New capabilities and expanded data set a new standard for institutional management fee analysis.
July 18th, 2019
By Mark Bell
The OCIO (outsourced chief investment officer) model has grown and picked up significant interest in recent years. What was once a relatively small and unnoticed corner of the institutional investor space has now turned into a hot market, with Institutional Investors going as far to say that “no in-house CIO running less than a few billion dollars is safe.”
Indeed, even a decade ago, the OCIO service model was relatively uncommon; it was not a dedicated service model but perhaps something offered as a customized option on the side to one or two clients. Now, it’s being defined and packaged as a full solution to clients.
The reasons for this rise are several; and something we discussed in detail to over 300 live attendees at a recent webinar we hosted, featuring research and insight from OCIO search firm Alpha Capital Management.
Unsurprisingly, nonprofits are the biggest clients of OCIO services; these tend to be organizations with small staffs that are often overworked, and operating with a limited budget. Corporate and health care are the next two most frequent sectors adopting OCIO, according to Alpha Capital data presented during the webinar. As far as the types of plans, E&F plans make up nearly half of the plan types Alpha Capital reported doing searches for, followed by DB and DC.
There’s also an increase in the number and type of firms that are offering OCIO services. For many, it is a natural extension of services that they already offer on a non-discretionary basis. There are more than a few investment consulting firms that are now branching into offering OCIO services, but the trend extends well beyond just consultants.
For example, we are seeing more private wealth managers – perhaps through a personal client relationship they have — increasingly taking on work in a discretionary capacity. There are also more frequent cases of former pension plans taking individual clients, or even endowment teams starting their own management company, to note a few more examples.
As mentioned, endowments and pension plans are among the sectors most voraciously turning to OCIO services. Improving governance is one major reason for the trend towards OCIOs; if you are a pension plan that is only making investment decisions on a quarterly basis and there is a significant market move intra-quarter, by the time you meet again, you may have missed an opportunity. Likewise, many nonprofits have non-investment professionals in charge of endowments, and they usually have to wait until the (often infrequent) meetings with their investment consultant before making any decisions.
The rise of OCIO adoption also has much to do with a growing desire among clients for an improved risk-adjusted performance. Many are starting to get itchy when it comes to the performance of their plan and are demanding more. According to Investment Metrics data, as presented in the webinar, the average return for a plan in the institutional universe fails to beat even a basic 70/30 benchmark. Clients want to beat these benchmarks; and they want a return that is over and above what they could get from simple portfolio.
That’s why for the above reasons and more, many investment consultants are starting to offer OCIO services. But there are several critical factors they should consider before doing so.
Firstly, there are the costs associated with building or buying the proper operational infrastructure. It’s easy with four or five clients you are providing OCIO services for, but with 40-50 the operational support you need grows exponentially. This can be a significant undertaking.
Consultants also must now be prepared to take full ownership of performance if they delve into OCIO services; as noted above, clients demand performance and are holding their OCIO’s to that. Moving from a relationship-based to a performance-driven relationship can be challenging to navigate.
Nonetheless, investment consultants are well-placed to offer OCIO services, and in fact, many have begun to do so. If consultants can find a way to do it without breaking the trust of clients, it could prove to be an exciting new business opportunity. What’s clear is that OCIO is here to stay. The service is in high demand and plan sponsors are exploring what efficiencies OCIO could bring to them.
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