Outsourced-CIO (OCIO) firm Fiduciary Research (FRC) will wind down operations after losing its sole client this month, CIO has learned.
The firm said FirstEnergy, an Ohio-based diversified energy company, decided to end its five-year advisory relationship with FRC.
According to the San Francisco-based manager, it will now focus on helping FirstEnergy transition its management to Aon Hewitt, which has been understood to be hired as the company’s traditional consultant and advisor.
With no client and no revenue, FRC said it is “no longer in a position to seek additional clients.”
“We are deeply committed to doing our utmost to make the transition as seamless as possible,” said Kathleen Dunlap, FRC’s chief business strategy officer.
The OCIO provider said it recently explored options to expand its business and diversify its client base, having “very fruitful conversations with a number of pensions.” But Dunlap said FRC is “no longer in a position to seek additional clients.”
Founded in 2009 by CEO John Boich, FRC managed over $8.5 billion of FirstEnergy’s defined benefit trust, according to its website.
Dunlap said the biggest challenge FRC faced as a small boutique firm in a vast sea of OCIO providers was marketing its approach.
Unlike a more traditional OCIO, FRC identified itself as an “integrated” CIO—one in which the firm’s 16 investment professionals partnered with FirstEnergy’s in-house team.
“We talked to CIOs one at a time, trying to break down the notion that outsourcing meant replacing their internal teams,” Dunlap said. “Instead, we created a platform to address resource needs and augment our client’s team. We worked to enhance and empower the in-house structure.”
According to its website, FRC offered bespoke portfolio management to fulfill the needs of a particular plan as well as “a robust risk management infrastructure.”
In addition, Dunlap said having just one client also hindered FRC from gaining more mandates, as many funds requested long-term track records and a minimum number of existing clients.
“The OCIO industry is very crowded so it’s difficult for firms to differentiate their services to asset owners,” she said. “And having one client left us a bit exposed and vulnerable, especially with the OCIO industry constantly changing.”
“Outsourcing is a zero-sum game and each provider is not only competing in its own segment, but also in the entire industry.” —John Nawrocki, Rocaton
According to CIO’s 2014 OCIO Buyer’s Guide, large and well-known firms—the likes of Russell Investments, Mercer, and SEI—have come to dominate the US business, with over $245 billion in total discretionary assets. According to this data, they also held the largest number of total discretionary clients, leaving little room for the upstarts.
“It’s a very highly competitive environment,” John Nawrocki, partner at consulting firm and OCIO provider Rocaton, told CIO. “Outsourcing is a zero-sum game and each provider is not only competing in its own segment, but also in the entire industry.”
Despite continuing flows of new entrants into the field last year, Nawrocki said the industry was maturing. The players who are going to stay are already in place, he added, and they are competing for clients.
To stand out in the crowd of OCIOs, firms should build out their organizational breath and reputation, Nawrocki said. Specifically, asset owners are likely to seek strong and extensive operational and investing resources as well as back-office support such as compliance.
CIO’s 2014 OCIO survey also confirmed these needs. Some 37% of responding asset owners identified “breath of capabilities/services offered” as the primary reason for choosing a provider, followed by “experience in top management” (22%), “reputation/recommendation” (17%), and “client service” (15%).
Nawrocki also said it was particularly important for smaller and newer OCIO providers to retain a “strong and experienced front-line investment talent” capable of building complicated and highly customized portfolios.
Asset owners, particularly among corporate pension plans, are expected to pursue OCIO services in de-risking, the consultant added. They will be seeking providers with strong capital market research and actuarial talent, alongside governance and operational infrastructures.
Related Content: 2014 OCIO Survey, The Many Tensions of Outsourcing