A closer look at outsourcing

Who is outsourcing appropriate for? The short answer is almost everyone who does not regard asset management as a core competency. But there are three main segments driving sub-advisory at the moment: Insurers – Insurers in many markets are looking for ways to become more financially efficient and as a result are looking at ways of cutting fixed costs and improving investment returns. They are also looking to take volatility and risk off their balance sheet – particularly in response to current market turbulence. As such, many insurers have sold or are looking to sell/close down their asset management division and/or outsource to a sub-advisor. Universal Banks –There are many reasons for such a bank to decide to outsource all or some of its asset management, depending upon the bank’s strengths and client base. They may want to focus on distribution and outsource all asset management to one or more sub-advisors. Alternatively, they may decide to outsource because they may be getting investment management performance from their in-house teams which is not good enough or cannot be systematically delivered. Regional banks – This is one of the growth areas in sub-advisory across Asia. This is partly driven by the spread of investment culture from the financial centres of Asia to the regions, creating new demand. At the same time, to compete for assets against large national and international players, regional banks are seizing the opportunity to bring in asset management experts from outside their own domestic arena. Often this results in a strategic alliance where the whole asset management function – all asset classes – is outsourced to one sub-advisor. How much to outsource? Those who are considering out-sourcing can be broadly divided into two camps: Range completers – Organisations which decide to outsource one or more asset classes to the “best in class” investment manager, either to add additional product to their offering or because they have decided to focus in-house resources more narrowly. Usually it is the CIO or another investment professional who is the prime decision maker here. Strategic partners – Organisations which decide to outsource all or the large majority of their assets to external asset managers – as they look to change their investment offering, reduce their fixed costs or exit asset management altogether. Here it is the CEO and CFO who are the prime movers. This often results in one or perhaps a small number of asset managers that become the partners of choice and manage all the assets. What to outsource? We generally find that the first asset class companies outsource tends to be equities – due to the size and breadth of the equities market; it is difficult to offer a full range managed in-house and, due to the competitive nature of the market, it may make sense to bring in providers with a strong track record. Clearly it can make more sense for distributors to keep lower-risk, lower-cost asset classes in house while utilising the power of scale and larger resource to manage the higher risk, cost-intensive asset classes such as international equities or nontraditional asset classes. Both the sponsor and the sub-advisor can benefit from a sub-advisory relationship. With the one major drawback to sub-advisory being the risk of losing clients to the sub-advisor, many sponsors look for a sub-advisor who does not compete in their market. Often this restricts the list of potential sub-advisors to those who are pure manufacturers – offering the additional advantage of the longer-term more institutional approach to asset management. When choosing a sub-advisor in times of market turbulence, you may wish to consider not only investment excellence but also operational strength to ensure that you are partnering with a stable and secure organisation that will benefit both you and your clients over the long term.