After several decades of increasing adoption, the outsourced chief investment officer (OCIO) approach to managing investments continues to evolve. The discretionary market is maturing, and recent market volatility and increased investor demands are serving as catalysts for assessments that lead to new OCIO relationships and replacement searches.
A formal periodic review of your governance structure and providers is consistent with industry best practice and will help ensure you are receiving the services aligned with your specific needs. The OCIO approach may be worth your consideration as you perform this review.
Read the full article below for more information on understanding OCIO Governance.
Key Considerations for Considering an OCIO Approach
The OCIO market began as a turn-key solution where assets were generally placed into a limited number of funds sponsored by the OCIO provider. Today, market demand for transparency and customization has evolved OCIO market offerings into a range of solutions, from partial delegation to full delegation.
Which approach is right for your situation is primarily based on the resources and expertise of your staff and investment committee, the complexity of your investment needs, and how quickly decisions can be executed. For example, an organization with limited staff and governance resources may choose full delegation, thereby improving decision efficiency—while an organization with sufficient resources but lacking expertise in private markets may wish to outsource its real asset allocation. Choosing the right approach can improve accountability and organizational effectiveness.
Non-profit institutions should be willing to assess their governance structure’s strengths and weaknesses by determining the following:
- Resources. Is there a budget to build and maintain an in-house investment staff? What is the investment sophistication level of the investment committee?
- Strategy. What level of customization is needed to meet your unique financial objectives? What are the strategic decisions you want to retain, and which do you delegate? What investment strategies does the organization want to pursue? How difficult are those to implement with in-house staff? Do your investment committee agendas have sufficient flexibility to include topics of interest that arise outside regular performance discussions?
- Execution. How quickly can investment decisions be made and implemented? Is there clear accountability for ensuring that advice, strategy implementation, and operational support are aligned with your strategic priorities? Is your portfolio large enough to implement the desired strategy and get attractive fees, or is an OCIO necessary to gain greater access to the benefits of scale?
Key Considerations for Assessing an OCIO Provider
Whether or not you are currently working with an OCIO provider, a strategic review of your governance requirements—including considering whether OCIO is right for your organization and whether a particular provider meets your needs—makes sense. Following is a series of questions to aid you in this analysis.
- Does your OCIO provider listen and understand its role as integral to the success of your mission and to increasing financial support?
- Is your asset allocation a reflection of your strategic goals? Is it accurately reflected in your investment policy statement? Is there flexibility for an opportunistic allocation to take advantage of market conditions?
- Does your OCIO provider have strong capabilities and specialists in every investment area you want to consider? If you have multiple asset pools, is the OCIO able to work across the pools and offer skilled advice that considers the entire organization (or enterprise)?
- Does your OCIO provider have the flexibility to adjust your current OCIO model to reflect changing needs as you grow and evolve?
Benchmarking, Monitoring, and Risk Management
- What measures of success are appropriate for evaluating your OCIO provider and portfolio?
- Is your reporting customized to meet your needs?
- What level of transparency do you have into your portfolio and fund changes? What is the process and timeline in the event an immediate change is required?
- Is operational due diligence a part of regular review and monitoring?
- Is there holistic performance monitoring to ensure your spending policy/hurdle rate is being reached while accounting for inflation?
- Is enterprise risk management (ERM) a component of the OCIO solution?
Implementation and Operations
- Can you implement the organization’s investment strategy efficiently with internal resources, or would using an OCIO aid in improving operations?
- Are your investments sophisticated to the degree that they require additional back-office support to meet their needs (e.g., private markets)?
- What systems does the OCIO provider use based on asset class and function (in-house, or a collection of systems)?
- Can the OCIO work with your existing custodian, or will you be required to change custodians?
- What is the time frame for implementation?
- How does the OCIO provider minimize transition costs?
- Do you have transparency into and understanding of the total fees, including segregation of investment management fees from OCIO services?
- Is your provider using funds to create scale? Are these fee concessions being passed on to you?
- Are there additional administrative fees charged to the fund that are not being disclosed?
- Are the fees in line with the value of the services received?
- If you leave or terminate the OCIO relationship, are there redemption fees or lock-ups? Will you be able to move assets in-kind?
Each investor’s needs are unique. Non-profit organizations benefit from understanding their optimal governance approach and assessing how well they are positioned to achieve their financial objectives. The process requires a significant commitment of time and the effective allocation of resources, so non-profits are becoming more likely to review OCIO providers as a potential solution.
With varying levels of size, capabilities, flexibility, and costs, OCIO is no longer a one-size-fits-all solution, but a more customized solution where investors need to understand what best meets their needs. The OCIO model has evolved so rapidly that investment committees need a well-defined assessment process to ensure their OCIO is adhering to the desired governance structure, guidelines, and risk parameters; that the platform is using leading-edge technology; and that fees continue to be reasonable.
The best decision on an OCIO provider always begins with bringing clarity to the optimal governance structure.
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