Outsourced CIOs and the Challenge of Managing Alternative Assets

Many institutional investors – including corporate and public pension funds, endowments, foundations and family offices – now rely on outsourced chief investment officers (OCIOs) to manage their portfolios, augmenting their in-house investment expertise without adding infrastructure. Engaging an OCIO enables investors to diversify their assets into complex asset classes they could not otherwise easily manage themselves, such as alternatives. By shifting a greater allocation to alternative investments, the investors aim to achieve higher returns while minimizing their exposure to any one asset class.

The ongoing shift toward alternatives is expected to drive a $2.5 trillion increase in these asset classes from 2019 to 2021.¹ But this trend, coupled with the increasing reliance on the OCIO, serves to shift the investment operations burden and poses a significant and growing challenge for OCIOs and their institutional clients. While institutions seek to diversify their portfolios, overcome low interest rates and generate new sources of alpha by adding more alternatives to the asset mix, this makes it more difficult to monitor overall portfolio performance and manage risk and liquidity. For most organizations, the increase in alternatives has resulted in manual data aggregation, siloed investment processes and spreadsheet-driven analysis – none of which are scalable or sustainable in the long run.

To be successful, OCIOs need a strong multi-asset class portfolio management platform that provides a simplified view of all investment data, across all asset classes, including alternative investments.

Alternatives: A Larger Slice of a Growing Pie

A recent survey by Cerulli Associates estimates that U.S. assets under management by OCIOs totaled more than $1.1 trillion as of year-end 2018 and are expected to grow to nearly $1.7 trillion by 2023. OCIOs project alternatives allocations to increase for nearly all institutional client types, while equity allocations are trimmed. More specifically, more than 40% of the OCIOs surveyed by Cerulli expect a substantial number of institutional clients to increase their private equity allocations. OCIOs also expect to see an increase in investment allocations to real estate, infrastructure and private debt.

OCIOs face the need to manage increasingly diverse portfolios, with positions in private equity, hedge funds, real estate, infrastructure and other alternative assets. Historically, when allocations to these investment vehicles were lower, managers were able to cope with the lack of data standardization without much automation. Now, the rapid rise in alternative investments is exacerbating the challenge of collecting and analyzing data from multiple sources. Investment data from general partners (GPs) comes in a variety of formats, contains varying metrics and is delivered on different timelines. And, since alternative assets are typically illiquid, determining valuation is a daunting task. These complexities and inconsistencies make it very difficult for the OCIO to determine, for example, whether certain investments will satisfy a client’s cash flow and liquidity needs or fit within desired risk tolerances.

Needed: A One Stop Solution for Multi-Asset Class Portfolios

To make informed decisions across a multi-asset class portfolio, an OCIO must be able to collect, aggregate and analyze vast amounts of data from a range of investment vehicles. In lieu of time-consuming, inefficient and possibly inaccurate manual processes, the OCIO needs a portfolio management platform that can normalize data across multiple investments, provide a uniform dashboard for modeling, analysis and reporting, and enable the investment team to project investment performance, cash flow, liquidity and risk.

For example, knowing what the unfunded commitment is on a private equity investment at any given point in time requires extraction and tracking of every cash flow. Dates associated with capital calls need to be factored in and forecasted to appropriately model the impact. Withdrawals made on the custodian accounts will impact liquidity needs and performance. Given a typical investor with numerous holdings, several managers and multiple custodians, each with their own reporting and delivery format, managing all this is no easy task for the OCIO. In addition, an OCIO has its own client onboarding growth targets which, if successfully met, will multiply the volumes. A great problem to have, but still one that must be addressed.

The institutional clients of OCIOs also recognize the need for more automation and better portfolio analytics technology to report on and model portfolios containing alternative assets. The Cerulli survey notes that 42% of the institutional clients of OCIOs, “anticipate needing additional technology services in the future” to enhance their ability to monitor portfolios and achieve greater transparency.

OCIOs also need to prepare themselves for the inevitable on-site investment operations visit during the selection process, which often includes a review of their technology infrastructure. Smart OCIOs know that having the right technology will enable them to proactively address client questions before they are asked. As OCIOs continue to increase allocations to alternative assets, there will be no choice other than to embrace technology that allows them to scale and make smarter investment decisions with respect to increasingly diverse portfolios.

To learn how our solutions can help OCIOs make better, more informed investment decisions, more efficiently manage multi-asset class portfolios, and scale their businesses more quickly, explore the Solovis platform.

 

¹Alternative investment industry to grow by USD2.5 trillion in next three years. (2018, September 10).