As we prepare to close the books on 2020, North Pier Search Consulting consulted OCIO firms Clearbrook, Payden & Rygel, as well as PFM for their perspectives on an extra-ordinary year. In addition to our usual market focused conversations, we were able to glean insight into how OCIO managers are approaching the ESG trend and the new work from home environment. In the wake of a contentious election and in the midst of a resurging coronavirus, markets remain volatile, prompting investors to remain as nimble as ever. 2020 is the year that taught us to expect the unexpected; it’s just another reason why North Pier continues to pound the table on contemplating the virtues of the Outsourced Chief Investment Officer solution for many institutions both large and small.
State of the Markets
Risk markets remain buoyant. As the election uncertainty dissipates, market participants are appearing increasingly comfortable with the outcome. The election was often portrayed as a significant potential catalyst, yet our discussions with top OCIO managers indicated a near universal preference to look through the election when making allocation decisions. Beth Westvold, Director at Payden & Rygel, briefly commented on how the firm was preparing for potential election related dislocation; “We would expect an increase in volatility as we look ahead through the election… with that elevated volatility we’d be looking for opportunities in certain sectors that may react in the short-term to political developments.” Regardless of the outcome, Payden & Rygel was confident in the prospects of the domestic economy over the longer term. “We think the US recovery is going to be stronger and the corporate earnings picture will continue to be better here versus non-US markets. As a result, we’re not exposed to international equities at this time,” says Westvold. In light of an expected continued economic recovery, the firm was placing an emphasis on retaining exposure to mid-cap equities, thinking that this group is best positioned to benefit from the fundamental tailwinds whilst having better prospects of weathering the crisis than smaller cap competitors. Given the Fed’s initial and continued response, Payden & Rygel has maintained that the combination of credit exposure paired with active management will continue to bear fruit for their clients.
Ellen Clark and Tim Stidman, Directors at PFM, were marginally more positive on the international equity space. At North Pier Search Consulting, we find that most Outsourced Chief Investment Officer managers have anywhere from a 25% to 45% allocation to international within their public equities bucket. Ellen indicated PFM retained a neutral allocation with exposure squarely in the aforementioned range. PFM has preferred to take additional risk on the fixed income side of the portfolio. “We added some high yield and emerging market debt, smaller allocations but trying to pick up yield and take advantage of underpriced assets on the fixed income side,” Clark stated. PFM also added a convertible bond allocation at the end of May, it ended up being a tactical move that the firm exited recently in mid-September. Ultimately PFM was able to take advantage of some dislocation in the convertible market, which ended up being accretive to performance. PFM continues to expand the investable universe for their clients as they explore additional opportunities in the private debt space, which has been a consistent focus for OCIO managers this year.
The team over at Clearbrook was able to take advantage of tactical overweights to help drive performance over the last several months. “We have overweights to US large cap and high-quality growth in Europe, with absolute overweighting in healthcare and IT services which really helped the cause dramatically,” says Clearbrook’s Chief Investment Officer Timothy Ng. On the fixed income side, Clearbrook extended duration and overemphasized corporates, at the expense of their exposure to securitized markets. It was interesting to hear Clearbrook discuss how they had actually increased their allocation to active management; “Last year we were probably about 60-40 on active versus passive, today we’re probably 77-23 active – it’s a huge shift that we made,” says Ng.
State of the OCIO
As we’ve all been forced to adapt to a new and unfamiliar reality, we checked in with how some of the Outsourced Chief Investment Officer managers were managing the transition. Planning for a safe return the office was a recurrent theme. With the success managers have had working from home thus far it seemed likely that remote work will be permitted in some form post pandemic, especially if it cuts costs. In regard to remote work, Payden & Rygel talked a bit about the importance of robust cyber security. Network security is an issue of particular importance for OCIO managers as their employees continue to operate from home and handle sensitive data daily.
ESG continues to be a hot topic and the OCIO industry has been put on notice. Clearbrook illuminated how their client base is probing the space. Ng put it well; “More and more of our clients are moving towards ESG oriented investments. Not just with regards to carbon but also thinking about economic inequality, gender, and racial equity as well. We started our ESG efforts about three and a half years ago at the firm but it’s becoming more prevalent. We’re very much supporters of emerging managers and we have diligently added to our list of approved management teams with diverse backgrounds.” The proliferation of thematic ESG investment is gaining steam at a remarkable pace. With no sign of letting up, we believe it will be imperative for managers to remain abreast of further developments. While not entirely analogous, it is clear that the trend towards passive investing over the last ~15 years has affected the markets in a fundamental way; ESG has the potential for an equivalent impact.
With OCIOs growing in popularity, it’s no surprise that more and more providers are entering the space. With the consultant-to-OCIO transition progressively looking like a one-way street, everyone from upstart managers to established financial institutions are looking to expand their product offerings to meet the demand of their clients. At North Pier Search Consulting, we don’t see this trend reversing. The competitive landscape will continue to evolve with new players, the potential for strategic partnerships, and mergers and acquisitions between firms. A long runway for future growth ensures the territory will become even more crowded. A more mature OCIO industry should lead to a greater number of replacement searches as institutions find they simply have more options than they did five or ten years ago. For now, however, the majority of searches are for asset owners contemplating the move to Outsourced Chief Investment Officer from the traditional consulting model. At North Pier Search Consulting, we endeavor to help keep institutions and managers apprised of the latest developments while navigating these turbulent times.