Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing can help institutions with both large and small asset pools to address portfolio complexity and risk management challenges. Employing this model allows institutions to benefit from more timely decision-making and contend with an increasingly rigorous regulatory environment, while enabling trustees to focus on institutional governance.
What is an ocio?
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 is broadly known as outsourcing. The terms “outsourced chief investment officer” or “OCIO” are also used. These terms 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 portfolio 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 rebalancing, 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.
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 is most often applied to management of the total portfolio of an institution, it has expanded to include 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.
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Implementation of outsourced management requires attention to the governance model that will be employed. The extent to which investment discretion is delegated by the institution’s board of trustees to the outsourcing provider depends upon the preferences, needs and capabilities of the trustees, the investment committee and the OCIO provider. Some institutions may prefer that the investment committee and staff retain hands-on control, remaining involved in all investment decisions. Other institutions and committees may find it best to delegate essentially the entire investment function to the OCIO provider, retaining approval of only the highest-level portfolio policies such as the setting of strategic asset allocation targets.
