What is OCIO?

OCIO stands for outsourced chief investment officer, or, more broadly, outsourced investment management. The term refers to the full or partial outsourcing of an organization’s investment function to a third party. In most cases, the third party is an asset management firm or investment consultant. In delegating investment tasks to a third party, the organization typically retains some level of fiduciary responsibility—often times, maintaining control over the strategic asset allocation—while other fiduciary duties are transferred to the OCIO provider.

Who uses OCIO, and why?

Defined benefit plan sponsors, and non–profit organizations partner with OCIO providers to satisfy a range of objectives, including fiduciary requirements, enhanced governance structure, improved funded status 1, decreased volatility, risk reductions and lower costs.

How can OCIO help establish a robust governance structure?

One key reason an organization may shift the management of its investment program to an OCIO provider is to improve its governance structure. The traditional governance model used by organizations to make investment decisions is rife with several shortcomings, many of which have been exacerbated by today’s increasingly complex regulatory and investing environment.

Many companies, for instance, establish and review their investment policies and asset allocation during quarterly meetings run by an investment board or committee. This means that on an annual basis, a shockingly small amount of time—as little as 16 hours—is spent making high–impact investment decisions for corporate pension plans, defined contribution plans, university endowments and more.This isn’t even remotely close to the ballpark range of time we believe is necessary to review and refine an investment strategy.

An OCIO provider, by contrast, works to establish an improved, robust governance process for organizations, with the provider assuming daily oversight of all investments. A skilled OCIO provider will have the superior resources, expertise and implementation capabilities that this day–to–day attention demands, with clear visibility into a portfolio’s holdings at any given time. This is crucial due to the volatile nature of markets, where yesterday’s winners can become tomorrow’s laggards in the blink of an eye, as the events of last spring demonstrated all too clearly. Just as significant, market volatility can sway investors from their long–term goals, tempting them to make hasty decisions at odds with their overall strategic objectives. A strong, well–defined governance process helps prevent this from happening, ensuring that the organization does not stray from its previously–established investing mandates.

How can OCIO help with strained resources?

A year into the pandemic, with more and more companies facing resource constraints and tighter budgets, there’s increasingly less time to spend on activities that aren’t core to the business. A public electric utility, for instance, is better served focusing its time on power generation and distribution efforts than on managing employee retirement plans. Yet both demand stringent, around–the–clock attention.

That’s where an OCIO provider can step in.

How can OCIO help improve access to best–in–class money managers?

The right provider will not only have a dedicated team of in–house specialists to provide daily oversight and strategic advice, but also offer improved access to best–in–class investment managers on a global scale. A leading OCIO provider will be able to extensively research and rate thousands of investment managers and opportunities to find those ideally suited to an organization’s portfolio. In addition, skilled providers will possess a comprehensive risk management system—a necessity for effective portfolio management today, in our view.These systems typically show aggregated portfolio exposures across multiple managers, with a view of how exposures are likely to affective both risks and rewards—all with the click of a mouse.

Can OCIO also help with back–office functions?

Investment outsourcing also means that the OCIO provider takes charge of the associated daily administrative tasks, reducing the strain on an organization’s resources. This, in turn, frees up more time for the organization to spend on core business activities and programs—while simultaneously ensuring that its fiduciary duties are still being carried out.

Can OCIO provide cost savings?

Many organizations can also save significant amounts of money by outsourcing some or all of their investment function. How? There is a well–documented inverse relationship between asset management costs and portfolio size. In other words, large OCIO providers—with billions of dollars of assets under management—can use their scale to negotiate more competitive rates with sub–managers. They can also accomplish this by pooling the assets of multiple organizations together. In aggregating this buying power, OCIO providers can pass along these efficiencies, which are, quite frankly, unachievable when an organization negotiates independently.

Another popular feature offered by leading OCIO providers is transition management. Organizations seeking an asset allocation policy or investment manager change can reduce unnecessary costs and risks by partnering with an OCIO provider to execute a well–planned transition management strategy. The cost–saving benefits of this can be substantial, due to the reduction in trading costs stemming from the provider’s ability to consolidate multiple transactions.

Volatility and funded status improvement: Can OCIO help?

Another key reason many organizations cite when switching to OCIO is a desire to reduce volatility. This is especially important for corporate pension plans, which can face larger, unexpected contribution requirements if their plan’s funding drops below a certain level. Defined benefit plans under the management of a skilled OCIO provider can experience significantly less volatility of funded status movements, leading to a smoother overall experience. 

Best–in–class OCIO providers also offer the potential for improvements in a plan’s overall funded status—an objective which is likely to increase in scope due to the dramatic drop in discount rates since the onset of the pandemic.

A range of custom, uniquely tailored solutions

It’s worth emphasizing that, above all else, there is no cookie–cutter approach to OCIO. The goals and objectives of organizations that have made the decision to outsource vary widely across the spectrum, and so too do the range of potential solutions. Leading OCIO providers will be able to draw on their flexibilities and utilize the proper set of tools to align their investment outsourcing services with the precise needs of each organization. In our opinion, the emphasis placed on customization is one of the key calling cards in a trusted OCIO partner.

Some organizations may choose to only outsource a partial set of services—such as risk management or transition management—while others may opt to take a full, holistic approach. The lack of a one–size–fits–all solution means that each organization receives its own uniquely tailored solution based upon itsgoals, circumstances, values and beliefs. Ultimately, we believe that this improves the likelihood of the organization achieving its goals, without compromising its values or beliefs.

The bottom line

In today’s topsy–turvy pandemic world, companies are beset by a multitude of challenges. Investing shouldn’t be one of them. Consider partnering with a skilled OCIO provider to improve your organization’s governance process, alleviate resource strain and reduce your overall costs. Let us know how we can help.

1Funded status refers to the extent to which a pension plan's liabilities are ‘funded’ by plan assets.