Institutional funds consider investment delegation

As institutional funds continue to be battered by volatile equity markets and low interest rates, more boards and investment committees are considering investment delegation, also called investment outsourcing, a Mercer survey has found.

The survey of 100 U.S. organizations found that 41% of respondents with assets below $500 million are considering investment outsourcing, while 31% of those surveyed with assets in the $501 million to $1 billion range are also considering such delegation.

A key consideration for this seems to be a growing need for quick, informed decision-making in a volatile market environment. Some 27% of respondents to the Mercer survey believe that they have missed investment opportunities due to the time it takes to make or implement decisions, a 6% increase from a similar survey the firm conducted in June, 2010. The most frequently cited reasons behind inefficient decision-making were market volatility (26%) and not enough expertise (20%). The largest impediments to executing asset allocation and manager changes have been insufficient staff (18%) and market volatility (15%).

One-third of respondents indicated they take more than three months to make a decision on asset allocation or manager changes, while 11% take six months to a year.

For U.S. pension plan sponsors, 2012 is shaping up to be a challenging year in which there is increasing pressure for speed and quality of investment decision-making. Since the first of the year, faced with major pension deficits and the requirements of the U.S. Pension Protection Act, many major companies have announced significant increases in planned contributions to pension plans. Mercer expects to see additional announcements of large cash contributions to plans as companies file their I0Ks over the next few weeks, and expects that for many this burdensome cash contribution requirement will carry into 2013.

Staffing may be a particular challenge for all respondents. Half of the institutions surveyed have either one or no full-time staff managing investments, and 89% of the respondents have no plans to change staffing levels in the coming year.

“We believe the trend to investment outsourcing will accelerate due to a combination of factors: volatile market conditions, the desire to take faster and more considered investment decisions, and the challenge of staffing to adequately monitor performance and risk in real time,” said Tom Murphy, U.S. head of fiduciary management at Mercer.

“In the corporate sector, companies are facing a dramatic increase in balance sheet deficits in 2012 and beyond, increased income statement expense, and a sizeable increase in cash contributions to their pension plans,” Murphy observed. “For endowments, foundations and hospitals, the problem is often the complexity of many investment decisions and a lack of resources. Given these factors, a delegated option should look very attractive to a growing number of boards and investment committees.”