Increasing Investment Complexity Is Driving OCIO Growth

The Widespread Impact of OCIO Growth, a report analyzing our proprietary research, will be published on January 25 as part of our Future of Investments research project.? We are sharing key insights in advance of publication, starting with the first of two trends we believe are driving the explosive growth of the OCIO business, increased investment complexity.

Our research results clearly illustrate how higher investment complexity is driving investors to seek OCIO services.? Institutional investor respondents named governance advisory as the most important factor by far - tied only with fees - as driving their OCIO hiring decision.?

We believe the COVID-19 crisis caused many institutional investors to realize they are not comfortable or properly structured to effectively navigate a complex, fast-moving investing environment under the traditional consulting paradigm, much less fully independently.? Let’s look at the biggest ways OCIOs simplify the investment process for their clients.

More Nimble than the Traditional Institutional Investing Approach: The traditional institutional approach of quarterly investment committee meetings to approve all portfolio allocation changes was significantly challenged by volatile capital markets in the wake of COVID-19. An OCIO survey respondent explained the tie between the increasingly complex investing environment and the rapid growth of OCIO this way: “The last year was a meaningful stress test for traditional governance. If you didn’t rebalance early on, you got pummeled. If you did rebalance, you did pretty well. Rebalancing is a strong discipline for most OCIOs.”??

Deeper Investment Implementation Resources: A related factor driving larger and more sophisticated institutions to hire OCIOs is the increased time needed to implement and monitor the execution of investment views across a client’s portfolio, due the the increasingly volatile market environment.? In fact, many large client-OCIO relationships begin with the client outsourcing implementation tasks such as performance documentation, rebalancing and day-to-day cash management.

Governance Advisory Addresses a Wide Range of Needs: Even when an OCIO has full discretion over a portfolio, the ultimate fiduciary responsibility always rests with the Board. Boards are increasingly seeking regular expert advice on how they should address a wide range of issues.? The most widely-sought types of governance advisory today include:?

• Portfolio risk/return guidelines: As new asset classes and vehicles continue to multiply and traditional investments like fixed income become less reliable, OCIOs provide a holistic approach to helping each client articulate a set of risk return goals that can be consistently implemented across portfolio design, management and monitoring?
• Risk management: The range of risks institutional Board members are responsible for managing today have moved well beyond traditional portfolio volatility concerns and encompass everything from liquidity to reporting and documentation to Diversity, Equity and Inclusion (DEI) standards to Board size and tenure rules?
• ESG implementation and measurement: Fully a third of institutional investors cited ESG advisory as a top two factor driving their OCIO hiring decision
• DEI implementation and measurement: Institutional boards are increasingly seeking data and guidance on how they should implement DEI as a factor in manager selection, as a fair reflection of the institution’s values across the Board and investment team’s members, and if and how to set and measure DEI goals that will meet the desires and needs of the institution’s constituents
• Fundraising: Advice and support have become a major focus for OCIOs serving the Endowment and Foundation marketplace

We will publish the full Widespread Impact of OCIO Growth report, incorporating research results from over 450 investment professionals and conducted in partnership with Pensions & Investments, on January 25.??