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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.
In a survey of 100 organizations, Mercer found that 41% of respondents with assets below $500 million are considering investment outsourcing and 31% of those surveyed with assets in the $501 million to $1 billion range are also considering such delegation.
A major reason for delegating some or all fiduciary responsibility for investment decisions relates to the need for speed and sophisticated decision-making in a volatile, fast-moving 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 that Mercer conducted in June, 2010. The largest impediments to delay in decision making have been 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%).
As market conditions continue to be challenging, one-third of respondents take more than three months to make a decision on asset allocation or manager changes and 11% take six months to a year. Lack of speed of execution, once a decision has been taken, compounds the problem. Nearly half the respondents to the Mercer survey (44%) take from one to three months to execute asset allocation or manager changes. One in five (21%) take more than three months to execute a decision.
For 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 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, US 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,” Mr. 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.”
Mercer’s survey was conducted in November, 2011 of 100 organizations with institutional funds. Some 57 of these were corporations,25 were endowments, foundations or hospital systems, and the remainder included professional organizations and government bodies.
Mercer is a global leader in human resource consulting and related services. The firm works with clients to solve their most complex human capital issues by designing and helping manage health, retirement and other benefits. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.