5 Key Questions: Comparing Fees of OCIO Providers

May 8, 2019  | by Keith Luke

Outsourced Investing

The market for Outsourced Chief Investment Officer (“OCIO”) services has boomed over the last decade.  Today, OCIO assets under management are by some estimates nearly $1.5 trillion, 2.5 times the level of just seven years ago[1].  What’s more, industry estimates are for double digit annual growth among endowments and foundations over the next several years[2].

Yet with this “mainstreaming” of OCIO services, why is it that fees and expenses of OCIO providers are so opaque and difficult to compare? The easy answer is that OCIO services vary widely, with little to no definition. Hire a manager to fill a single strategy mandate – U.S. equity for example – and it’s simple to understand the manager fee and associated fund expenses. But OCIO providers can use a myriad of investment structures to build a total portfolio, from simple ETFs, index funds and mutual funds, to privately placed commingled funds to single manager strategies and for some hedge funds and private equity, fund-of-funds.

Expenses can vary dramatically not just by asset class or strategy, but by fund structure as well, so it is important to understand how any prospective OCIO provider seeks to implement your policy portfolio – remembering that the devil is in the details.

Below are five key questions to ask an OCIO that can help you make apples to apples comparisons:

1

What is included in the OCIO advisory fee? More specifically, are there “a la carte” services that the OCIO charges that are outside of the advisory fee?

2

Does the OCIO receive any other compensation or is it limited to the advisory fee? This is most common if the OCIO allocates to its own proprietary products, or if it receives revenue sharing from managers or other platforms.

3

How is the OCIO providing allocations to alternative strategies? For example, if the OCIO is providing such allocations via fund- of-funds structures, are the fully disclosed fees inclusive of the fund-of-fund provider as well as the underlying managers?

4

How does the OCIO provider charge for private, illiquid strategies? That is, are you being charged fees on your committed capital, or only that which is invested?  It makes a big difference.

5

What is included in fund expenses? Is it just custody, or more inclusive of audit costs, performance reporting, etc.?  Everyone pays these expenses, but they are rarely consistently disclosed.

Fees and expenses are always an important consideration in selecting an OCIO provider and asking detailed and probing questions of potential providers is critical in a diligence process.

outsourced investment management

[1] Source: 2018 Pensions & Investments

[2] Source: 2018 Cerulli Associates

Authors

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Keith W. Luke is responsible for firm-wide client relationship management and business development. In this capacity, he and his team provide OCIO and private capital solutions to nonprofits and public sector investors. Keith is President of Commonfund Securities, a registered broker-dealer subsidiary of Commonfund and is also responsible for managing Commonfund’s corporate marketing and strategic planning.  Additionally, he oversees the educational programs and research initiatives of the Commonfund Institute. Keith serves as a member of the Commonfund Operating Committee. Prior to joining Commonfund, he was in commercial banking for 19 years, most recently at Citibank, where he held a number of marketing and strategic planning positions in The Private Bank and Corporate Bank. Prior to Citibank, Keith was with HSBC USA (formerly Marine Midland Bank) in corporate finance and investment banking. He earned a B.A. in Economics at Duke University and an M.B.A. in Finance from NYU Stern School of Business.

Keith W. Luke
President and Chief Executive Officer, Commonfund Securities, Inc.

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.