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Pensions & Investments: Outsourcing, More Use of Specialist Managers Part of 2020 To-Do List

December 23, 2019

Read the article on P&I's site here.

Timothy T. Yates Jr. said larger endowments now are in the midst of having serious ‘buy- or-build discussions.’

The new year is expected to see more outsourcing and use of consultants and specialized managers by endowments.

"Increasingly people are calling us to ask whether and how to outsource," said Rosalie Wolf, founding partner of Botanica Capital Partners LLC in New York, which provides governance and endowment consulting advice and services to investment boards and committees. The last two recessions "convinced many investment committees and chairs that they don't want to be in the hot seat, but they also want accountability," Ms. Wolf said.

Timothy T. Yates Jr., president and CEO of Commonfund Asset Management in New York, which manages $9 billion in OCIO capital from endowments and foundations, has seen "tremendous activity" even in the last six months, and from larger endowments with assets of $500 million or more. "There's a buy-or-build discussion that's taking place now," said Mr. Yates.

The growth of OCIO firms has also prompted "a lot of flavors" of OCIO, with varying degrees of discretion and execution mandates, and led to the growth of OCIO consultants to help find and monitor the OCIO firms, he said.

Another developing trend is discretionary consultants for more specialized asset classes like private equity as more endowment offices get involved in private markets. "That's the stuff that's really labor intensive that (in-house) staff can't handle," said Scott F. Perry, partner and co-head of investment consultant NEPC LLC's endowment and foundations practice in Boston. Between OCIO and discretionary consultants, "it's a theme that's becoming more and more prevalent," he said.

If and when the next downturn comes, an already competitive market for endowment CIOs and investment committee members is likely to have more endowments considering the OCIO route as a way to ensure good governance, said Margaret Chen, global head of Cambridge Associates LLC's endowment and foundation practice in Boston.

"It's harder to sustain a stable investment committee centered around a common investment approach who have not only the skills but the time. Time is the most precious commodity and that leads them to focus more on governance," Ms. Chen said.

Colleges and universities feel increasing pressure to reduce endowment expenses and increase operational efficiency, but there could also be renewed interest away from indexing and toward managers complementary to the existing portfolio, as well as those who can help fulfill a school's goals for impact and sustainable investing.

In 2020, "managers are going to have a moment," said Ms. Chen.

That could include China specialists, Mr. Perry said. "Endowments that had previously allocated (through indexes) are now making dedicated allocations to managers with particular expertise."

NEPC found in its fall 2019 survey that 79% of endowments have investment exposure to China, compared to 91% in the 2018 survey. Despite concerns over trade, corporate governance and other economic issues, 80% have no plans to change that. "There is tremendous interest in all things China," said Mr. Perry.

Topics: Press, Press Coverage

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