Asset Owners seeking access to hedge funds, private markets, real assets, and beyond are now leveraging Outsourced Chief Investment Officer firms more than ever. OCIOs not only enable institutional investors of all sizes to gain access to an array of alternative asset classes, but most OCIOs also provide a variety of operational services in support of those investments, taking the burden off your team.
Maybe you’re contemplating a search for an OCIO, or possibly your current partner isn’t meeting expectations. In this blog we review some of the key considerations in selecting a new OCIO partner.
Alignment
Your search begins with the fundamentals: Understanding each potential OCIO partner’s investment philosophy and approach. It’s critical to ensure they align with your own firm’s objectives, risk tolerance, and investment objectives.
Gaining insights into higher level alignment will enable you to short-list a small number of OCIOs to evaluate via a formal RFP and due diligence. In that phase, you’ll dive into the details that follow.
Evaluating Historical Performance
Performance calculation approaches can be inconsistent across OCIOs, as many of these firms do not attempt to follow GIPS. The CFA Institute is currently drafting OCIO-specific guidelines, which may in the future help gain compliance and produce a standard method for comparing OCIO performance. Regardless, it is still possible to achieve a uniform comparison.
To accurately evaluate and compare OCIO performance, return and risk factor comparisons must be done not only for equivalent time periods, asset classes / strategies, and calculation methodologies, but should be computed only on positions for which the OCIO has full discretion. Legacy, advisory, and even semi-discretionary assets do not tell the OCIO’s performance story. Data on assets resulting from their clients’ own trading decisions skews performance and should remain outside of the equation.
Asset Class Access
Evaluating asset class depth can include a review of an OCIO’s existing fund manager network. This in conjunction with the related performance information paints some of the picture.
Investment research tools also play a role in how effectively OCIOs can find and select funds and other investments to allocate to your portfolio. Their ability to continually monitor, analyze, and react to the performance of your investments is equally important. Look at what tools they’re using and how they use them to make decisions to invest and gain access to new investments.
In addition to managing standard client portfolios, many OCIOs also offer structured products so that even their smallest clients can gain access to diversified investments across both public and private markets.
Scope of Operational Services
Assessing what your firm wants to get out of a relationship with an OCIO is an important first step. Olmstead can guide you on what to expect based on industry norms, and craft your operational service requirements accordingly.
Beyond front office portfolio management and trading services, OCIOs normally provide a level of middle office services on the investments they manage for you. Some also partner with fund administrators and custodians, giving you the option to enjoy full front-to-back services through your OCIO.
An important consideration is that the technology and third-party partnerships of OCIOs tend to vary widely, and these can directly impact your level of service and operational risk. It’s critical to assess what takes place behind the scenes at an OCIO to determine if their infrastructure is adequate.
Beyond Selection
Through the RFP and due diligence process, Olmstead guides you in deeply assessing each of these focus areas. After selection of an OCIO partner, we also help you reengineer your operating model to fully optimize the value proposition of leveraging an OCIO. We’ll help you implement not just the OCIO services but also the changes to your internal organization that will be critical to your initiative’s success.
Read more about our full due diligence approach and philosophy on operating model transformation.