Low interest rates and market volatility have many institutional investors changing their investment process and running to institutional custom solutions, according to new research from global analytics firm Cerulli Associates.
According to Cerulli, institutional custom solutions represent a substantial and growing market for asset managers, investment consultants and other financial firms. Assets stood at $1.1 trillion at the end of 2015, up from $506 billion in 2010. Assets are expected to grow 34.5% to $1.7 trillion by 2020, according to Cerulli.
Cerulli defines an institutional custom solution as any service devised to meet a specific client objective. Examples of custom solutions include multi-asset-class solutions, outsourced chief investment officers, liability-driven investing and pension risk transfer.
The main objective of multi-asset investing is to find a combination of different strategies that aim to lower asset volatility, capture investments with low or no correlation in returns, raise risk-adjusted returns, and protect an institution from debilitating large-scale losses.
“The demand of multi-asset-class solutions (MACS) strategies should continue to grow over time given the challenges institutional investors face,” Alexi Maravel, director at Cerulli said in a statement. “Our research found that the residual effects of persistent capital markets volatility are among the most significant reasons institutional investors seek custom solutions like MACS strategies.”
Cerulli finds that the number of institutional MACS added over the past year has risen exponentially, even if growth of client assets under management is more uneven lately.
Multi-asset-class solutions can range from custom target-date strategies for larger defined contribution plans, to derivatives-oriented managed volatility overlay strategies, to the most sophisticated volatility or income targeting and absolute return investments, according to Ceulli.
“At a higher level, though, asset managers and other providers spend a great deal of time and resources demonstrating a track record and proficiency in tactical asset allocation, which can involve views on the capital markets, relative valuations and market liquidity, among other elements,” Maravel said in a statement.
According to Cerulli, about 60% of MACS strategies continue to be judged on outperformance of a traditional market benchmark as opposed to an objective such as real returns or volatility targets.
“MACS is a function that is almost always based on an asset manager’s or other provider’s ability to tactically allocate among multiple asset classes, because inherently the strategies will have more than one underlying asset class,” Maravel said in a statement. “Only about one-third (31.3%) of asset managers and other providers say their institutional clients place a high value on tactical asset allocation ability. This is not surprising as some institutions continue to feel confident in their ability to oversee all forms of asset allocation.”
Overall, custom solutions mandates tend to be complex and, according to Cerulli, clients expect a greater amount of interaction with a manager than in traditional single-asset-class assignments.
Cerulli finds that a majority (68.4%) of firms overseeing these mandates report having a dedicated team to work with custom solutions clients. The most-cited roles serving institutional custom solutions mandates are portfolio manager and investment specialist (89% and 83%, respectively).