Outsourced chief investment officer (OCIO) firms have become increasingly popular in recent years among institutional investors looking to delegate their investment management functions. OCIO firms provide a range of services and benefits that appeal to investors with limited resources or expertise. This article will examine the key advantages of using an OCIO firm and the typical services they provide.
OCIO firms can help investors develop an investment policy, design an asset allocation, select investment managers, monitor performance, and provide other services that require significant time and skill. By outsourcing these complex tasks, investors can focus on their core operations and objectives. Small pension plans, endowments, foundations, and family offices are among the common users of OCIO services.
When properly implemented, an OCIO arrangement can provide fiduciary protection, customized services, fee efficiencies, and access to institutional-quality investment management expertise. However, the OCIO model also requires strong oversight and open communication between client and provider.
OCIO Firms Offer Experienced Investment Expertise
A key benefit of partnering with an OCIO firm is gaining access to professional investment management expertise. OCIO providers employ skilled specialists in areas like capital market research, portfolio construction, manager selection, and risk management. They have experience across various asset classes and investment strategies. This depth of expertise would be difficult and expensive for most investors to replicate internally. OCIO enables clients to leverage experienced investment professionals while retaining oversight over the program. The OCIO staff essentially serves as an extension of the client’s team.
OCIO Firms Help Establish an Investment Policy and Governance
A crucial early step for most OCIO engagements is developing an investment policy statement (IPS) to establish the program’s objectives, constraints, and governance provisions. The OCIO advisor collaborates with the client to outline the purpose of the assets, risk tolerances, return objectives, liquidity needs, time horizon, and other relevant factors. This policy serves as an enduring guide for managing the assets in a manner aligned with the client’s mission and goals. The OCIO can also help establish an appropriate oversight model, reporting procedures, and ongoing communication protocols to facilitate strong governance.
OCIO Providers Offer Fee Efficiencies
Many investors turn to an OCIO firm after determining they cannot justify or afford to build their own internal investment staff. The OCIO fee structure allows clients to pay only for the services utilized rather than incurring the fixed costs of hiring investment professionals and staff. OCIO fees are often tiered based on assets under management and the complexity of services delivered. Clients may also gain fee efficiencies by leveraging the OCIO’s institutional relationships with asset managers.
OCIO Firms Provide Ongoing Portfolio Management
A primary ongoing service of an OCIO firm is discretionary management of the client’s investment portfolio. This includes determining an optimal asset allocation across equities, fixed income, real assets, hedge funds, and other asset classes. The OCIO will implement this portfolio, selecting and overseeing underlying investment strategies and managers. Providers also continually monitor the portfolio, rebalancing as needed and adjusting allocations or managers when appropriate. This active portfolio management by experienced specialists would be difficult for small internal teams to replicate.
OCIOs Offer Comprehensive Investment Services
While the scope varies based on client needs, OCIO firms can provide a full range of investment-related services. This may include helping craft investment policy and objectives, strategizing asset allocation, selecting external managers, executing due diligence and reporting on managers, monitoring and rebalancing the portfolio, and handling daily administrative tasks. OCIOs aim to provide integrated solutions that fully outsource the complexities of investment management based on the client’s customized requirements.
In summary, outsourced chief investment officer firms offer institutional investors a way to benefit from proficient investment management expertise in a cost-efficient manner. By leveraging the personnel, resources, and experience of an OCIO provider, clients can effectively delegate day-to-day oversight of a customized investment program aligned with their specific objectives and constraints.