Step five: Ongoing management to adapt and stay on track

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The critical fifth and final step in an investment program is understanding how it is tracking. This includes identifying if there are areas of the program that aren’t working and what can be done to get back on track. Once an investment program is setup, it can be easy to fall into a trap of ‘set and forget’. But to have the greatest chance of success, your investment program needs constant attention.

Manager oversight—but that’s not all

In today’s market, many outsourcing conversations revolve around the task of selection and monitoring of money managers. Those are the key components of ongoing management. But that’s far from the whole outsourcing story.

OCIO providers bring specialist focus and greater responsiveness to the manager oversight process. But they also bring a specialised approach to the asset classes lined up side-by-side in silos, helping to coordinate risk exposures at the total portfolio level. Manager styles can drift over time and without the right specialised insight and resources to continually monitor this, a portfolio can leave itself open to eroded diversification or unintended risks.

OCIO provides visibility

A key need of managing an investment program is having enough visibility to truly manage the investment program. Knowing exactly what risks are held in a portfolio, how those risks aggregate, and the impacts of those aggregations. How does OCIO solve this? World-class OCIO providers come with sophisticated risk-management platforms. Ideally, the platform is security-based, updated daily and able to provide actionable information. Instead of the CIO or those responsible for managing the investment program needing to mine for answers, the OCIO provider provides clear visibility into the holdings of client portfolios. At Russell Investments, our team knows precisely what our OCIO clients own at any given time and can share that as required.

OCIO helps to navigate the storm

During aggressive market sell-offs, its normal for asset allocations to move outside of allowed ranges. This creates the need to deal with the question of rebalancing. For those of us without OCIO in place, rebalancing decisions can be subject to committee approval and discussion. Investment committees, however, are composed of human beings and this can often cause fear to impede or delay a rebalancing decision that was designed in calmer times to ensure a specific risk budget was maintained.

We all have that fight-or-flight reaction when faced with an uncomfortable situation. Even for rebalancing, where the strategy is intellectually compelling, heart rates can still increase when a planned-for risk becomes palpable.

So, how can you take some of the emotion out of the rebalancing process? Partnering with an OCIO provider, can reduce the impact of emotion by delegating rebalancing responsibilities and documenting the key parameters in the investment policies. In choppy markets, where the policy calls for portfolio changes, it needs to be done in the most cost-effective way possible. Minimising transaction costs requires a world-class trading capability, but also requires traders with decades of experience. It's vital for your OCIO partner to know through experience what it costs to move money in normal markets as well as what you are up against when moving money in stressed markets.

A best-in-class OCIO solution should be designed to improve many aspects of the investment program and includes the daily risk management required to ensure that a portfolio is positioned every day to meet the organisations objectives. This means an investment program is not a set and forget once implemented. It requires the right oversight and ongoing management to ensure that the investment program stays on track, can adapt if needed and can sustain to meet its investment and funding objectives.

Configuring an investment program around your desired portfolio outcomes is hard work. The Manage step is key to increasing the likelihood that hard work will pay off. By understanding what you own, where you want your portfolio to be and having the tools to get the portfolio there efficiently, you ensure that your investment program stays aligned with the portfolio design unique to your organisation.