listed income)

• Illiquid • Illiquid

• Private equity, growth opportunities • real estate

• Absolute return, Hedge funds (Semi-liquid)

• Infrastructure, Income opportunities


volatility, capturing investments with low or no correlation in returns, raising risk-adjusted returns, and protecting an institution from debilitating large-scale losses (i.e., asset drawdowns) that may ultimately hamper the institution from meeting its ultimate goals. MACS is almost always based on an ability to tactically allocate among multiple asset classes; inherently the strategies will have more than one underlying asset class. Strategies can range from derivatives-oriented managed volatility overlay strategies to the most sophisticated volatility or income targeting, as well as alternative and absolute return investments. ultimately, this effort is about better downside risk mitigation, which requires sophisticated analytical tools to break down both intended and unintended exposures in portfolios.

Another area in which volatility mitigation comes into play, at least for corporate pension plans, is liability-driven investing (LdI). even the largest corporate dB plan sponsors are looking to institutional fixed-income managers and others for asset-liability analysis, better hedging of liabilities,

and enhanced awareness and management of so-called surplus volatility on the remaining return-seeking plan assets. With interest rates moving higher since the u.S. presidential election, corporate plan funded status has improved and more plan sponsors may look to lock in better rates for payment of future plan benefits. After a pause in activity for much of the past 12–18 months, Cerull expects significant LdI and corporate derisking assets in motion for the foreseeable future.

In sum, the growth of strategic partnerships among larger institutions is here to stay and outside asset managers should try to engage with their clients as they seek to develop these partnerships. Additionally, even for the most sophisticated institutions, there is scope in MACS and LdI strategies for asset managers to continue to add value. u

Related Research The Cerulli Report: U.S. Investment Consultants 2016: Collaborating with Consultants to Improve Investor OutcomesThe Cerulli Report: U.S. Institutional Custom Solutions 2016: The Rising Demand for Outcome-Oriented Client Strategies


greatest Threats Presently Challenging investment Consultants, 2016Investment consultants, like asset managers, are concerned about large institutions bringing more investment resources in-house.

MACS and LdI are areas in which larger institutions are likely to continue to seek the advice and guidance of

outside investment managers.

21% 21%15% 14% 11% 5%

37% 32% 45%57%

32%30%

55%

40%

37% 47%40%

29%

58%60%

45%

60%

5% 5%

0%

20%

40%

60%

80%

100%

New competitionfrom entrants

in theoutsourcedCIO space

Perceivedexpertise

in alternativeinvestments

Increasedcompetitionfrom peers

who areexpanding into

new market areas

Difficultyfinding

talentedresearch

analysts andconsultants

Largeinstitutional

investors bringing

asset managementin-house

Mergers andacquisitions

among investmentconsulting firmsin recent years

Increasedcompetition

from peers whoare growing

their practiceglobally

Lack of quantitativeperformance

measurement ofvalue-add as

an investmentconsultant

Major threat Moderate threat Little or no threat N/A


The u.S. dB market is much larger than the Canadian market, with u.S. plans accounting for approximately $6

trillion in assets compared with registered plan Canadian dB assets of more than $1 trillion.

ANALYST COMMENTARY

In the united States, the challenges facing defined benefit (dB) plan sponsors during the past few years have been well documented. rising Pension Benefit guaranty Corporation premiums and low interest rates continue to plague corporate plan sponsors, while low expected asset class returns place significant pressure on public plans to meet their assumed rates of return. Many players in the institutional space, including asset managers, consultants, and plan sponsors, increasingly look to their Canadian counterparts for their unique approach to dB pension plan management.

In this article, Cerulli explores the Canadian dB marketplace, and how the ideology of the “Canadian Model” inherently differs from pension plan management in the united States. Additionally, a brief case study of the Ontario Teachers’ Pension Plan (OTPP) is provided, outlining how one of Canada’s largest institutional investors uses the Canadian Model. Finally, Cerulli conveys the opportunities for managers in the Canadian dB space, particularly as they apply to strategic partnerships.

the Canadian DB LandscapeTo understand where the Canadian Model is most applicable, it is important to first understand the Canadian dB arena and how it compares with the dB space in the united States. Among the most notable differences between the two markets is the variation in both the assets under management and the number of plans. According to Cerulli’s proprietary institutional market sizing, u.S. dB plans held approximately $6 trillion in assets as of 2015 across state/local, corporate, and Taft-hartley (union) segments. In comparison, the approximately 9,800 registered dB plans in Canada represented assets of only $1.02 trillion (CAd $1.4 trillion) for the same time period. (For comparison, the u.S. department of Labor’s annual Pension Plan Bulletin lists more than 40,000 single-employer plans, excluding multiemployer and state/local plans).

summaryAs a result of ongoing investment-related challenges, many u.S. dB plan sponsors are turning their attention to the Canadian Model of pension plan management. This approach is frequently associated with large Canadian institutional investors such as the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan (OTPP), which use their size, scale, and sophistication to achieve their investment goals more effectively

Key Points y Cerulli defines the Canadian Model as a pension plan with a strong emphasis on cost mitigation, a well-diversified investment portfolio across several asset classes and geographies, and a large appetite for illiquid alternative investments.

y One of the fundamental differences between public dB plan management in the united States compared with Canada is the compensation of investment professionals managing public plan assets. In Canada, compensation levels are similar to those in the U.S. private sector, whereas in the united States, compensation for public dB managers is much lower.

y While many u.S. dB plans may express interest in adopting elements of the Canadian model, Cerulli attests that this is possible only for very large investors with the necessary size, scale, and internal resources.

The Canadian Model for Defined Benefit Pension Plan Management Many defined benefit plan sponsors look to large Canadian investors for new insights

DEfInED BEnEfIt


Aside from the significant difference in size, the Canadian dB space is much more concentrated among the largest plan sponsors. According to data obtained from Pensions & Investments and Statistics Canada, the top-10 Canadian dB plans accounted for less than half (45%) of the entire market as of 2015. Conversely, in the united States, the concentration among the top-10 plans was only 22%, when removing the effect of federal dB assets. As a result, and despite the smaller overall market size, Canada has a number of very large and sophisticated institutional investors, including both the Canada Pension Plan Investment Board (CPPIB), and the OTPP. As of September 2016, the CPPIB held assets of close to $300 billion, putting it on par with one of the united States’ most influential investors, the California Public employee retirement System (CalPerS). These large institutions are both prime examples of the Canadian Model in action, often serving as the standard for using it effectively.

Defining the Canadian DB ModelAs with many hot-button terms in the industry (e.g., smart beta, outsourced chief investment officer), there are several different definitions when trying to deconstruct the Canadian Model. Through interviews with industry executives both in the united States and in Canada, Cerulli has learned there are three defining characteristics to the model, including an emphasis on cost mitigation, a sophisticated and well-diversified investment portfolio across asset classes and different markets, and a strong

appetite for illiquid, alternative investments. It is also important to note that the Canadian Model does not apply for all Canadian dB plans; given the nature and defining characteristics of the model, a plan must be of sufficient size to capitalize on cost efficiencies and investment opportunities related to scale. Similar to many smaller university endowments seeking to emulate david Swensen’s “Yale Model,” those plans without the necessary size are likely to fail when pursuing the Canadian Model.

One manager with whom Cerulli spoke outlines the three general segments that make up the Canadian dB marketplace. First, the plans that typically fall into the “mega” segment (and are likely using the Canadian Model) manage assets greater than $10 billion, are highly sophisticated, and place a significant emphasis on managing their liabilities and risk levels. Moving downmarket to those with $1 billion–$10 billion in plan assets, it is likely that instead of a robust investment team, these plans employ only a handful of professionals overseeing third-party managers. While interest in more complex investments (i.e., alternatives) is usually present, these plans are more reliant on their consultants and third-party managers for education and guidance. Finally, at the smallest end of the market,

Source: Statistics Canada

Canadian Defined Benefit Pension Market Sizing and Growth Rates, 2011–2015 (CAD millions)As of 2015, the Canadian DB market consisted of approximately U.S.$1.02 trillion (CAD $1.4 trillion) in registered DB plan assets.

defined benefit plans adhering to the Canadian Model typically exhibit three distinct characteristics: an emphasis

on cost savings, a well-diversified investment portfolio, and a large appetite for illiquid alternative investments.

$1,076,279 $1,126,259

$1,199,242

$1,300,608 $1,416,295

4.6%

6.5%

8.5%8.9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

2011 2012 2013 2014 2015

Market value Growth rate


plans are usually the least sophisticated, and have little to no emphasis on managing their plan liabilities or risk. It is also possible that the plan is using only limited asset classes in its portfolio, such as a balanced equity/bond strategic asset allocation.

Regarding an emphasis on cost mitigation, mega plan sponsors using the Canadian Model often have well-developed and highly sophisticated internal investment capabilities. These teams often allow plans to undertake a large percentage of the investing in-house, which allows them to save on third-party management fees in the process. In terms of the organizational structure, mega plans frequently have several experienced professionals covering specific asset classes, all reporting to a chief executive officer or a chief investment officer (CIO). For example, the OTPP lists seven individuals as part of its investment team leaders, covering asset classes such as private capital and infrastructure, or geographic regions such as the Middle east or Asia-Pacific.

According to another manager with whom Cerulli spoke, Canadian plan sponsors view their in-house teams as true investment management professionals, as opposed to just civil servants with investment management responsibilities. As such, they are compensated on levels similar to those in the private sector. In the united States, many public plan CIOs receive compensation that is much lower than what they could earn if they were employed by a third-party asset management firm. Internal teams are much leaner, leading many investment professionals to rely on third-party managers (and pay the fees associated with doing so).

Portfolio Allocations and the Appetite for Alternative Investments The second major defining characteristic of the Canadian Model as defined by Cerulli is a well-diversified investment portfolio across several different asset classes and geographic regions. Looking again to Ontario Teachers, a comprehensive strategic asset allocation is used. As of 2015, the plan allocated close to 46% to equities (with only about 2% to domestic Canadian equities), 23% to bonds, followed by a variety of alternative asset classes. In addition, the plan also uses leverage by borrowing in the money markets to help fund investments in other asset classes. The OTPP is

Analyst Note: Data are in USD millions Source: Pensions & Investments

Top-10 Canadian DB Plan Sponsors, 2015 ($ millions)The Canadian DB landscape is highly concentrated, with the top-10 plans accounting for approximately 45% of the total market.

By compensating investment professionals on par with the private sector, Canadian dB plan sponsors attract

the best industry talent and can manage investments more effectively in-house.

Rank Plan sponsor Total

1 Canada Pension (CPPIB) $214,851

2 Ontario Teachers $121,440

3 Public Service Pension Plan $65,224

4 Ontario Municipal employees $57,494

5 Quebec government & Public $43,232

6 Quebec Pension $41,210

7 B.C. Municipal $31,436

8 Local Authorities Pension Board $24,768

9 B.C. Teachers $17,590

10 Ontario Pension Board $16,715

Total of top 10 $633,960


also well-diversified across geographic segments, giving foreign exposure to currencies such as the u.S. dollar, British pound, euro, and the Australian dollar, among many others.

Similar to david Swensen’s Yale Model for university endowments in the United States, plans implementing the Canadian Model exhibit a robust appetite for alternative investments. given the long-term nature of pension liabilities (or perhaps, indefinite time horizon for government-sponsored plans), plans can sustain long periods of illiquidity to capture an additional risk premium for their respective time horizons. Several alternative asset classes, including real estate, private equity, private debt, and infrastructure, provide such benefits. In addition to an illiquidity premium, these asset classes offer sources of non-correlated returns. Furthermore, with modest capital market expectations projected for several traditional asset classes during the near term, many plan sponsors look to alternative investments to meet their desired return targets.

In addition to potentially higher returns and increased diversification, oftentimes there are ancillary benefits that arise given the characteristics of certain investments. For example, investments in infrastructure typically provide steady cash flows, which could potentially help offset, or perhaps mitigate, pension distribution payouts. One manager with whom Cerulli spoke indicates that some of the most sophisticated plans may wish to pursue a long-term strategic target of 60% or more in these types of alternative asset classes. Many plan sponsors are keeping a close eye on u.S. President donald Trump’s much-anticipated infrastructure plan. While many of the details surrounding the plan are unknown, some suggest new opportunities for infrastructure investment will arise.

Analyst Note: Money market activity is reflected as a negative value that provides funding for investments in other asset classes. The plan uses bond repurchase agreements to fund investments in all asset classes because it is cost-effective and allows the plan to retain economic exposure to government bonds. This type of activity results in a negative net exposure in the asset mix and the amount is expected to vary from year to year based on the plan’s needs. Source: Ontario Teachers’ Pension Plan Board

ontario Teachers’ Pension Plan Asset Allocation, 2015The Ontario Teachers’ Pension Plan (OTPP) has a well-developed and sophisticated internal investment office, allowing it to invest in a wide range of asset classes and geographic markets.

dB plan sponsors seeking to emulate the Canadian Model often are interested in alternative investments to capture

illiquidity premiums, non-correlated sources of returns, and other ancillary benefits.

44.0%

22.6%18.5%

14.8%10.5% 9.3%

6.1%2.1%

-27.9%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Non-Canadianequity

Bonds Real-rateproducts

Realestate

Absolutestrategies

return

Infrastructure Naturalresources

Canadianequity

Moneymarket


the Canadian DB Model in Action: the ontario teachers’ Pension Plan Throughout this discussion, there have been several examples of how the OTPP exhibits nearly all the defining characteristics of the Canadian Model. According to its investment brochure, the plan defines the aforementioned model based on “independence, strong governance with expert board members, direct investing by world-class teams, and the ability to attract and retain top professionals.” So how has the model worked for the plan from a performance standpoint? As of 2015, the plan returned approximately 13%, versus a benchmark of slightly more than 10.1%. Looking back even further, the OTPP outperformed its benchmark in 2014, during the trailing four- and 10-year time horizons ending in 2015, and since inception. As plans in the united States continue to face ongoing investment-related challenges, it is not surprising that many look to the OTTP for best practices and fresh approaches to managing dB pension plans.

given the sophistication of the OTTP and similar plans, (in combination with the investing they do internally), some may question whether there are opportunities for third-party asset managers to add value. However, many plans, including the OTPP, welcome relationships with managers in the form of strategic partnerships. As explained in the prior article, Cerulli defines a strategic partnership as a relationship between a manager and an institution that goes beyond a traditional single-asset-class investment mandate.

There is typically a transfer of both investment knowledge and resources between the outside manager and the institution. These types of relationships can be very resource-intensive and, by nature, are highly customized. Such relationships are typically long-lasting and often involve sizeable portions of the portfolio once established. For that reason, Cerulli believes that managers seeking to expand their business to large Canadian institutions have attractive opportunities through the formation of strategic partnerships.

It is likely that the vast majority of institutional investors in the united States lack the necessary size and sophistication to pursue the Canadian Model. As plan sponsors in the united States continue to look for new, innovative approaches to dB plan management, it is important for managers to understand the various approaches that exist worldwide. Managers should also recognize the growing importance of strategic partnerships, particularly as the trend of large institutions looking to in-source gains traction. These relationships, although complex and highly specialized, can present meaningful opportunities for institutional managers. u

Source: Ontario Teachers’ Pension Plan Board

Ontario Teachers’ Pension Plan Board Investment Performance, 2014–2015Due to the plan’s long-term time horizon, the plan has the ability to capture illiquidity premiums through investments in real assets such as real estate and infrastructure.

Related Research The Cerulli Report: U.S. Institutional Markets 2016: Reassessing Opportunities for Growth Across Multiple Institutional Asset Pools

investment Performance 2014 2015 4-Year 10-Year since inception

Total return (%) 11.8% 13.0% 12.2% 8.2% 10.3%

Benchmark (%) 10.1% 10.1% 10.1% 6.9% 8.1%

return above benchmark (CAd billions) $2.4 $4.2 $11.0 $16.3 $35.6


Definition of OCIO

ANALYST COMMENTARYSMALL InStItUtIonS

summaryWhile a growing number of large institutional investors are insourcing assets under management, the opposite is true among small to mid-sized institutions, with many handing over control for some or all their investment portfolio decisions to an outsourced chief investment officer (OCIO).

Key Points y Cerulli believes there is considerable scope for additional asset growth in the OCIO space and projects that the OCIO market will grow to nearly $2 trillion by 2021.

y OCIOs increased their proportion of total portfolio clients with greater than $1 billion in AuM to 17.4% in 2016 versus 12.3% in 2015.

y In terms of number of clients, endowments and foundations have historically been the greatest users of the OCIO service model and remain the top new business growth prospect for providers for both total and partial portfolio mandates.

y Cerulli survey results indicate that most new OCIO mandates (72%) won to date have come from institutions moving to a discretionary mandate from an advice-only advisory relationship.

The outsourced chief investment officer (OCIO) concept is not a new idea. Many credible providers, such as russell Investments, SeI, and northern Trust, have offered these services to clients for more than 20 years. Additionally, trust banks have managed investors’ total portfolios for decades. however, the evolution of service offerings and the dramatic growth of assets has taken place primarily during the past 10 years, and demand spiked following the 2008 financial crisis. Institutions face a number of challenges, including new regulations, litigation, stretched budgets, and underfunded pension plans. Capital markets have become more complex and volatile, and many institutions do not have the expertise and resources to cover all asset classes and handle the growing operational and administrative burden. As a result of these growing challenges and constraints, investors are seeking the support of an OCIO to help with more timely decision-making, deeper manager due diligence, and greater oversight of portfolio risks.

outsourcing gains Steam Among Small to Mid-Sized Institutions Lack of internal resources is the top reason why institutions outsource

The definition of OCIO and the breadth of services provided within these types of relationships is wide-ranging. At a high level, discretionary OCIO means delegating some or all decision-making responsibilities relating to the management of an institution’s investment portfolio to a third party for a portfolio-based fee. under an OCIO relationship, the third-party provider takes on some or all of the responsibilities of the internal staff and assumes discretion over certain investment decisions, such as implementation and rebalancing, manager selection and replacement, and tactical asset allocation. even within an OCIO model, investment committees retain their fiduciary responsibility for overall policy decisions, including defining the institution’s investment policy and deciding on the portfolio’s investment objectives. This scenario generally includes agreeing on allowable asset classes and signing off on permissible asset class ranges. Because these matters are related to the enterprise risk and objectives of the institution, it makes sense that these functions are not outsourced to a third party.


Market SizingOCIO assets managed on a partial or fully discretionary basis more than doubled from approximately $600 billion in 1Q 2011 to nearly $1.3 trillion as of 1Q 2016. While the market shows signs of maturity, the potential for OCIO assets is substantial. Cerulli believes there is considerable scope for additional asset growth in the OCIO space mainly due to strong institutional market demand and OCIO interest moving upmarket. Cerulli projects that the OCIO market will grow to nearly $2 trillion by 1Q 2021, which represents a 9.1% five-year compound annual growth rate (CAgr). As the industry matures, continued momentum is expected, albeit at a declining pace from historical three- and five-year CAgrs of 11.0% and 16.5%, respectively.

Institutions’ motivations for outsourcing vary. A recent Cerulli survey of OCIO providers indicates that the top reason why institutions outsource is their lack of internal resources (86%). This can include insufficient investment expertise to cover and manage assets across asset classes, as well as inadequate operational resources and infrastructure to support more complex portfolios and properly manage risk. Additionally, many institutions find it difficult to attract, fill, and retain the role of chief investment officer (CIO) to oversee a complex investment portfolio in a cost-effective manner, further enhancing the appeal of outsourcing. A desire to improve their governance process (64%) and transfer of responsibility (43%) are also key reasons why institutions use the support of an OCIO.

oCIo gradually Moves UpmarketAlthough institutions of all size cohorts use the OCIO model, thus far smaller investors with less than $250 million have been the most frequent adopters of an OCIO solution. Cerulli’s discussions with OCIOs reveal that larger institutions are most interested in outsourcing a portion

of the portfolio, generally a specific asset class. given the growth of new investment strategies and structures offered, many internal investment offices and committees do not have the resources or time to keep pace with product/strategy proliferation. Some providers believe that OCIO is moving upmarket partly due to interest from new client segments, such as defined contribution (dC) plans and healthcare institutions. Others cite an increase in demand from nonprofits with greater than $100 million in assets. A few global providers note that they were granted partial portfolio mandates from a sovereign wealth fund. One provider tells Cerulli, “We have seen interest in large development banks and sovereign wealth funds that seek knowledge transfer.”

Survey data also identify a greater use of the OCIO model by larger institutions. OCIOs increased their total proportion of clients with greater than $1 billion in assets under management (AuM) to 17.4% in 2016 versus 12.3% in 2015. (See Quantitative Insights section page 19.) results show that the highest percentage of OCIOs’ total portfolio (41.5%) and sleeve of portfolio (36.4%) clients are smaller investors with less than $100 million in assets. however, nearly one-quarter of providers’ partial portfolio clients have between $251 million–$1 billion in assets, and approximately 18% of total and partial portfolio clients oversee greater than $1 billion.

oCIo Works for Multiple Pools of AssetsOCIO providers continue to broaden their capabilities and service model to support multiple client types. Historically, providers have seen the greatest acceptance of OCIO services in the corporate defined benefit (dB) and nonprofit


Outsourced CIO Providers’ Client Composition by Account Size, 2016Institutions of all size cohorts use the OCIO model; however, smaller investors with less than $250 million are the most frequent adopters of an OCIO solution.

Cerulli’s discussions with OCIOs reveal that larger institutions are most interested in outsourcing a portion

of the portfolio, generally a specific asset class.

41% 36%

22%22%

11%12%

9% 12%

17% 18%

0%

20%

40%

60%

80%

100%

Total portfolio Sleeve of portfolio

Less than$100 million

$101 millionto $250 million

$251 millionto $500 million

$501 millionto $1 billion

More than$1 billion


Analyst Note: Participants were asked, “Which market segment(s) are important to the growth of your firm’s OCIO business over the next two years?” Source: Cerulli Associates

importance of non-Retirement Client segments to growth of oCio Assets During the next Two Years, 2016In terms of number of clients, endowments and foundations have historically been the greatest users of the OCIO service model and remain the top new business growth prospect for providers for both total and partial portfolio mandates.

As the range of client types that outsource expands and boards/investment committees cede greater discretion to

an OCIO, they expect providers to bring additional expertise and resources to the partnership.

55% 53%34% 30%

19% 17%

29% 30%

34%

20%

13% 27%

16% 17%31%

50%68%

57%

0%

20%

40%

60%

80%

100%

Endowment Foundations Healthcare Privatewealth

Sovereignwealth fund

Insurancegeneral account

Very important

Somewhat important

Not important

81% 79%

44% 39%

8% 5%

16% 14%

30%20%

23% 25%

2% 7%26%

41%

69% 70%

0%

20%

40%

60%

80%

100%

Foundation Endowment Healthcare Private wealth Sovereignwealth fund

Insurancegeneral account

Total PortfolioOutsourcing

Portfolio SleeveOutsourcing

segments. however, as capital market, regulatory, and demographic forces change, a wider range of institutional client sectors are adopting OCIO solutions.

Cerulli’s OCIO survey results show that use of an OCIO remain highest among dB pension clients, with nearly half (46%) of providers’ total OCIO assets under management (AuM) coming from this client segment. The bulk of these assets are for corporate dB plans. As investment markets remain volatile, and dB plans face greater challenges, in particular underfunded pension plans, many plan sponsors recognize the need for greater oversight, and, accordingly, seek the support of an OCIO.

demand from nonprofit institutions also remains strong. endowments and foundations make up 28.5% of respondents’ AuM. recent examples of nonprofits choosing the outsourcing route include the Leukemia & Lymphoma Society ($110 million portfolio) and the ex-Students’

Association of the university of Texas ($93 million portfolio). nACuBO data as reported by Bloomberg indicate that higher education assets managed by an OCIO doubled to approximately $100 billion between 2010 and 2016.

Private wealth and family-office clients are among the early adopters of the OCIO model. Family-office clients had the highest average allocation to hedge funds (22.3%) and private equity (27.4%) as of 1Q 2016, and tend to invest directly in both asset classes, according to Preqin data. Thus, many private wealth investors seek the support of an OCIO.

dC plan assets represent only 5.2% of providers’ AuM. However, anticipated growth for this sector is high, primarily due to the use of more complex investment strategies (e.g., target-date funds and customized retirement income products), the prominence of 401(k) fee-related lawsuits in recent years (e.g., Chevron, Intel, and Oracle are among the plan sponsors that have faced litigation), and the potential for implementation of the department of Labor (dOL) Conflict of Interest rule. For example, in May 2016, henrico County in richmond, Va., issued a request for proposal (rFP) for discretionary investment manager selection and monitoring services for the county’s central government 457 plan and public schools’ 403(b) and 457 plans, according to Pensions & Investments.


Analyst Note: OCIO providers were asked, “For each client type, which size cohort do you anticipate will drive future growth the most in the OCIO market?” Source: Cerulli Associates

OCIOs’ Anticipated Growth of Non-Retirement Segment Client Assets by Portfolio Size, 2016Providers anticipate the greatest demand in the healthcare space to come from investors with $251 million-$1 billion in assets.

OCIOs are strengthening their service offerings by investing in the infrastructure and talent needed to

provide more customized and comprehensive services.

While the greatest demand for OCIO services has been among smaller foundations and endowments, providers tell Cerulli that they are starting to receive requests from mid-sized to large institutions.

38% 33% 28% 22%10%

27%23%

21%17%

10%

19%30% 38%

6%39%

7%

12% 13% 10%

11%

26%

14%

4% 3% 3%

44%

16%

79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private wealth Foundation Endowment Insurancegeneral account

Healthcare Sovereignwealth fund


$101 million to$250 million


$501 million to$1 billion

More than$1 billion

Total Portfolio Outsourcing

As the range of client types that choose to outsource expands and boards/investment committees cede more discretion to an OCIO, they expect providers to bring additional expertise and resources to the partnership.

Accordingly, OCIOs are strengthening their service offerings by investing in the infrastructure and talent needed to provide more customized and comprehensive services. The breadth of OCIO services explores deeper issues than an institution’s investment portfolio. For example, when developing an investment policy for a nonprofit institution, OCIOs also consider operational and budget policies.

Anticipated DemandIn terms of number of clients, endowments and foundations have historically been the greatest users of the OCIO service model and remain the top new business growth prospect for providers for both total and partial portfolio mandates. nonprofits continue to use the support of an OCIO to build and manage investment portfolios that help support the institution’s mission. Additionally, given that nonprofits generally have long-term investment horizons, they typically

have high allocations to alternative investments and often lack the resources to manage and monitor these assets. Accordingly, providers expect more opportunities to support nonprofits with a sleeve of their portfolio.

healthcare is another area of anticipated expansion, as more than one-third of respondents expect these institutions to be very important to their OCIO total portfolio (44%) and partial portfolio (34%) business. In terms of size, providers anticipate the greatest demand in the healthcare space to come from investors with $251 million–$1 billion in assets. health and hospital systems are grappling with many challenges and rely more heavily on investment performance to meet their goals. Furthermore, they need support analyzing how a range of enterprise operating issues and risks will impact their investment strategy. Healthcare institutions often use an OCIO solution to manage their multiple investment portfolios—pension plan(s), foundation, operating fund, and endowment—and support their unique investment objectives, risk sensitivities, spending requirements, and liquidity needs. These institutions also need administrative and operational support.

demand from retirement segments remains high (See page 20). OCIO providers view corporate dB plans as being very important to the growth of their business during the



OCIO Providers’ View on Source of New Business Opportunities, 2016The vast majority (85%) of providers anticipate continued opportunities to win new business from institutions moving to a discretionary mandate from an advice-only relationship.

As the industry matures, the number of replacement searches from institutions looking to change from one

OCIO to another have increased.

Providers expect the number of new business opportunities coming from institutions looking to replace an existing OCIO to grow, as 37% view this source as a major opportunity.

85%

45% 37%

15%

52%63%

2%

0%10%20%30%40%50%60%70%80%90%

100%

Institutions looking to move from anadvisory model to a discretionary model

Institutions that have previouslynot used a gatekeeper

Institutions looking toreplace an existing OCIO

Major opportunity Minor opportunity No opportunity

next two years, with anticipated opportunities for both total portfolio (64%) and partial portfolio (46%) mandates. Private dC plans (47%) and Taft-hartley pension (51%) clients are viewed as being at least somewhat important to OCIOs’ total portfolio mandate asset growth. At least half of providers believe that sleeve opportunities from public dB pension (59%) and Taft-hartley pension (50%) plans will be somewhat important to their outsourcing business. While public dB and Taft-hartley pensions are less likely to outsource their entire portfolio, many providers have seen increasing interest from these segments for support with alternative investments. Public pension and Taft-hartley plans looking to narrow their funding gaps are increasing their holdings in risky assets, and may need guidance with building an alternative asset portfolio.

While the greatest demand for OCIO services has been among smaller foundations and endowments, providers tell Cerulli that they are receiving requests from mid-sized to large institutions. A recent example includes the City university of new York’s rFP issued in September 2016 for an approximately $250 million OCIO mandate for endowed and non-endowed funds. Another example includes the nevada System of higher education, Las Vegas’ announcement in december 2015 to launch a search for OCIO services for its $240 million endowment. The search is continuing as of this writing.

Among private dB, private dC, and Taft-hartley plans, OCIOs anticipate the greatest opportunities to support clients with between $251 million–$1 billion in assets under a total portfolio mandate. nearly half of providers expect the

greatest opportunities to support mega retirement plans (more than $1 billion in assets)—across all segments—with a sleeve/portion of their portfolio.

new Business opportunities for oCIosCerulli survey results indicate that most new OCIO mandates (72%) won to date have come from institutions moving to a discretionary mandate from an advice-only relationship. A smaller percentage of mandates won have been from institutions looking to replace an existing OCIO (15%) or investors that have previously not used a third-party consultant/manager.

going forward, the majority (85%) of OCIO providers expect significant new business from institutions looking to move from an advice-only relationship to a discretionary OCIO solution. OCIOs also anticipate new mandates from institutions that previously managed their investment portfolio in-house, as 45% view this segment as a major opportunity for new business. As the industry matures, the number of replacement searches from institutions looking to change from one OCIO to another have increased. Accordingly, more than one-third (37%) expect major opportunities to come from institutions looking to replace an existing OCIO. u


Quantitative insights

Fee structure for Cio outsourcing, 2016

Percentage of oCio Providers That Have an Approved list of Managers, 2016



KeY iMPliCATion: There are multiple fee structures for outsourced chief investment officer (OCIO) services. The most widely used approach is a basis point fee that is based on a firm’s total assets under management. Most OCIO providers also offer a fixed/flat fee option for clients that need or prefer to maintain a fixed-fee structure. There is the option for an all-inclusive fee, which covers all functions that were outsourced, including the fees for the underlying managers. It is also common for some OCIO providers to charge fees for the services they perform, and a separate set of fees to each underlying manager. Cerulli recommends that outsourced providers clearly convey what is included in their fee to clients and prospects.

KeY iMPliCATion: More than three-quarters (79%) of OCIOs maintain an approved list of investment managers. Conversely, 21% of OCIOs surveyed by Cerulli do not have an approved list of investment managers, and must create client-specific parameters and screen managers from the broad universe. All providers typically screen from an internal or a third-party database, such as eVestment. Cerulli recommends that asset managers use meaningful resources to maintain accurate, complete, and up-to-date data in consultant and third-party databases that oCio providers use to screen and select managers.

oCIo SErvICE offErIngS

57%

17% 17%

6%2%

0%

10%

20%

30%

40%

50%

60%

70%

Basis point fee Basis point fee +Performance-based fee

Basis point fee +Fixed/flat fee

Basis point fee +Performance-based fee +

Fixed/flat fee

Fixed/flat fee

Has an approvedlist of investment

managers79%

Does not havean approved list

of investmentmanagers

21%


OCIO Providers’ Origins of New Business, 2016

oCio Providers’ Percentage of AuM by Market segment, 2016



KeY iMPliCATion: To date, most new outsourced chief investment officer (OCIO) mandates won are from institutions moving to a discretionary mandate from an advice-only advisory relationship. Institutional investors have demonstrated a need for more due diligence, quicker decision-making, and greater oversight of portfolio risk. Cerulli suggests that managers maintain good relationships with the institutions they service due to an increase in managers switching to the oCio model.

KeY iMPliCATion: While corporate defined benefit plans and nonprofit institutions have been the heaviest users of OCIO services to date, the OCIO model can work for nearly any pool of assets. Private wealth and family offices were among the earliest adopters of the OCIO model. Family-office clients have the highest allocation to hedge funds (22.3%) and private equity (27.4%), according to Preqin data. By better understanding OCIOs’ end clients, managers can better position themselves to target and service them more efficiently.

Institutions looking tomove from an advisory

model to a discretionary model72%

Institutions looking toreplace an existing OCIO

15%

Institutions that havepreviously not used

a gatekeeper11%

Reason not specifiedin RFP/RFI

2%

45.6%

28.5%

12.8%

5.2% 4.7%2.1% 0.8% 0.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Definedbenefit plan

Nonprofit Privatewealth

Definedcontribution plan

Healthcare Insurancegeneral account

Sovereignwealth fund

Superannuationscheme

QUAnTITATIve InSIghTSoCIo MArkEt oUtLook


Outsourced CIO Providers’ Client Composition by Account Size, 2015 versus 2016

Outsourced CIO Providers’ Client Composition by Account Size and Level of Discretion, 2016



KeY iMPliCATion: Of the outsourced chief executive officers (OCIOs) that Cerulli spoke with, several reported a trend of outsourcing mandates moving upmarket. Some providers attribute this trend to an increase in demand from nonprofits with greater than $100 million in assets, while others believe it is due in part to new client segments, such as defined contribution plans and healthcare institutions, taking a larger interest in OCIO services. A handful of global OCIO providers indicate that they were granted a partial portfolio mandate from a sovereign wealth fund.

KeY iMPliCATion: Total OCIO assets managed on a discretionary basis more than doubled from 1Q 2011 ($600 billion) to nearly $1.3 trillion as of 1Q 2016. Full or partial discretionary assets managed worldwide showed strong growth at a compound annual growth rate of 16.5% during the five years ended March 2016, according to Pensions & Investments. Cerulli believes that over time, more clients will cede greater discretion to oCios.

48.0%

22.2%

9.5% 8.0%12.3%

41.5%

21.7%

10.6% 8.9%

17.4%

0%

10%

20%

30%

40%

50%

60%





More than$1 billion

2015 2016





More than$1 billion

43.3%

23.0%

8.5%12.2% 12.9%

20.1% 19.0%15.9%

12.7%

32.3%32.3%

20.3%17.2%

11.4%

18.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Full discretion Partial discretion No discretion

QUAnTITATIve InSIghTSoCIo CLIEnt CoMPoSItIon

Importance of Retirement Client Segments to Growth of OCIO Assets During the Next Two Years, 2016

OCIOs’ Anticipated Growth of Retirement Segment Client Assets by Portfolio Size, 2016

Analyst Note: Participants were asked, “Which market segment(s) are important to the growth of your firm’s OCIO business over the next two years?” // Source: Cerulli Associates

Analyst Note: OCIO providers were asked, “For each client type, which size cohort do you anticipate will drive future growth the most in the OCIO market?” // Source: Cerulli Associates

KeY ImPlICATION: While most corporate defined benefit (DB) pension plans in the United States are closed, many plans still need help with pension derisking services. As defined contribution plans institutionalize, many are trying to take a DB-like approach by offering custom solutions, such as white-label and custom target-date funds. Although public DB and Taft-Hartley pensions are less likely to outsource their entire portfolio, many outsourced chief investment officer (OCIO) providers has seen a rise in interest from these segments for support with alternative investments.

KeY ImPlICATION: many OCIO providers that Cerulli spoke with have experienced an uptick in opportunities to support large to mega retirement plans. The largest mandates for global OCIO providers usually come from superannuation schemes with several billion dollars in assets. In October 2016, Pensions & Investments announced that a $1 billion sleeve mandate was awarded to Russell Investments to provide OCIO services to Guild Trustee Services, the Sydney-based trustee, for six of its portfolio’s eight asset segments.

64%

20% 19% 14% 3% 3%

16%

27% 33%26%

26% 20%

20%

54% 49%60%

71% 78%

0%

20%

40%

60%

80%

100%

PrivateDB pension

Private DC Taft-Hartley PublicDB pension


Public DC

Very important

Somewhat important

Not important

14% 12% 12% 11% 10%

19% 16% 12% 16%24%

31%28%

27% 21%

28%

25%24%

27%21%

24%

29%

11%20% 23%

32%14%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PrivateDB pension

Taft-Hartley Private DC Public DC PublicDB pension






More than$1 billion

Quantitative insights

© 2017 The Cerulli Edge Series is published by Cerulli Associates, 699 Boylston Street, Boston, MA 02116. Restricted and confidential. Not to be duplicated or distributed. Reproduction in whole or part in any media is prohibited except by permission.

CeRullI ASSOCIATeS | [email protected] | www.cerulli.com

Cerulli For ConsultingCerulli’s strategic consulting and custom research combines our excellence in research, industry-focused thought leadership, and 25 years of experience to provide clients with guidance on the most important strategic issues facing their firms.

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Quantitative insightsOCIO In the RetIRement Segment

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