The Benefits of Outsourcing Investment Management
The outsourcing of investment management has grown substantially in popularity over the years as investors of small and large asset pools continue to realize the benefits of turning to external managers.
One survey found that 44 percent of institutional investors outsource at least a portion of their investment management function. For example, the American Red Cross in late 2017 announced it would shutter its in-house investment team that managed some $4 billion in assets. Data from U.S. insurance companies in 2016 showed about 40 percent had an unaffiliated investment firm manage more than 10 percent of their total reported assets and 30 percent had more than 50 percent of their assets outsourced. The trend is expected to continue.
The outsourcing phenomenon is not limited to institutional investors, as 54 percent of certified financial planners outsource portfolio management, according to Cerulli.
Outsourcing can pave the way for institutions to pursue more innovative and effective investment strategies while shifting resources away from execution and allowing them to be reallocated toward more strategic efforts. Access to the latest technologies and expertise, better earnings and more effective reporting are all frequently cited as top benefits.
Here is an overview of a few benefits to outsourcing investment management.
Freedom to Focus on Organizational Strengths
Outsourcing asset management can allow certified financial planners to focus more on growing their business. A 10-year study of 8,000 advisors by SEI Advisor Network and FP Transitions found that by outsourcing investment management, advisors have nearly twice as much time to spend meeting with prospects and clients.
Outsourcing can also help institutions redirect their time and energy to services that offer the most value to clients or stakeholders — budgeting and strategic planning for example. Or they can outsource some investment activities and retain those in which they can offer the most knowledge and expertise.
Expanded Access to Expertise
Staff at smaller companies or government entities often are stretched thin, which can potentially force them to short change investment management functions. As capital markets become more difficult to navigate, the result can be inefficiencies, a lack of expertise, and a heightened risk of errors.
External investment management offers access to highly trained specialists who are dedicated to the particular function an organization requires. It also gives firms the ability to tap into a broader range of knowledge, skills and experience that may reduce risk and offer a stronger upside or income potential over the long run. However, it’s not just esoteric assets that can benefit from expertise, but traditional fixed income as well.
This trend is evident among insurers. A Goldman Sachs Asset Management survey of 300 insurers found that the top three asset classes global insurers were considering outsourcing to a third-party asset manager in the next 12 months were U.S. investment grade corporates (30 percent), private equity (30 percent) and emerging markets debt (23 percent) — areas for which hiring in-house staff to manage would be difficult and costly.
Major Cost Savings
Outsourcing enables organizations to pay only for the services they actually need. In addition, organizations can save substantially on systems, software, and potentially even in-house operational employees focused on investment management.
Furthermore, outsourcing may have a direct impact on the performance of a portfolio. A third-party manager with a dedicated staff and state-of-the art knowledge and technology can help build a cost-efficient portfolio that strikes the appropriate balance between risk and return. An independent manager can employ sophisticated analytical tools to help properly align an investment strategy with an institution’s goals; implementing a portfolio designed to deliver a strong and stable pattern of returns over time that persists in a wide range of market environments.
Last, it can be easy. Investment managers can help ease a number of the burdens internal staff currently deal with. For all of these reasons, the trend of outsourcing is poised to continue to expand in the coming years as the complexity of capital markets increases and more organizations start to realize the potential benefits of partnering with an external manager.