A Primer on Outsourced Investment Management

August 31, 2017 |
1 minute read
|

Once seen primarily as a solution for small institutions with limited resources, outsourcing of the investment management function is now widespread, with a broad range of long-term investors – including those with more substantial investable asset pools – turning to the outsourced chief investment officer model.

Properly implemented, outsourcing can help institutions to address portfolio complexity and risk management challenges, speed decision-making and contend with an increasingly rigorous regulatory environment, while enabling trustees to focus on improving institutional governance.

Among institutional investors with long-term portfolios, the practice of delegating the bulk of the investment office function to a third-party provider, typically an investment management or consulting firm, has increased steadily over the past decade. Outsourcing, as it is broadly known (the terms “outsourced chief investment officer” or “ocio” are also used), encompasses a wide range of models, depending on the degree of portfolio delegation to which the institution commits itself and the operational methodology it employs in carrying out its decision.

In a typical version of the OCIO model, the outsourcing provider designs a customized solution for the institution based on its risk tolerance, return targets and other requirements. Such a comprehensive approach includes:

  • investment policy review and counsel,
  • portfolio construction and asset allocation,
  • manager due diligence and ongoing monitoring,
  • portfolio re-balancing,
  • risk management and
  • reporting.

The provider thus assumes responsibility for the institution’s entire investment process, filling a role equivalent to that occupied, at institutions with very large investment pools, by the internal investment office staff. Services provided can range from fully customized asset allocation and implementation to the provision of comparatively standardized or specific portfolios, allocations or strategies.

While the OCIO label was historically applied to management of the total portfolio of an institution, in recent years there has been a trend toward more flexible arrangements in which only a portion of the portfolio — often specialized or more complex areas such as alternative investment strategies or operating assets — is outsourced. In these cases the OCIO serves as an extension of the organization’s investment committee or internal staff, supplementing their capabilities or expertise with additional resources.

The OCIO model has developed in response to profound changes in the institutional investment environment over the last two decades, which have placed increasing pressure on the nonprofit governance model. Volunteer boards and investment committees, meeting only four or five times a year, have been challenged to construct and monitor these complex portfolios, which have become the standard for many long-term investors. New legal and regulatory requirements, too, have placed a heavier load on fiduciaries. Taken as a whole, the investment process is far more time- and resource-intensive than ever before.

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