Executive summary:
- OCIO, or Outsourced Chief Investment Officer, refers to the complete or partial outsourcing of an organization’s investment program to an external party, such as an asset management firm or investment consultant.
- An OCIO provider can help extend your investment program's staff, lower your investment costs and potentially reduce volatility.
- We believe that the best OCIO providers offer customized, uniquely tailored solutions based upon an organization's goals, circumstances and values.
What are the benefits of Outsourced Chief Investment Officer (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, such as 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 outsourced CIO provider.
Who uses OCIO?
Institutional investors such as defined benefit plan sponsors, defined contribution plan sponsors, healthcare systems and non-profit organizations partner with outsourced CIO providers to satisfy a range of objectives, including fiduciary requirements, enhanced governance structure, improved funded status, decreased volatility, risk reductions and lower costs.
How can an outsourced CIO or OCIO model improve governance?
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 investment management outsourcing provider, by contrast, works to establish an improved, robust governance process for organizations, with the provider assuming daily oversight of all investments. A skilled 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 supplement your strained resources?
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 investment outsourcing provider can step in.
How to choose the right OCIO provider for your organization
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. Top OCIO providers 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 outsourced CIO 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, investment outsourcing providers can pass along these efficiencies, which are, quite frankly, unachievable when an organization negotiates independently.
Another popular feature offered by leading investment outsourcing providers is transition management. Organizations seeking an asset allocation policy or investment manager change can reduce unnecessary costs and risks by partnering with a CIO outsourcing 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.
How can OCIO help manage risk and reduce volatility?
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. In addition, because PBGC (Pension Benefit Guaranty Corporation) premiums are determined by how well-funded a plan is, a sponsor’s rates may increase if such a drop in funded status occurs at a time when the plan is under PBGC review. Defined benefit plans under the management of a skilled CIO outsourcing provider can experience significantly less volatility of funded status movements, leading to a smoother overall experience.
Best-in-class investment outsourcing 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.
What is the benefit of a custom, tailored OCIO solution?
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 investment outsourcing 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 its goals, 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 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.