Outsourced Chief Investment Officer Market : Growth Potential and Need for Full Discretion

Korea’s Outsourced Chief Investment Officer (OCIO) market has grown on the back of public funds and is now diversifying its client base into private companies and foundations. As a way to enter the oligopolistic OCIO market, some financial services firms have tried to open up a new niche market, leading to such diversification. This article has estimated the accurate market size based on data provided by OCIO service providers. As a result, Korea’s OCIO market is projected at KRW 132 trillion as of end-August 2022. In the OCIO market, 85% of assets under management are still concentrated in public funds (KRW 112 trillion) but the proportion of private companies and public organizations has increased noticeably to 6% and 5%, respectively. The segmented OCIO market defined as a target market is expected to continue expanding into public institutions including public enterprises, rather than into private companies or mutual aid associations. What gains the most attention is the segmented OCIO market for retirement pension funds, which has particularly prompted securities firms to advance into the OCIO sector. But the market still amounts to no more than KRW 2 trillion. In this respect, institutional reform is required to encourage DB contributions to flow into the OCIO market. Despite this quantitative growth, Korea’s OCIO scheme (K-OCIO) has structural limitations in that its role is confined to the execution of funds, which inhibits the OCIO model from providing a comprehensive asset management solution to OCIO service users. This can be attributable to the partial discretion scheme adopted by the K-OCIO. The full discretion model should be widely adopted to fully serve the OCIO’s goal of using external experts and stimulate healthy competition between trustees. To this end, this article recommends the use of the referent portfolio, selected by the Seoul National University Development Fund. The reference portfolio scheme, extensively used by Korea’s National Pension Fund and foreign public pension funds, is an effective tool to implement the full discretion OCIO model aimed at entrusting independent financial institutions with the top-level strategic decision-making process including the Strategic Asset Allocation (SAA). Full discretion can be implemented based on a trustor’s confidence in a trustee’s investment capability. It is notable that the OCIO scheme designed for supervision, instead of management, would end up delivering low operational efficiency