OCIO and the art of investment manager maintenance

Executive summary:

  • Many once-in-a-while tasks that institutional investors face such as manager changes and portfolio restructurings require high levels of expertise in order to execute properly
  • But for skilled OCIO providers, these are routine operations that benefit from the full-time attention of individuals with specialized expertise, tools and scale.
  • And for best-in-breed OCIO providers, these tasks are integrated with their daily management cycles—precisely the opposite of being once-in-a-while 

Amid an ongoing backdrop of heightened economic and market uncertainty, there have been grumblings in the financial industry that perhaps the outsourced chief investment officer (OCIO) model has lost its appeal. Some have even gone so far to declare the OCIO model broken. Perhaps distracted by inflation running near 40-year highs and the threat of a looming recession, it might seem tempting for organizations to deprioritize OCIO as a nice-to-have rather than a necessary-to-have.  And for some early adopters, it’s easy to understand a little buyer’s remorse if they’ve experienced a one-size-fits-all OCIO solution instead of a flexible solution that would be adaptable to the varying markets and the unique circumstances of these asset owners.

But is it broken? I strongly believe the answer is a resounding no. I contend that the case for OCIO today is as strong as ever before, and believe that for most organizations, not evaluating the potential of outsourcing some—or all—of their investment needs may be a mistake. Let me explain why—using manager monitoring and replacement as an example.

Car troubles and OCIO. Say what?

I suspect most of us have been in this situation before: You’re in a hurry, driving to work for an important meeting, when one of those scary-looking warning lights appears on the dashboard of your car. You panic and consider pulling off to the side of the road and calling a car mechanic for help, but that meeting is an extremely important one that you can’t afford to miss. So you cross your fingers and continue down the road, hoping that whatever issue is ailing your car simply goes away.

To your surprise, the warning light goes off as you pull into work. Breathing a major sigh of relief, you make the meeting on time and drive home later in the day with no additional car trouble—the dashboard warning light doesn’t flick back on. But in the back of your mind, you know you probably haven’t seen the last of it—that this light will inevitably start flashing again sooner than later. Hold this thought: I’d venture to say all asset owners have had a mental warning light light up in the wake of disappointing manager results versus expectations, then flash off again as a good quarter rolls in.

Back to the car thing. A few days pass by with no issues, and then the warning light comes on again when you’re midway through the morning commute. This time, it stays on, leaving you with no choice but to immediately pull over to the shoulder and call for roadside assistance. And while automotive repairs are something many of us could do, there’s no question in my mind that someone who fixes cars every day is going to do a better job than I could do. The asset owner parallel here is now you know you need to change out the manager. Ask yourself, is your manager oversight and change process in your wheelhouse or might you sleep better at night if you had delegated responsibility for monitoring and execution to an expert?

Enter OCIO—a potential solution to all of this.

The value of OCIO as a risk management tool

Think of your company’s investment program as your car, and an OCIO provider as the team of automobile experts tasked with ensuring that your car is always in tip-top shape and running smoothly. Because just as a skilled car mechanic routinely conducts checkups on the health of your vehicle, an OCIO provider should routinely assess the health of your organization’s investment program—and take the necessary steps to fix any problems. For instance, if a manager in your portfolio is showing early signs of a breakdown, a skilled investment outsourcing provider will remedy the situation before any lasting damage is done. But just how, you might ask? And isn’t this something that can just be done internally?

These are both valid questions. Let’s unpack the answer to the first question by starting with the specific process that we believe a skilled OCIO provider will undertake when manager performance is an issue. We see this as a process consisting of two steps: ongoing diagnosis and decision making, and when needed, a comprehensive implementation toolkit. I’m confident that by the time we’ve walked through this process, you’ll also see why we believe that fixing your manager roster yourself is similar to fixing your own timing belt—for many, it's something you don’t want to do.

Step 1: Diagnosis and decision making

The first step in this process, diagnosis, sounds simple enough. But diagnosis sounds too much like a project, not a process. The question of whether a given manager continues to be the right manager may have as much to do with the role that strategy plays as part of your overall asset class structure as it does with the manager itself. In reality, what appears to be a manager problem often is a bigger problem than originally thought. While many asset owners monitor portfolio progress via quarterly returns and perhaps biannual review meetings, a best-in-class OCIO has dedicated, experienced portfolio managers with access to daily holdings-based visibility into manager portfolios—as well as visibility into the role each manager plays in the aggregate asset class structure. Additionally, many asset owners don’t have a bench of potential replacement managers at the ready. A skilled OCIO will have this information at its fingertips to model what if scenarios in order to evaluate the impact of alternate manager line-ups. So while a manager change decision may appear  binary, an OCIO should bring a more nuanced perspective to reaching the ultimate manager retention or replacement conclusion.

Step 2:  Manager change implementation

So now let’s agree you’ve made the decision to adjust your manager structure and need to execute. Picking up on the perhaps fractured transportation metaphor, you’ve reached the conclusion that your car needs attention. Do you fix it yourself or take it to a mechanic who fixes cars every day? The answer probably depends on your experience in auto repair. Lo and behold, the same thing applies for transitioning assets between managers.

So, yes, a seasoned investment staff that has changed managers 20 times won’t be fazed by swapping managers a 21st time. But many organizations don’t have teams like those in the driver’s seat. For many organizations (especially for those without an experienced defined benefit plan investment staff), a manager change can be their first time at the rodeo—and the experience can be more than daunting. Trust me when I say that even with top-tier advice to guide you, nothing can prepare you for doing the actual implementation yourself. So, why go at it alone, especially when a best-in-breed OCIO provider with all the right tools and resources can take the reins?

This is another instance where I believe an OCIO provider demonstrates their full worth, as delegating these tasks may save organizations months of time and more effectively manage risk, not to mention relieve a boatload of worries. A best-in-breed OCIO provider will have a full suite of capabilities and services, including a dedicated transition management team to run point during the entire manager-change process. This is because skilled OCIO providers are designed specifically to handle complex situations like this. In short, changing managers is a capability for an OCIO provider—rather than a project.

When you partner with an OCIO provider, all your bases are covered, from process to governance to market sensitivity to being able to see across multiple managers to risk management and implementing. You have the comfort of knowing that your plan will be well-managed by a team of experts, and that any issues that crop up will be addressed in a timely fashion. This sure sounds like it might be a pathway to a better sleep to me.

The value of placing your investment program in safe hands

Let me be clear here: The point of this article isn’t to say that the services an OCIO provider offers are tasks that in-house investment teams are unable to accomplish on their own. These tasks can be learned, and I’ve seen firsthand some of our long-time consulting partners master them. But many of these tasks tend to be enormously complicated and require high levels of expertise in order to execute properly. In other words, most can only be carried out the right way after years and years of experience.

But as mentioned before, more effectively handling manager changes should be a pretty fundamental advantage of partnering with an OCIO firm. A more subtle challenge for many asset owners is dynamically managing good managers. For example, the sounds simple, but hard to do process of taking profits from an outperforming manager and reallocating to a recent laggard is a perennial challenge for many asset owners. This should be another area where a good OCIO can improve on the do-it-yourself or not-do-it-at-all concept, earnings its fee by nimbly picking up basis points.