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 Outsourced Management (OCIO)?
OCIO is the practice of delegating a significant portion of the investment office function to a third-party provider, typically an investment management or consulting firm. The terms “outsourced chief investment officer” or “OCIO” are frequently used to describe this process, which encompasses a wide range of models depending on the degree to which the institution commits itself to delegation of investment discretion and the operational methodology it employs in carrying out its decision.
Smaller institutions may benefit from a set of efficient and standardized portfolio choices, while for mid-sized and larger investment pools 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 as well as implementation via portfolio construction and asset allocation, manager due diligence and ongoing monitoring, portfolio rebalancing, risk management and reporting. The OCIO 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.
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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.