A Primer on Outsourced Investment Management

August 31, 2017  | by Commonfund Institute

Industry Knowledge | Investment Strategy | Outsourced Investing

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.

outsourced investment management

 

Subscribe to Insights Blog

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.

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.