Key takeaways:
- Outsourcing specialization—like cash equitization or hedging strategies—can free you up to focus on your core assignments.
- Adding expertise—such as implementing a private markets strategy—can help increase bandwidth and portfolio performance, by expanding your team capabilities.
- It’s OK to start small—by outsourcing a single assignment. That way, you can see if the experience is right for you.
I recently celebrated another trip around the sun, which meant I couldn’t let the occasion pass without enjoying some birthday cake. As I mulled over which type sounded best—chocolate, red velvet, or strawberry—I realized there were three ways of obtaining this quintessential birthday treat. I could make it myself, I could ask a friend to do it, or I could go to a bakery.
As you would expect, each option involved costs and resources. The first choice—doing it myself—meant I’d need to purchase the ingredients and spend an ample amount of my limited time making the cake. The second option—asking my friend to do it—meant I’d need to pay them and then they would have to carve time out of their busy schedule to prioritize making the cake. Because both of these choices placed the entire burden on a single resource (myself or my friend), neither sounded appealing to me.
The third option of buying a cake at a bakery, however, struck just the right chord. In this scenario, the cost to get the cake was about the same as in options one and two, but from a resourcing standpoint, there were far less constraints. The job of making the cake wasn’t on me or my friend—it was on a well-resourced bakery staffed with multiple employees and stocked with a vast supply of ingredients. And, perhaps just as importantly, getting the cake from a place that specialized in baking tasty deserts ensured that the cake would probably taste pretty darn good. (No offense to my friend or to my own ego.)
So, what does my experience purchasing birthday cake have to do with OCIO (outsourced chief investment officer)? At a high level, the process for deciding who does the work is remarkably similar—whether that work consists of making a cake or managing investments. I.e., will the assignment be handled alone? Given to a teammate? Or transferred to a third party?
Let’s dive deeper into the investment-management process by exploring each of these choices from a cost and resourcing standpoint. When we’re done, I’m confident you’ll agree that OCIO and a slice of cake from a bakery have something key in common. They both go down well.
Resource constraints
For most new investment leaders, the budget and resources they’re given to run an organization’s investment program are etched in stone. By this I mean they’ve already been set and decided upon before the leader arrives on the job. Take it from me, a former CIO with a two-decade stint at a public energy utility. As the head of the utility’s investment program, I had a staff of two and a budget that was inflexible. There was no chance I was ever getting more budget dollars to add another staff member.
And yet, the amount of work on my plate was staggering. I had to rejigger the company’s investment policy and research top-performing managers across a wide breadth of asset classes. I had to figure out how to set up a dynamic asset allocation and ensure our portfolios could withstand a slew of potential challenges. I had to implement these strategies efficiently and effectively … and so on and so forth. You get the drift.
By reducing your operational burden, you're free to focus on what matters most to you.
I soon realized—as have many investment leaders before and since—that my team and I simply could not do everything we wanted to do. As a staff of three, our internal resources were too stretched, and there simply weren’t enough hours in the day. So I was faced with the ultimate decision: I could either do less, or somehow find a way to do more with the same.
Expanding your budget
How could I possibly do less? Well, there was one way—I could simplify the structure of our portfolios by using more passive strategies instead of actively managed ones. But that meant leaving potential money on the table. As a fiduciary, that didn’t sit right with me.
What about doing more with the same? A tall ask, right? That’s how it seemed to me at first, anyway, before I had an epiphany moment. While it was true that I couldn’t get more internal resources, what about external resources? Was there a way to utilize my budget to outsource some investment assignments to an external provider? That way, I reasoned, my team and I would have more time to focus on urgent assignments, while tasking an OCIO provider with other work that still needed to get done.
The answer, I soon discovered, was a resolute yes. In a nutshell, partnering with an OCIO provider allowed my team to do more with the same—because OCIO essentially extended my team. We started by transferring cash equitization and currency hedging assignments, which freed up bandwidth for myself and my team members to handle other pressing functions. Our outsourcing journey was gradual, but in time, I came to realize that fully leveraging my external resources allowed me to run a more efficient and productive investment program. And at the end of the day, that’s what OCIO is—a service that allows you to expand your resource budget so that you can do more with the same.
I also contend that OCIO also allows organizations to do better with the same. For instance, maybe your organization is managing an allocation to small cap equities. But are you getting the most out of it? How much money is being left on the table? Working with a provider that specializes in finding best-in-breed managers—for instance, a manager of managers—could be a real eye-opener. They might use strategies that you’ve never thought of, or work with managers you’ve never heard of.
The private markets example
By harnessing the external resources that come from an OCIO partnership, organizations can also gain access to complex investment solutions they typically would not have the capacity to take on themselves. A highly relevant example of this is private markets.
We believe the private sector today is rife with investment opportunities, especially as the number of publicly listed firms continues to shrink. And we’re not alone—I’d bet a pretty penny that any recent asset/liability modeling study would show that incorporating an allocation to private equity, private real estate, and private credit is beneficial to long-term investors. To put it bluntly, for many organizations, incorporating alternatives into an all-weather portfolio is strategically a no-brainer.
But deciding you should add an alts allocation is the easy part. The hard part is the walk and talk—the implementation of these strategies. Call it the big-brainer. Integrating private markets into a portfolio is a highly involved process that involves things like capital calls, hiring managers, managing distributions over time, valuations, and accounting. These are all complex assignments. They’re not straight forward—and they eat away at time and resources. This isn’t to say organizations can’t take them on themselves—but at what cost? How much time will they suck up? What other priorities will be forced to take a backseat?
In many cases, this leads to two choices: Foregoing private markets all together, or hiring a specialist that can slot in a turnkey alts solution. I’d find a way to do more with the same by choosing the latter.
The bottom line
Look, I get it. Managing an investment program is an intensely demanding job—made even more so stressful by today’s cost-cutting environment, complete with tight budgets and thinly staffed internal teams. But we believe there’s a solution if you tap into your creative juices and grow your resources. Ask yourself, what am I doing today that someone else could do? What am I not doing today that someone else could do?
Jot down your answers. And then consider using an external investment solutions provider to handle these tasks. Because just like with birthday cake, some things turn out better when they’re put on someone else’s plate.