Does scale matter when choosing an OCIO provider?
When looking for the right OCIO partner, does scale matter?
The honest answer is yes and no. If you check out the annual Outsourced Chief Investment Officer (OCIO) survey from this February's issue of CIO magazine, the critical reason cited for outsourcing by institutional investors was due to a "jump in the lack of internal resources, even as the need for better risk management also climbs."
Logic dictates that the ability to meet resource-heavy demands requires size, simply because significant scale allows for significant resource availability. According to the accompanying article, institutional investors began moving away from boutique OCIO providers in 2016. Why? "As conditions become more challenging institutional investors are asking for more from the best providers."
We agree with these clients. Managing large pools of assets successfully is more complicated than ever. Frankly, I believe the barrier to entry in our fragmented OCIO market is too low. Fortunately, the harsh realities of business and of markets tend to winnow out the inferior firms.
But how should an institutional investor choose the right OCIO provider? Certainly, size is not the only criteria, nor should it be. But it can provide a guiding light, simply because large firms have tended to get large by succeeding over the long-term. So how to choose? Let's simplify it. For an OCIO provider to succeed today, on behalf of their clients, I believe they need three key things:
2. The ability to deliver the desired outcome
3. Scale—the systems,infrastructure and economic power
Why experience matters
Of course experience matters. The thought of even questioning the value of experience, in today's complex markets, seems frivolous and self-serving, right? But it's worth restating.
Increasingly, we hear from clients that they have no desire to provide on-the-job training to their OCIO provider. I believe clients are looking for a provider with callouses—one that has both run with the market bulls and fought off the recessionary bears. And while OCIO providers should be innovators, they should also have enough real-world experience to be skeptical of the shiny new object and stay focused on solutions that add real value.
Experience can help a firm focus on what matters at the strategic level. Experience has taught us that for many clients, beating benchmarks is a poor proxy for the real objective which is to fully fund the associated liability at the lowest total cost without taking on risk that would lead to mission impairment or be a fatal blow to the sponsor. While liability-driven investing is far from new, the outcome-driven focus it provides is a vital reminder to us and to the rest of the industry to pay attention to what matters most: the best interests of our clients. If experience has not taught us OCIO providers to be better stewards of our fiduciary responsibility, then we haven't been listening.
One of the most important results of experience is the day-to-day understanding of what it means to be a plan sponsor—and the struggles that come with this challenging job. With decades of sitting on the same side of the table as our clients, we've come to recognize that sometimes the stress is more about the next board meeting than it is about funded status. We've also realized that humble administrative tasks can be overwhelming, so focusing on supporting those areas–on street-level client satisfaction–can matter almost as much as strategic support. But there's a catch—in order to provide that breadth of support, a provider needs substantial scale.
Focusing on the ultimate outcome
The most gold-plated levels of service will only take you so far. At the end of the day, nothing matters more than results and the ability to deliver those results consistently. With scale comes the ability to provide downside protection—in the form of robust risk management—and upside potential—in the form of performance capabilities.
It's no surprise that markets continue to become more global and more complex. But our current late-cycle market also provides the one-two punch of a low-return environment as well as the risk of a significant market correction. We believe to successfully turn over every rock in the search for return sources and simultaneously protect against downside requires the right in-house expertise, the right access to opportunities and the right data systems and analytics.
To improve risk management, we've pioneered a move from a portfolio of asset class sleeves toward a multi-asset approach, in which all members of the investment team take ownership of the entire portfolio. Russell Investments expanded our Multi-Asset team globally, building it up to over 75 people, as a key part of our team of more than 250 investment professionals. We've focused even more on our risk systems and execution services, in order to expand our ability to take a total-portfolio approach. We strategically broke down the silos in our regional and asset-class-based investment teams to a single, globally integrated investment team. The investments we have focused on with clients have become less benchmark-focused and more outcome-oriented. We aim at solving a specific challenge rather than trying, bucket-by-bucket, to fill out a portfolio.
But none of this comes for free. If a provider is not of significant size, it's frankly challenging to make the investments in these vital resources.
The economy of scale
The scale that comes with significant assets under management can make it possible for a provider to deliver much of what we've discussed. But it can also allow the associated fee structure to still be palatable for clients. There's no trick to this. It's a simple economy of scale that allows the cost of building a capability to be spread across more clients.
That more-clients part is key as well. As one of the world's largest OCIO providers, we've had both the honor and the learning opportunity that comes with solving problems for many of the world's most demanding investors. And with a systematic approach that captures and applies those learnings, even the smallest client can benefit. And benefitting clients—well, that's what this is all supposed to be about.
The big picture
As the OCIO provider landscape continues to evolve, we believe many clients will continue to gravitate toward OCIO firms that put their experience and scale to work on delivering specific client outcomes. Size may not be a perfect indicator of service capabilities or investment skill, but for all the reasons described above it can be an important clue for institutional investors looking for the right OCIO provider to partner with. And this process of evaluation doesn't end with the decision to hire an OCIO. Going forward, it makes sense to periodically ask the question: Is my OCIO provider still putting their size to work in a way that is enhancing the opportunity to meet my desired outcome?