Over the past decade, the growth of outsourced CIO (“OCIO”) relationships with consultants and asset managers among U.S. institutional investors has grown significantly, reaching $1.1 trillion by late 2018 and anticipated to reach $1.7 trillion by 2023. These relationships go by many names, including discretionary, delegated and OCIO. But at their core, they share the same elements—another entity, typically an investment consultant or investment manager, assumes discretion for implementing parts of an investment program.
This discretion could include decisions on asset allocation, manager selection and termination, reporting, and cash flow management. The benefits to plan sponsors can be material—cost savings on investment management fees, time savings for the company, and often improved performance (including enhancements in execution, risk management, and governance).
Plan sponsors tend to look at this decision as binary, in that they decide to use their consultant as either 100% advisory or 100% discretionary. However, many plan sponsors could benefit from a partial OCIO approach— one where a consultant assumes discretion over a component of the investment program but continues to serve in an advisory role otherwise. Some examples of this type of arrangement are:
- Liability-hedging component. The consultant manages the liability-hedging component of the investment program, including manager selection and the cash flow associated with implementing the de-risking glide path.
- Multi-asset credit. This interesting area crosses several asset class lines and often involves new products. A discretionary mandate can allow for customization and keep it fed with new market offerings that are appealing in the current market environment.
- Private equity and/or real asset component. These two areas within the alternatives component require different skill sets from those needed for success in traditional asset classes. The vehicles are complex, cash flows are numerous, and decisions on who to hire often must be made in short order. Having an expert in these matters can reduce the burden on staff.
- Functional OCIO role. In this type of arrangement, the client retains the consultant in an advisory role for manager selection, but the consultant serves in a discretionary role for execution.
Each investor’s needs are unique. An appealing quality of a partial OCIO arrangement is that it can be customized to address an investor’s individual needs/gaps and work alongside those areas where the investor wants to retain control.
The benefits typically fall into the following areas:
Aon has extensive experience in a wide range of full and partial OCIO mandates and would be happy to discuss your needs.