Evaluating outsourced CIO (OCIO) performance is not straightforward, nor is it impossible

Outsourced CIO (OCIO) is growing. With that growth comes the need to evaluate the success of OCIO providers: is your provider delivering on expectations? How does your provider compare to others? But because OCIO is a broader-ranging service than traditional investment management, evaluating the success of an OCIO mandate is less straightforward.

Five challenges

In the recent issue of Communiqué, our institutional client newsletter, Peter Corippo and I discuss some of the challenges associated with the evaluation of OCIO and how they are being addressed. As an added bonus, our communications folks had us produce a short video, too, so if you want to see Peter and me making our best media-friendly efforts on camera, watch the video.

The full article reviews five of the reasons that evaluating OCIO is a tougher task than evaluating traditional investment management. Summarizing, these are:

  1. Joint responsibility. Some of the most important decisions in an OCIO mandate may be made jointly by the investor and the OCIO manager. Where decisions are shared, it can be difficult to apportion responsibility when things go well, or not so well.
  2. Outcome-oriented. While OCIO often looks past a market benchmark to the investor’s end objectives, “Did we achieve our desired outcome?” is not the same question as “Did the OCIO provider do a good job?”
  3. Strategic asset allocation is a big factor in ultimate success. Assessing the success or failure of a strategic asset allocation decision – based as it is on a trade-off between risk and return – can be difficult.
  4. Subjectivity. OCIO is a suite of services, some of which can be assessed only subjectively.
  5. Comparisons across providers are not like-for-like. Investors – and the press – love league tables. But OCIO mandates vary in their scope and in the extent of the risk taken on, so meaningful direct like-for-like comparison is much more difficult. At best, any such comparison must be multidimensional.

Challenging, but not impossible

While the evaluation of OCIO can be challenging, it still must be done. One principle is the need to use multiple metrics in any evaluation. A multidimensional framework can focus on measures that fall within the OCIO provider’s control. Secondary objectives can support a primary performance benchmark and help the investor evaluate the provider’s contribution toward accomplishment of the key objective. It’s critical that the investor and the OCIO provider agree up front on this suite of metrics, and on the periods over which each will be measured.

To that end, our article includes one example of what a reporting structure for an OCIO mandate might look like, and how assessments against the chosen measures of success can be built into the OCIO provider’s reporting process.