THE CERULLI REPORT Investment Consultants 2014 Partnering with Consultants to Provide Client Solutions Overview This annual report focuses on the institutional investment consulting landscape and the trends reshaping the consultant business model. Research examines the evolving needs across institutional client segments, as well as how asset managers can collaborate with gatekeepers to meet institutions' changing needs. Data from this report comes from extensive executive interviews and three proprietary surveys of investment consultants, outsourced chief investment officer (OCIO) providers, and institutional sales and service professionals. Benefits Build actionable business plans for working with gatekeepers and investment consultants Position your firm for success with investment consultants Review the specialties and profiles of 20 investment consulting firms Identify asset allocation trends and product development opportunities Understand which client segments will generate future opportunities for asset managers and gatekeepers Questions Answered 1. What asset classes and strategies will drive future new manager search activity? 2. How are consultants supporting institutional investors? 3. How are consultant relations professionals adapting their role to the changing investment consulting model? 4. What is the demand for OCIOs? 5. Which institutional client segments are using the support of an investment consultant? 6. How should asset managers work with gatekeepers under an OCIO relationship? 7. How will the evolving investment consultant landscape impact asset managers, investment consultants, and dedicated OCIO providers? 8. Which consulting firms are gaining marketshare and what types of clients does each provider support? 9. What new services beyond OCIO are consultants providing to institutional investors, and how can asset managers collaborate with them to garner assets? The Cerulli Report 14 THE CERULLI REPORT TO PURCHASE CALL +1 617-437-0084 EMAIL info@cerulli.com VISIT www.cerulli.com HAVE US CONTACT YOU: http://clients.cerulli.com/tiny/w5fg Subscription Information $15,000 ANNUAL Hardcopy Digital copy in color Unlimited online firm-wide access Exhibits in Excel Key findings Analyst support LOOK INSIDE 10 pages of report content attached 163 pages, 117 exhibits Research Included with Subscription A subscription to this report remains active until the next iteration of this report releases.
Expanded Table of Contents TABLE OF CONTENTS - Expanded Key Questions Answered...17 1. What are the greatest threats presently challenging investment consultants?...17 2. What is the average recommended use of active versus passive strategies by investment consultants?...18 3. Do OCIO providers expect significant growth opportunities across pension channels?...19 4. What is investments consultants client composition by services offered?...20 5. What strategies are institutions using to implement responsible investing?...21 6. What percentage of asset managers new business was consultant-intermediated?...22 Chapter 1: Institutions Relying More on Investment Consultants...23 Industry Overview...24 More Support and Taking Discretion...24 Consolidation...25 Summary of Notable Merger & Acquisition Activity...26 Top Consulting Firms...29 Exhibit 1.01. Top-50 Investment Consultants by U.S. Institutional AUA, 2Q 2013...29 Challenges...31 Exhibit 1.02. Greatest Threats Presently Challenging Investment Consultants, 2014...31 Exhibit 1.03. Consultant Use by Institutional Channel, 2014...32 Pension Plans...33 Exhibit 1.04. Consultant Penetration in Public DB, 2014...33 Exhibit 1.05. Consultant Penetration in Public DC, 2014...34 Exhibit 1.06. Consultant Penetration in Taft-Hartley, 2014...35 Exhibit 1.07. Consultant Penetration in Private DB, 2014...36 Exhibit 1.08. Consultant Penetration in Private DC, 2014...37 Endowments and Foundations...38 Exhibit 1.09. Consultant Penetration for Endowments, 2014...38 Exhibit 1.10. Consultant Penetration for Foundations, 2014...38 Firm Profiles...40 Exhibit 1.11. Hewitt EnnisKnupp, An Aon Hewitt Company...40 Exhibit 1.12. Callan Associates Inc....41 Exhibit 1.13. Mercer...41 Exhibit 1.14. Cambridge Associates...43 Exhibit 1.15. RVK Inc....44 Exhibit 1.16. Pension Consulting Alliance Inc....45 Exhibit 1.17. Strategic Investment Solutions...46 The Cerulli Report Investment Consultants 2014 7 C A
Table of Contents Expanded Exhibit 1.18. Wilshire Associates Inc...47 Exhibit 1.19. Towers Watson Investment Services...48 Exhibit 1.20. NEPC LLC...49 Exhibit 1.21. Meketa Investment Group Inc....50 Exhibit 1.22. Segal Rogercasey...51 Exhibit 1.23. Rocaton Investment Advisors LLC...52 Exhibit 1.24. Graystone Consulting, A Morgan Stanley Company...53 Exhibit 1.25. Summit Strategies Group...54 Exhibit 1.26. Bank of America Merrill Lynch Global Institutional Consulting...55 Exhibit 1.27. Curcio Webb LLC...56 Exhibit 1.28. Marco Consulting Group...57 Exhibit 1.29. Jeffrey Slocum & Associates Inc....58 Exhibit 1.30. Marquette Associates Inc....59 Chapter 2: Shifting Allocations...60 Constructing Stronger Portfolios...62 An Objective Approach...62 Exhibit 2.01. Investment Consultants Who Look at Asset Allocation in Terms of Risk Factors, 2014...62 Asset Managers' Views...63 Exhibit 2.02. Asset Manager Perspective: Percentage of Consultants That Use Risk-Based Asset Allocation, 2014...63 Institutional Investors' Shifting Allocations...64 Exhibit 2.03. Asset Allocation of the Largest 1,000 DB Plans, 3Q 2010 versus 3Q 2013...64 Exhibit 2.04. Endowment Asset Allocation, 2009-2013 FYE...66 Exhibit 2.05. Foundation Asset Allocation, 2009-2013 FYE...67 Post-2008 Allocation Modifications...67 Pension Plans...68 Exhibit 2.06. Comparative Asset Allocation: Corporate Defined Benefit Pensions, 2008 versus 2013...68 Exhibit 2.07. Comparative Asset Allocation: Public Defined Benefit Pensions, 2008 versus 2013...69 Exhibit 2.08. Comparative Asset Allocation: Taft-Hartley Plans, 2008 versus 2013...70 Exhibit 2.09. Comparative Asset Allocation: Defined Contribution Plans, 2008 versus 2013...71 Nonprofits...72 Exhibit 2.10. Comparative Asset Allocation: Endowments, 2008 versus 2013...72 Planned Allocation Shifts...73 Exhibit 2.11. Comparative Asset Allocation: Foundations, 2008 versus 2013...73 Exhibit 2.12. Comparative Asset Allocation: Corporate Private Defined Benefit Pensions, 2013 versus 2015E...74 Exhibit 2.13. Comparative Asset Allocation: Public Defined Benefit Pensions, 2013 versus 2015E...75 Exhibit 2.14. Comparative Asset Allocation: Taft-Hartley Plans, 2013 versus 2015E...76 Exhibit 2.15. Comparative Asset Allocation: Defined Contribution Plans, 2013 versus 2015E...77 Exhibit 2.16. Comparative Asset Allocation: Endowments, 2013 versus 2015E...77 Exhibit 2.17. Comparative Asset Allocation: Foundations, 2013 versus 2015E...78 C A 8 The Cerulli Report Investment Consultants 2014
Expanded Table of Contents Exhibit 2.18. Investment Consultants' Current Client Assets by Investment Vehicle, 2014...79 Exhibit 2.19. Investment Consultants' Expected Change in Use of Various Investment Vehicles Over the Next 12 Months, 2014...80 Use of Active versus Passive Management...81 Exhibit 2.20. Investment Consultants Use of Active versus Passive Across Asset Classes, 2014...81 Exhibit 2.21. Asset Managers' View Regarding Investors' Shifting to Passive Investing, 2014...82 Exhibit 2.22. Demand for Passive Strategies by Institutional Client Type Over the Next 12 Months, 2014...83 Exhibit 2.23. Investment Consultants Expected Change in Use of Passive Strategies Across Client Types, 2013 versus 2015E...84 Exhibit 2.24. Investment Consultants Use of Active versus Passive Across Asset Classes, 2014...85 Use of Exchange-Traded Funds...86 Exhibit 2.25. ETF Assets by Channel, 2Q 2014...86 Exhibit 2.26. ETF Sponsors' Institutional Distribution Focus, 2014...87 Exhibit 2.27. How Institutional Investors Are Using ETFs, 2014...88 Exhibit 2.28. Reasons Consultants Recommend Use of ETFs in Institutions Portfolios, 2014...89 Exhibit 2.29. Use of ETFs Across Asset Classes, 2014...90 Summary...90 Chapter 3: OCIO Continues to Gain Momentum...91 Demand for Investment Outsourcing...92 Range of OCIO Models...92 Exhibit 3.01. Spectrum of Outsourcing Providers, 2014...94 OCIO Providers...95 Exhibit 3.02. Largest Providers of Global and U.S. Investment Outsourcing by Assets, 1Q 2014...95 Discretion Granted...97 Exhibit 3.03. Level of Discretion Provided by Outsourced CIO Providers, 2014...97 Exhibit 3.04. Outsourced CIO Providers' Client Composition by Level of Discretion, 2014...98 Fee Arrangements...99 Exhibit 3.05. Fee Structure for CIO Outsourcing, 2014...99 Exhibit 3.06. Anticipated Growth of Outsourced CIO Providers, 2014...100 Opportunities Across Client Segments...101 Exhibit 3.07. Outsourced CIO Providers' Expected Growth of CIO Outsourcing for Pension Clients by Market Segment, 2014...101 Exhibit 3.08. Outsourced CIO Providers' Expected Growth of CIO Outsourcing for Non-Pension Institutional Clients by Market Segment, 2014...103 Exhibit 3.09. Outsourced CIO Providers' Expected Growth of CIO Outsourcing for Pension Clients by Account Size, 2014...104 Exhibit 3.10. Outsourced CIO Providers' Expected Growth of CIO Outsourcing for Non-Pension Institutional Clients by Account Size, 2014...105 New Entrants in the OCIO Alternatives Space...106 Outlook...106 The Cerulli Report Investment Consultants 2014 9 C A
Table of Contents Expanded Chapter 4: New Business Opportunities...107 Exhibit 4.01. Institutional Market Sizing, 2003-2013...109 Exhibit 4.02. Institutional Market Asset Projections, 2013-2018E...110 Exhibit 4.03. Investment Consultant Business Segmentation by Institutional Channel and Service Offering, 2014...111 Exhibit 4.04. Investment Consultants' Client Composition by Services Offered, 2014...112 Exhibit 4.05. Investment Consultants' Expected Growth of New Business by Client Segment, 2014...113 Exhibit 4.06. Consultant Firm Share of Mandates Placed, 1Q 2013 through 2Q 2014...114 Exhibit 4.07. Consultant Firm Share of Mandates Placed Defined Benefit Plans, 1Q 2013 through 2Q 2014...115 Exhibit 4.08. Consultant Firm Share of Mandates Placed Endowment/Foundation, 1Q 2013 through 2Q 2014...116 Exhibit 4.09. Consultant Firm Share of Mandates Placed Defined Contribution Plans, 1Q 2013 through 2Q 2014...117 Exhibit 4.10. Consultants' Top Expected New Manager Search Activity for Private Defined Benefit Pension Plans Over the Next 12 Months, 2013...118 Exhibit 4.11. Consultants' Top Expected New Manager Search Activity for Public Defined Benefit Pension Plans 119 Over the Next 12 Months, 2014...119 Exhibit 4.12. Consultants' Top Expected New Manager Search Activity for Endowments over the Next 12 Months, 2014...120 Exhibit 4.13. Consultants' Top Expected New Manager Search Activity for Foundations Over the Next 12 Months, 2014...121 Chapter 5: The Broadening Scope of Service Offerings...122 Exhibit 5.01. Average Traditional versus Outsourced CIO Percentage of Assets Under Advisement, 2010-2013...124 Exhibit 5.02. Investment Consultants' Expected Allocation of Traditional versus Outsourced CIO Business in Three Years, 2014...125 Exhibit 5.03. Investment Consultants' Specialty Services Provided to Clients, 2014...126 Exhibit 5.04. Investment Consultants' Planned Headcount Changes, 2014...127 Exhibit 5.05. Proportion of Alternatives Investment Consultants Offering Services by Asset Class, 2013...128 Exhibit 5.06. Main Methods Used by Investors to Source New Alternative Fund Investment Opportunities by Asset Class, 2014...129 Exhibit 5.07. Breakdown of Alternative Investment Consultants by Nature of Service Provided, 2014...130 Exhibit 5.08. Strategies Used to Implement Responsible Investing, 2014...131 Exhibit 5.09. Percent of Clients Requesting Addition of ESG Strategies, 2014...132 Exhibit 5.10. Average Number of Products/Funds Currently Tracked that Incorporate ESG by Asset Class, 2014...133 Exhibit 5.11. Distribution of ESG Ratings by Asset Class, June 2014...134 Exhibit 5.12. Asset Classes with the Most Potential for Growth of SRI/ESG Strategies/Overlays, 2014...135 Chapter 6: Consultant Relations...136 Exhibit 6.01. Institutional Flows: Consultant-Intermediated versus Direct, 2014...138 Exhibit 6.02. Segmentation of Consultant-Intermediated Flows, 2014...139 Exhibit 6.03. Future Level of Emphasis Placed on Consultant Relationships, 2014...140 Exhibit 6.04. Average Consultant Relations Headcount, 2014...141 Exhibit 6.05. Asset Managers' Planned Headcount Changes over the Next 12 Months, 2014...142 Exhibit 6.06. Percentage of Asset Management Firms with Dedicated Consultant Relations Teams, 2014...143 Exhibit 6.07. How Asset Management Firms Cover Investment Consultants, 2014...144 Exhibit 6.08. Structure of Consultant Relations Teams, 2014...145 C A 10 The Cerulli Report Investment Consultants 2014
Expanded Table of Contents Exhibit 6.09. Consultant Relations Professionals' Compensation Structure, 2014...146 Exhibit 6.10. Average Compensation Level for Consultant Relations Professionals, 2014...147 Exhibit 6.11. Compensation Structure for Incremental New Business Under OCIO Relationships, 2014...148 Exhibit 6.12. Effectiveness of Strategies for Targeting Investment Consultants, 2014...149 Exhibit 6.13. Importance of Qualities in Relationships with Investment Consultants, 2014...150 Exhibit 6.14. Importance of Qualities in Relationships with Investment Consultants, Ongoing Servicing, 2014...151 Exhibit 6.15. Asset Managers' Greatest Sources of Frustration with the Consultant Community, 2014...152 Exhibit 6.16. Client Sectors Where Consultant Relationships Are Most Important, 2014...153 Exhibit 6.17. Frequency with Which Portfolio Manager Attends Consultant Meetings, 2014...154 Exhibit 6.18. Outsourced CIO: Impact on Consultant-Intermediated Business, 2014...155 Exhibit 6.19. Outsourced CIO: Impact on the Volume of RFPs, 2014...156 Exhibit 6.20. Client Servicing Responsibilities under OCIO, 2014...157 Exhibit 6.21. Number of Consultant and Third-Party Databases Maintained by Asset Management Firms, 2014...158 Exhibit 6.22. Top-Five Most Important Investment Consultant or Other Third-Party Databases, 2014...159 Exhibit 6.23. Plans to Incorporate Automation Tools for Consultant/Third-Party Database Updates, 2014...160 Index of Companies...161 The Cerulli Report Investment Consultants 2014 11 C A
Sample Section From: The Cerulli Report Investment Consultants 2014: Partnering with Consultants to Provide Client Solutions
Chapter 2 Shifting Allocations An Objective Approach EXHIBIT 2.01: Investment Consultants Who Look at Asset Allocation in Terms of Risk Factors, 2014 Of consultants surveyed by Cerulli, 86% consider risk factors when developing asset allocation. Sources: Cerulli Associates, in partnership with Institutional Investor Institute Consultants Who Use/Are Considering a Risk- Based Asset Allocation Framework Under consideration, 7% No, 7% Yes, 86% C A 62 The Cerulli Report Investment Consultants 2014
Company Index COMPANY INDEX Aksia...128 Alan D. Biller & Associates...35 Alaska Permanent Fund Corp...96 Albourne...24, 114, 115, 128 Altius Associates...33 Amaranth Advisors...80 Aon...26 Archstone Portfolio Solutions...27 Arnerich Massena & Associates...30, 34 Asset Consulting Group...114 Bank of America Merrill Lynch...28, 38, 39, 53, 55 Becker, Burke...27 BlackRock...24, 82, 86, 93, 96 Blackstone Group...106 BNP Paribas...96 BNY Mellon...96 Bogdahn Group...27, 30, 114 Brockhouse & Cooper...27 Buck Consultants...37 Callan Associates Inc...27, 30, 33, 41, 114, 115, 159 Cambridge Associates...30, 33, 38, 39, 43, 93, 96, 116, 159 Canterbury Consulting...39 Capital Advisors...28 CAPTRUST...117 Carlyle Group...106, 133 Clearbrook Global...26 Cliffwater...24, 114, 115, 128 Colonial Consultanting...39, 116 Credit Suisse...96 Curcio Webb...37, 56 Dahab Associates...114 DiMeo Schneider & Associates...37 Disciplina Group...93 Evaluation Associates...27 evestment...159, 160 The Cerulli Report Investment Consultants 2014 161 C A
Company Index Franklin Park Associates...114, 115, 128 Fund Evaluation Group...38, 39, 116 Gallagher Fiduciary Advisors...37, 117 GBS Investment Consulting...26 Goldman Sachs...24, 93, 96 Graystone Consulting...28, 38, 39, 53, 55, 116 Hamilton Lane...114, 115, 128 Hammond Associates...26 Hewitt EnnisKnupp, An Aon Hewitt Company...26, 29, 30, 33, 34, 36, 37, 40, 93, 96, 104, 115 Hewitt Associates...26 Hirtle, Calligan & Co...96 Investure...24, 93, 96 ishares...86, 90 Jeffrey Slocum & Associates...58 Kohlberg, Kravis and Roberts (KKR)...106, 133 LP Capital Advisors (LPCA)...28 Madison Portfolio Consultants...26 Marco Consulting...19, 35, 57, 102 Marquette Associates...27, 59 Meketa Investment Group...33, 35, 50 Mercer...26, 27, 30, 33, 34, 36-39, 42, 93, 96, 104, 116, 133, 134, 159 Milliman, Inc....37 Morgan Stanley...28, 38, 39, 53, 116 National Association of College and University Business Officers (NABUCO)...66 New England Pension Consultants (NEPC)...30, 33, 37, 49, 115 Neuberger Berman...117 Northern Trust...82, 93, 103 Pavilion...27, 28 Pension Consulting Alliance...30, 33, 45, 63 Plan Sponsor Advisors...28 Portfolio Advisors...114 Prime Buchholz & Associates...38, 39, 116 P-Solve...96 Pyramis Global Advisors...96 R.V.Kuhns & Associates (RVK)...30, 33, 44, 114, 115 Rocaton Investment Advisors...52 Rock Creek Group...80 C A 162 The Cerulli Report Investment Consultants 2014
Russell Investments...92, 93 SageView Advisory Group...37 SEI...92, 93, 96, 102 Segal Advisors...27 Segal Rogerscasey...27, 34, 35 StepStone...115 State Street...82, 86 Strategic Investment Group...93, 96 Strategic Investment Solutions...30, 33, 46, 114, 115 Stratford Advisory Group...27 Summit Strategies Group...54 TIFF Advisory Services...96 The Brice Group...28 Towers Watson...26, 30, 36, 37, 48, 93, 96, 104, 109, 110, 117 Townsend Group...115, 128 UBS...96 Vanguard...82, 86, 102 Verger Capital Management...93 Watson Wyatt...26 Wells Fargo...96 Wilshire Associates...30, 33, 47, 115, 159 Wurts & Associates...30, 96 Company Index The Cerulli Report Investment Consultants 2014 163 C A