Outsourced Chief Investment Officer, more commonly known as OCIO, refers to a model in which institutional investors engage a third party to manage all or a portion of their investment portfolio. In many cases, investors who choose the OCIO route lack the internal resources, time, expertise or desire. Institutions that subscribe to the OCIO model are also looking to reduce liability and manage cost. Although OCIO represents one of the fastest growing segments in the institutional investment space over the last ten years, it is one that still generates many questions and concerns as it relates to fiduciary responsibility and overall efficiency.
Institutions often feel there are a variety of day-to-day decisions that don’t necessarily require outsourcing, leading many to ask, “What am I paying for?” On a larger scale, there are many critical portfolio decisions where an OCIO can add significant value. Services such as asset allocation reviews, investment manager selection, portfolio implementation, ongoing portfolio and investment manager oversight, risk management and other areas of portfolio management typically fall under both the traditional consultant model and an outsourced structure though the decision-making authority shifts under OCIO.
Over the last several years, the stewards of these institutional assets have increasingly explored the OCIO model and are bringing their investment consultants on in a more defined role as fiduciaries for the assets. Investment consulting/OCIO firms serve as terrific complements to Investment Committees and Boards as they have the requisite investment knowledge and resources to manage portfolios and are also held to the same stewardship guidelines as the Committees and Boards they consult.
According to Charles Skorina & Co., as of November 2016 there were 74 OCIO firms with a total of $1.37 trillion assets managed with full discretion1. OCIO assets grew 17% year-over-year from 2014 to 2015 and almost ten-fold (860%) from 2007-2015. That eight year growth ($91 billion to $873 billion) implies an annual growth rate of roughly 30%2. While the OCIO growth started to slow in 2014, these remarkable growth numbers do not factor in assets that are managed with partial discretion or agreements where only a portion of the portfolio is under outsourced discretion (i.e. alternative investments).
Drawbacks of the OCIO model typically center on costs and efficiency. For example, the perception exists that an OCIO will be an added cost that will detract from the overall performance of the portfolio. In reality, the OCIO will often add value as they can negotiate better fees and provide lower transaction costs. This negotiating power is based on the amount of assets they advise as a firm and the relationships they’ve built with managers whom they share multiple clients. Other common concerns include lower efficiency and breaks in information channels. Frequently overlooked, an OCIO tremendously helps maintain continuity as institutions endure personnel turnover both in-house and on an Investment Committee or Board.
With more and more OCIO firms emerging, the responsibility of selecting the right OCIO falls on the steward as well as determining the best approach to achieve their financial and strategic goals. Each endowment and foundation has its own unique investment strategy, size and specific considerations. Some firms offer a more standard pre-packaged approach based on asset size, which may work for a larger plan, but in many cases a more strategic, customized offering is preferred as it is tailored to the client’s needs, and provides them with the ability to adapt to the current market environment. The definition of stewardship is “the careful and responsible management of something entrusted to one's care”. With that in mind, partnering with an OCIO is a prudent way to solidify the ability of the steward to responsibly manage and grow the assets to which they’ve been entrusted.
Please contact any of the professionals at DiMeo Schneider & Associates, L.L.C. to discuss the various advisor models and determine the optimal solution for your institution.
