What do investment outsourcing and ice cream have in common?

Answer: They both come in many flavors.

As anyone who’s ever enjoyed a chocolate-vanilla swirl cone can attest to, sometimes the best outcome originates from a combination of things. I’d argue that the same holds true for many folks’ notions of OCIO (outsourced chief investment officer). In some instances, the optimal solution for an organization isn’t black or white. Or chocolate or vanilla. It isn’t just full OCIO or limited to consulting. Rather, it’s a mix of services. Call it the swirl-cone approach.

This is because the reasons why an organization may choose to partially outsource are many. Some asset owners literally need a full array of services from asset/liability modeling through answering auditor questions. But others only need a specific type of risk management assistance or help with maintaining their desired asset allocation. Maybe the asset owner just wants to slot in a private-markets solution on a turnkey basis. Perhaps the resources and bandwidth exist to keep some investment functions in-house, but the organization is looking externally to leverage additional resources in order to expand into a new asset class or strategy. Or maybe an internal CIO is intrigued to test the waters of OCIO by handing over one assignment at a time, rather than everything in one fell swoop. Whether it’s a traditional notion of total outsourcing that the industry often associates with OCIO or a more selective harnessing of external resources to leverage limited internal staff, the ability to customize the mix of services with the asset owner’s needs is key.

I firmly believe the best OCIO providers can meet clients where they are—to deliver customized, tailored solutions that align with an organization’s wishes. The problem is that not all providers offer that flexibility. For some, only an all-or-nothing approach works. That is, they offer an off-the-shelf product called OCIO rather than a menu of services that can be structured to fit hand-in-glove with the asset owner’s needs.

Drawing on my experience as a CIO who was always looking ways to do more with the same internal resources —and now in my role at an asset management firm whose bread and butter is to develop customized investment solutions—I’ll walk through some of the key factors I believe organizations should be aware of when shopping for an OCIO partner.

There can be an advantage in the optionality of working with a provider that can handle more than one function.

One of the first things that leaps to the top of my mind when looking to do more on an outsourced basis is finding a provider that has best-in-class capabilities in all aspects of investing—whether it’s portfolio transitions, private markets, foreign exchange (FX), asset liability modeling, risk management, you name it. Why? For starters, building the right relationship with any provider requires plenty of care and attention. Every relationship with every external firm comes with practical incremental requirements—more contracts, more meetings and more reports and more administration, all of which can suck up enormous amounts of time. Simply put, the more providers an asset owner chooses to work with, the more potential time that can be lost in managing all those separate relationships.

Secondly, and perhaps even more importantly, coordination among different investment functions can be critical to keeping the overall investment program on track. And where confidence warrants, consolidation of accountability can be key to preventing performance slippage and managing risk. To illustrate why, let’s say a defined benefit (DB) plan sponsor has retained an overlay services provider to maintain the plan’s desired exposure—but a transition management assignment has been awarded to another party. During the transition event, constant communication between these two providers during this period of change is absolutely critical. If they fail to get on the same page, serious repercussions to the sponsor’s portfolio are very possible. Case-in-point: In the second quarter of 2023, one market hour of misaligned exposure for U.S. equities had a standard deviation—or tracking error—of +/-27 basis points. In the fourth quarter of 2022, that standard deviation was as high as +/- 57 basis points. In other words, just an hour of exposure mismanagement by uncoordinated transition and overlay activities could rob the sponsor of significantly hard-earned alpha.

This is a situation I experienced first-hand during my days as a CIO. I needed to transition assets in my portfolio while running an overlay strategy on top of that, and I had a different provider handling each task. Each provider failed to let the other know what they were doing, and guess what? While they were each doing their own thing, the market moved.

Needless to say, when this happened, my exposure wasn’t in sync with what was happening in real time, and that led to some pain in my portfolio. Ultimately, because neither provider had accountability over the project, there was no single entity to coordinate market exposure. I learned the hard way there can be value in consolidating related tasks with a single provider—a provider who can handle all tasks—in order to ensure accountability in the execution stage. Like many investors I know, there’s value in optionality. Where you are confident of expertise across multiple services, there might be significant benefit in having these outsourcing needs handled by just one provider— a provider who can take on many of the tasks, do them well, and act as a fiduciary.

The bottom line: One size does not fit all. The right provider will meet clients where they are.

I know it can sound cliché, but the one-size-does-not-fit-all saying is popular for a reason: because in so many aspects of life—OCIO included—it’s the truth. What works for Organization A doesn’t work for Organization B, and only partly works for Organization C.

Here’s the other stark truth that I learned from my days as a CIO, which I touched on at the beginning of this piece: Some OCIO providers will try very hard to convince you that going full OCIO is right for you regardless of what flavor of outsourcing you prefer. They’ll try to convince you that outsourcing your investment program from soup to nuts is your only suitable option. But to reiterate what I said earlier, they don’t know the ins and outs of your company. They don’t know the specific asset owner responsibilities you prefer to retain, what expertise you have on staff, and your organization’s comfortability level with outsourcing.

Don’t let a provider talk you into a full outsourcing model if that’s not what’s right for your company. For some organizations, it’s not about just chocolate or vanilla. It’s about the in-between—the sweet spot between pure advisory and full-on outsourcing that allows your company to move closer to its investment goals.

And honestly, for some organizations, the outsourcing need might be quite small. For instance, maybe your company just need extra hands around asset rebalancing, help with a manager transition, or someone to trade your FX or control your factor exposures. Maybe you just need a partner to manage your private markets portfolio.

Whatever your needs are, the right OCIO provider will meet you where you are. They won’t scoff at your request to only handle a few functions or assignments, but instead will embrace the work. They’ll understand that in many instances, investment outsourcing is more nuanced than chocolate or vanilla—and that a swirl cone might taste best for your organization.

As anyone who’s ever popped into a drive-in for a chilly piece of heaven on a hot summer day can attest to, a little of this and a little of that can go down pretty well.