The Right OCIO Can Cure Insomnia in Restless Markets

Even in normal times, managing an investment program is a challenging job. But when you add on tariffs and trade wars, it's bound to lead to some sleepless nights. Learn how an OCIO firm can provide relief. 

Can an OCIO provider help during times of market volatility?

I'd sure say so. As a former chief investment officer (CIO) who had to navigate the 2008 Global Financial Crisis without one, I wish I’d known then what I know now from sitting on the other side of the desk.

Let me explain.

First, a skilled outsourced chief investment officer or OCIO can help your organization establish the right investment strategy well before the going gets rough. This is critical because the overwhelming majority of an investment program's success or failure can usually be traced back to its strategic asset allocation and liability-hedging strategy. Strategic asset allocation is a high-impact, but low-frequency decision. If it's done right, it shouldn't need to change much—even during a global trade war.

Coordination chaos

When major market events strike, it’s even harder to generate excess returns. As a CIO, trying to do this on my own by assembling the best managers meant facing one terrifying truth: Coordination across managers was limited.

For instance, no one expected Manager A to have any visibility into or responsibility for understanding anything in Manager B's portfolio. If their combined exposures created common active-management biases such as high volatility or beta and momentum, that was my responsibility. I always knew that. But I didn't understand how poorly equipped I was to meet that challenge—until the hard questions came at the hardest possible time. During GFC.

When the CFO asked about my company's exposures—about what we owned and what it was worth—it was a tough question to answer because my aggregate manager view was limited. The review cycle occurred no more often than once a quarter and even then, it wasn't a live view. It was decidedly backward-looking.

Clear visibility

Fortunately, as I learned once I came to an investment solutions firm, it doesn’t have to be this way. World-class OCIO providers have robust risk management tools that can see the entire holdings in a portfolio—all the way down to the street level.

For instance, at Russell Investments, our METRiQ platform lets us know precisely what our OCIO clients own at any given time. This information can be shared with clients on demand. It’s not hard to imagine hearing a news report on tariffs and being asked by your investment board how that may impact your current holdings. Hopefully, it's also not hard for you to imagine sending an urgent request to your OCIO provider and getting a thorough analysis back in time for your board meeting.

Rebalancing roadblocks

As a CIO in 2008, my organization's equities cratered, causing asset allocations to move outside of allowed ranges. I had to deal with the question of rebalancing. Because we didn't have an OCIO in place, these decisions were often subject to committee approval and discussion. 

The problem? Investment committees are composed of human beings and this "let's discuss it" process often caused fear to impede or delay a rebalancing decision that was designed in calmer times to ensure a specific risk budget was maintained. 

Many times, staring down the fear and reverting to the planned strategy represents the best option for recovery. Best-in-breed OCIOs know this and can act accordingly by removing emotion from the decision.

Parking your emotions

At Russell Investments, we do this by assuming rebalancing responsibilities and documenting the key parameters in our clients' investment policies. For these clients, it would be rare not to execute according to the policy. But in choppy markets, we still keep a close eye on things, focusing on managing risk and potential buying opportunities. 

Our objective is to do all of the above in the most cost-effective way possible. Minimizing transaction costs requires a world-class trading capability. It also requires traders with decades of experience—through bear markets, drops and bounces, and so many unexpected events that the traders become wired to expect the unexpected. 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.

One more thing

In addition to rebalancing, many investment programs could benefit by moving beyond hedging strategies that are solely focused on fixed income to take a total portfolio approach. Including an allocation to Treasuries usually provides both capital-efficient duration as well as downside risk management. But a total-portfolio-driven OCIO solution looks beyond just fixed income, including alts, overlays, and other less traditional diversifiers.

The bottom line

With all that's going on in the world right now, managing the day-to-day operations of an investment program may seem like an exceptionally tall order. But it doesn't have to be. Consider reaching out to an OCIO provider to help you sleep better at night.