The Appeal of OCIOs: Questing for Good Returns

Why do asset owners hire outsourced chief investment officers? To help them get the returns they want. As common-sensical as that sounds, this quest for good performance is woven into the OCIO appeal in a way that benefits the owners more than many realize.

This coming Monday, CIO unveils its annual survey on OCIOs, which offers an array of enlightening insights.

At Commonfund Asset Management, the OCIO operation ($12 billion under management) seeks to “generate the types of returns that support the long-term missions” of clients, said CEO Tim Yates.

But the company also helps asset owners manage reporting, cash flow, audits, and spending. Private foundations—that is, those that accept no outside donations and are based on their founders’ contributions—must spend 5% yearly, he pointed out. “We use a lot of time helping our clients set policy,” he noted.

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To Arizona State University Enterprise Partners’ CIO, Jeff Mindlin, going the OCIO route has been a big help. And so he gives his provider a decent amount of leeway. The ASU body has half of its money in passive vehicles and the rest in the likes of private equity. “BlackRock has the direction to pull the trigger” on specific investments to realize the overall strategy, Mindlin said.

“The OCIO model makes sense,” he maintained. “It allows the investment committee a high level of governance. We can get things changed if we want to.”

Northern Trust Asset Management has a unit that focuses on smaller clients, particularly small family offices with around $200 million in assets. “We bring them expertise” in such complex endeavors as commodities, foreign exchange, and environmental, social, and governance (ESG) investing, said Abdur Nimeri, senior manager of client programs for Northern Trust’s Managed Accounts team.

He noted that some clients want to de-risk their portfolios, but they need advice on whether and how to take such a step. De-risking often involves employing derivatives, Nimeri said. “And derivatives are expensive,” he added.

Beyond that is the question of how to find the right OCIO. For that, a survey by the Cerulli Associates consulting firm found that 36% of OCIO providers say they turn to search firms to fin the right candidates.

And often the search folks are called upon to find a replacement for an OCIO provider who isn’t working out. Some 43% of search consultants’ nosiness in the past two years was involved in finding replacements, according to Cerulli.