Institutional investors in Asia eye CIO delegation

Under challenging market conditions and straining cost structures, some Asian investors are increasingly enticed by the sophistication offered by delegated investment services

Asian institutional investors are eyeing “delegated CIO” services, also known as delegated investment or outsourcing the management of portfolios to third-party fund managers, as a means of enhancing their capabilities in an increasingly complicated investment environment.

“The reason I’m in Hong Kong is because the trend for looking at delegated CIO services delegation as a means of addressing some of the current investment and governance challenges that funds have is starting to come to this market as well. We have got some clients here, prospective, as well as existing clients to whom we’re talking about the merits of delegation,” says Chris Mansi, global delegated CIO at Willis Towers Watson.

Delegated investment is a common practice in Europe and the US. But in recent years, increasingly difficult markets, as well as the greater complexity of investment strategies, has resulted in more challenging investment and governance strategies for Asian institutional investors.

“Delegated CIO” services have been gaining traction in Asia-Pacific in recent years, fueled by growing demand for better risk-adjusted returns in an increasingly complex investment industry. Typically, the delegated CIO manages the institutional investors’ portfolios and provides sophisticated investment solutions.

The trend that is pushing delegated investment is that institutional investors are struggling with the overall governance and investment challenge that comes from the necessity to generate substantial returns without taking too much risk.

“In order to address that challenge they need to look at more sophisticated investment strategies than simply investing in equities and bonds and that, in return requires a degree of expertise and time which some funds do not have. And therefore, outsourcing is one of the means to help address that problem,” Mansi says.

Also, a delegated investment framework can generate cost savings for the client since the delegated CIO can more effectively use economies-of-scale in dealing with the underlying managers.

“To put that in context, we’ve typically been able to negotiate fees with underlying managers, it differs by asset class but I would say between 30% and 60% of what those managers standard fees might be. And those benefits clearly pass to the clients, the end investors,” Mansi says.

“For delegated management itself we charge a fee. But I think the right way to compare that is how much it could cost an individual client to build a comparable level of resources to run a more sophisticated portfolio,” he adds.

Delegated investment can come in various forms. For example, it can be a mandate where the third-party delegated manager will manage a client’s assets against liability type benchmarks. Or it can be a range of specialist mandates covering either growth portfolios in aggregate, or individual parts of portfolios, such as equities, credit or alternatives.

 “By delegation, effectively what we’re doing is, for example, the client will give us a mandate to manage a fund whose goal is to outperform inflation by 4% per annum. We’ll be given a range of acceptable asset classes and ranges, and then we will be delegated to effectively do all of the asset allocation, the portfolio construction and the manager selection on an ongoing basis. Then we will report back to the client for them to form a basis about how they’re performing from a return and risk, and from other perspectives as well,” Mansi says.

Willis Tower Watson currently has about US$122 billion in delegated investment assets under management.

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Date

14 Mar 2019

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