U.S. OCIO for non-profits and healthcare: A nimble overview

Executive summary:

  • While corporate pension plans have traditionally been dominant OCIO clients, more recently endowment and foundations are making up a growing share.
  • Since the pandemic, healthcare organizations have turned to OCIO to better align their assets and operating funds. 
  • Opportunities exist for a range of different OCIO implementation services as clients consider how to delegate OCIO tasks. 

On Sept. 6, Howard Moore, associate editor of custom content at Pensions & Investments, invited Lisa Schneider, CFA, managing director and head of client solutions at Russell Investments; Suzanne Bernard, not-for-profit practice lead at Northern Trust Asset Management; and Tom Kennelly, senior investment strategist OCIO at State Street Global Advisors, to a discussion on OCIO (outsourced chief investment officer) for non-profits and healthcare. Heather Myers, partner and nonprofit solutions leader at Aon, moderated the panel.

Following is a recap of the key highlights from their conversation.

Myers began by explaining that while corporate pension plans had been the dominant OCIO clients, in the last few years, there has been an increase in endowment and foundations making up a growing share. Additionally, since the pandemic started, many more healthcare organizations have turned to OCIO to better align their assets and operating funds. With that, Myers explained that the discussion would revolve around the key issues that endowments, foundations, and healthcare organizations are facing and how OCIO has helped them deliver strategic objectives.

What does each of you see broadly in your practices in terms of nonprofit clients and their mandates?

Kennelly, with State Street Global Advisors, started by saying that a key role for OCIO providers is to educate clients and help them navigate through the complexities amid turbulent environments.

Schneider, of Russell Investments, agreed with Kennelly and added that a broader range of endowments and foundations and other clients that had followed the endowment model are now thinking differently. For example, some public higher education foundation clients are increasingly being called on, post-COVID, to support a greater percentage of the school's operating budget.

“That changes their spending dynamics, their need for shorter-term liquidity and to some degree that changes the way we think about what's the optimal portfolio for that type of client,” Schneider said. Also, mid-size nonprofits that were considering OCIO—those with a small internal staff of two or three people—are starting to consider full or partial OCIO. “We have clients that for one reason or another have not wanted the lock up on private equity in the past, but now are willing to consider things like private credit where the lockup might be a bit shorter and yet it allows for a higher yield opportunity as well,” Schneider said.

Bernard, of Northern Trust Asset Management, brought up the importance of good governance and how it’s a huge driver of an OCIO structure, making sure the roles and responsibilities of each group are articulated—pointing out that each stakeholder is critical.

What are some of the key portfolio management issues that endowments and foundations face, including things we've already discussed like liquidity and inflation and spending considerations, and how are you working with them to create solutions?

Bernard, who shared a slide, talked about revisiting basics, having the right liquidity and being discerning with private equity.

Schneider agreed and said nonprofit clients are having the most challenges asking questions on spending amounts and whether that needs to flex during different economic environments. “We model for clients that have these concerns. What is the impact of spending a higher amount during a challenging economic environment where the entities that you support may need greater support during a challenging environment and then you reduce spending during the strong economic environments—sort of that safe or rainy day philosophy—and how does that dynamic need to change?”

The COVID pandemic has far-reaching effects on healthcare organizations’ operating assets, their balance sheets, their overall enterprise risk management and much more.

What do you see among your healthcare clients and how are you addressing the issues they're facing now?

Schneider showed a slide depicting the impact of the post-Covid market environment on healthcare systems.

“It's sort of that perfect storm where COVID has impacted them in terms of a very sharp drop in revenue at the same time where you have dramatically increasing expenses,” she remarked.

Schneider then introduced a three-pronged approach: operations, financing and investments. “The investment strategy now is supporting the entire enterprise-wide financial plan, and it's really important for it to be flexible enough to support both balance sheet resiliency—which may be needed in an environment where their operating margins might still be pressured—and long-term growth. So there is this push-pull dynamic where you don't want to get too conservative in the desire to support balance-sheet resiliency. But then you cut off all of your future growth. Then on the flip side, if you take too much risk and then you need liquidity, now you don't have the liquidity, which you may need to support operations.”


Kennelly agreed with many of the previous points and added that the best value to OCIO clients is to be “a flexible partner.”


Today's tactical asset allocation is not the tactical asset allocation of the late 1980s and early 1990s. It's much more refined than that. What are our clients looking for in terms of investment management?

Kennelly showed a few slides while discussing tactical asset allocation (TAA). “The way we think of being nimble is not just on our views of asset classes, but our views of volatility and what we call our market regime indicator. So what that does is allows us to set our risk budget according to what we've told the client,” he said.

Bernard, who also showed a slide, added: “Relative to the fundraising boom of 2021 and 2022, we expect new fund launches, fund size increases, and the number of funds raised in 2023 to be more muted. That stated, 2023 forecasts are still predicting larger amounts of capital raised compared to 2009-2018 vintages, indicative of investors’ continued belief and confidence that private equity returns remain attractive.”

Are you seeing clients embrace investments with regard to climate change and thinking about net zero goals?

Schneider explained that global clients—those in Europe, Australia and other parts of the world—have a different imperative than U.S. clients due to climate-risk regulations. For clients that focus on climate risk, she explained their methodology is not focused solely on divestment or being 100 percent free from fossil fuels in their portfolios. “It's more of an integration approach, where understanding the manager's ability to integrate the portfolio is key,” she said. Further, clients are asking about proxy voting policies and shareholder engagement efforts.

“There are ways to impact change that are broader than security-selection decisions,” Schneider added. Finally, with the creation of renewable energies and the global economy shifting away from using carbon as the sole energy source, there are opportunities for investors of all kinds. “Whether they are seeking to incorporate a climate-aware focus in their portfolio or are just looking for diverse strategies, clients are considering global unlisted infrastructure,” she said. “Whether it's a wind farm or solar panels—there are ways to take advantage that may benefit investors whether or not they are necessarily focused on addressing climate change as part of their portfolio,” Schneider said.

Next, an audience member asked Schneider a question.

Do you have any thoughts on managing unrealized investment gains and losses with healthcare companies if you're investing in more risky assets with current higher volatility?

Schneider said clients have done customized rebalancing programs to harvest realized gains. “Not just the investment strategy has to be right, but also the implementation for healthcare systems has to align with the organization's goals,” she said. Further, Schneider said, “for organizations that really want to control when and how they realize gains and losses, they may be better suited in using commingled strategies versus full separate accounts.”

“We've had clients, particularly after COVID, that needed to recognize gains and for one or two of them, we did a purposeful full rebalance of their entire portfolio where they needed to harvest gains. You basically do a sell and a buy back of the exact securities just to fund that. For volatile strategies where there will be potential paper losses that you don't want to realize, those strategies are best placed in a commingled strategy versus a separate account for a healthcare system.”

The bottom line

The conversation wrapped up with each of the panelists providing a brief message on how the OCIO space may evolve. Schneider concluded by saying, “I think larger organizations are going to be more discerning about what they choose to delegate to a OCIO provider. There may be some tasks that they choose to keep in-house and have their staff do and then take more of an à la carte approach to what they ask their co-provider to do for them. That opens up opportunities for a range of different implementation services and different ways to work with an institutional client base.”