How to Measure OCIO Performance | Chief Investment Officer

The outsourced CIO model has exploded, overseeing $3 trillion in institutional assets, more than triple the level of 15 years ago. But it still has a way to go in improving the transparency that asset owners need from OCIO providers entrusted with managing holdings.

Three experts in the OCIO field appeared on a webcast hosted by CIO Thursday (click on the previous link to see the recorded video), outlining progress that has been made and what more they believe needs to be done. On the plus side, new OCIO standards are under study by a CFA Institute-sponsored working group, and performance-measuring indexes are now available from Nasdaq.

The guests on the webcast, hosted by CIO executive editor Amy Resnick, outlined methods “to bring more transparency,” in the words of panelist Daniel Brickhouse, head of product management for Nasdaq Analytics. The Nasdaq exchange, in partnership with consultant Alpha Capital Management, launched a series of indexes in 2019 to track various allocator groups. In 2022, its broad market index lost 15%.

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That measure gives asset owners a benchmark against which to compare their own OCIOs’ performance. But Brickhouse pointed to other problems, such as the difficulty entailed when an OCIO chooses to re-order an asset allocation it takes over. “It’s tough to just liquidate positions,” he noted, referring to the expense and effort involved.

Such challenges are the impetus behind the CFA Institute’s effort to revamp its Global Investment Performance Standards, or GIPS, to appraise outside investment chiefs. These guidelines, which investment firms worldwide employ to ensure full and fair disclosure of financial performance, tackle such questions as how to account for fees.

The differing types of allocators—defined benefit pension plans and university endowments, for instance—require disparate standards, explained panelist Karyn Vincent, senior head of global industry standards at the CFA Institute. She is part of the working group.

In judging assets an OCIO provider takes over, the outsourced investment chief might employ a performance “threshold to see whether to keep them,” Vincent said. The CFA Institute’s plan will be unveiled in late summer for public comment.

Gauging OCIO performance and methods is no simple thing, according to panelist Gregory Metzger, a senior consultant at North Pier Fiduciary Management, who advises asset owners. Questions arise, for example, involving valuing illiquid assets. What’s needed to assess OCIOs are templates of investment outcomes, he said. Otherwise, danger exists that an OCIO might be “cherry-picking data.”

He likened the necessary assessment to baking a cake. “You can’t just look at the ingredients,” he said. “You have to look at the baker, too.”

How long should an OCIO relationship last? Metzger answered: 10 years, although the provider should be reviewed every three. “The reason most OCIOs are replaced isn’t performance,” he said. “It’s service.” An OCIO might not communicate well with a client’s investment committee, for instance.

Owing to the diversity of the allocators, no one-size-fits-all model is possible, the panelists indicated. The relationship between asset owner and OCIO provider must be “customized,” Metzger said. But for the owners, he added, “then there is a challenge comparing them” to other OCIO firms to see if the clients are getting their money’s worth.