Recent data from the Commonfund Benchmarks Studies indicate that smaller nonprofit institutions are using an Outsourced Chief Investment Officer (OCIO) for investment management more often than their larger counterparts. This trend is evident among private and community foundations and higher education institutions (zero percent of the largest higher education institutions reported using OCIO), while independent schools outsourcing data show a reverse to this trend.
OCIO is a term used to describe a third-party firm who provides investment management services to an organization. In turn, the organization delegates some or all its investment portfolio management to the third-party firm.
Note: The largest foundations cohort is defined as institutions with assets over $500 million and the smallest cohort as those with less than $101 million. The largest higher education cohort includes institutions with assets over $5 billion, and the smallest as those under $50 million. The largest independent school cohort includes those with assets over $50 million and the smallest as those under $10 million. For higher education, institutions in the largest cohort tend to have in-house investment teams.
What are considerations for OCIO that may be more applicable to smaller institutions than larger ones?
Expertise and Resources: Smaller institutions often seek expanded capacity and expertise (i.e., asset allocation, manager due diligence, risk management) and resources associated with OCIO, especially when managing complex investment portfolios. An OCIO can provide access to specialized knowledge, such as peer benchmarking and trend analysis, in addition to sophisticated investment and risk management tools and strategies coupled with day-to-day investment management and oversight.
Cost Efficiency: Building an internal investment team can be expensive. An OCIO can be a more cost-effective option for smaller institutions, reducing the need for hiring additional staff and investment resources. Additionally, for smaller institutions that have an acute fee sensitivity, the right OCIO can provide a highly aligned solution that allows them to achieve their long-term goals at a reasonable cost.
Time Management: In smaller institutions where resources are often limited and headcount is lower, staff wear many different hats and have a range of responsibilities. An OCIO allows the institution’s staff to focus on their core responsibilities while the OCIO provider handles the day-to-day investment decisions acting as an extension of the business office.
Access to Investment Opportunities: OCIO providers often have access to a broader range of investment opportunities, which might not be available to smaller institutions on their own, including emerging asset classes, alternative investments, and hard to access public and private markets investment managers. Research shows that for longer term institutional investors, considering alternative strategies can help boost long-term performance and there has been a subsequent rise in interest in alternative strategies across asset size1. OCIO can provide the ability and expertise to source and perform the extensive manager due diligence needed to fully capture opportunities in private markets. Having access to top performing alternatives strategies can be attractive to long-term institutional investors regardless of size seeking to achieve an overall return objective of inflation plus distribution such as CPI + 5%.
Agility and Responsiveness: An OCIO provider can quickly adapt to market changes, make timely investment decisions, and rebalance your portfolio to its strategic asset allocation as necessary. This can be crucial in volatile markets. Equally as important, an OCIO can support your institution by reminding staff and investment or finance committee members about the long-term nature of the investment portfolio to help avoid reactive decision making.
Governance and Oversight: Institutions, regardless of size, should strive to improve their processes and practices in governance and leadership. Working with an OCIO can help improve strategic decision-making by providing detailed reporting, education, and communication to the institution’s board and investment/finance committee.
If you are a smaller institution and want to learn more about how the OCIO model can support you, please fill out the form below.
1 Commonfund research conducted with data from the Commonfund Benchmarks Studies
