With the growth of the asset management industry, many institutional investors and asset owners are considering outsourcing their investment management functions. Outsourcing to external investment management companies can provide significant benefits compared to managing investments in-house. Some key benefits include accessing specialized expertise and talent, improving operational efficiency, reducing costs, and enhancing risk management capabilities. This article will explore the landscape of investment management outsourcing and outline the advantages it offers to asset owners.
Outsourcing allows tapping into specialized skills and expertise
Investment management encompasses a diverse range of capabilities including portfolio management, research and analysis, trading, compliance, operations and technology. As asset classes, investment strategies and markets grow more complex, it becomes challenging for any single organization to have best-in-class expertise across all required areas. Outsourcing to an investment manager with proven capabilities in specific asset classes or strategies is an efficient way to augment expertise. Specialist firms are able to attract the top talent required to excel in niche investment disciplines.
Outsourcing improves operations and technology
Managing investments in-house requires significant investments into trading, compliance, reporting and technology infrastructure. For smaller asset owners, building and maintaining an institutional-grade platform may not be feasible. Outsourcing transfers these operational and technology burdens to an external provider. Investment managers provide robust and scalable solutions that smaller investors may not be able to replicate cost-effectively internally.
Outsourcing reduces costs through economies of scale
Larger investment management firms enjoy significant economies of scale due to their size and breadth of assets under management. Their scale translates into lower average costs for investment research, trading, operations, compliance and technology. These cost savings and efficiency benefits can be passed on to their clients in the form of lower fees. Conducting these activities in-house may be significantly more expensive for smaller asset owners.
Outsourcing provides objective oversight and governance
When investment decisions are made internally by a small group of individuals, it increases risks arising from emotional biases, groupthink and lack of accountability. Outsourcing to an external investment manager inserts an independent layer of oversight and governance into the investment process. The external manager’s interests are also fully aligned with the client’s investment objectives which minimizes potential conflicts of interest.
In summary, outsourcing investment management functions to specialist firms provides a compelling value proposition for many asset owners. It enables accessing best-in-class capabilities, technology and resources while also reducing costs and enhancing governance. As the investment landscape grows more complex, outsourcing is an efficient solution to manage institutional assets effectively.