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.

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Tags: CFA Institute, Daniel Brickhouse, GIPS, Gregory Metzger, Karyn Vincent, Nasdaq, North Pier Fiduciary Management, OCIO, outsourced chief investment officer

The Kansas bill, which has reached the governor, would reduce the state pension by $3.6 billion and cut its funded level by 10%, a fiscal analysis says.

Two bills are currently working their way toward becoming law in Kansas and South Carolina, aiming to prevent their respective state and local governments from incorporating environmental, social and governance principles when investing.

Kansas lawmakers have approved a bill that would prevent the state government, its pension funds and school districts from using ESG principles in investing their funds or when awarding contracts. The Protection of Pensions and Businesses Against Ideological Interference Act would require the Kansas Public Employees Retirement System to divest from financial companies that engage in “ideological boycotts or other discriminatory conduct.”

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The bill would require the state treasurer to prepare, maintain and provide to the KPERS board a list of all financial companies that engage in so-called “ideological boycotts,” which is how the bill refers to companies’ divestment based on ESG principles. The treasurer would rely on publicly available information regarding financial companies and request written verification that the company does not engage in “ideological boycotts.” A financial company that fails to provide the treasurer with written verification 31 days after receiving the request would be presumed to be engaged in an ideological boycott.

However, an analysis of the bill conducted by the Kansas Division of the Budget found that it would reduce the expected returns of the Kansas Public Employees Retirement System by 0.85%, or $3.6 billion, over the next 10 years, compared with the current investment portfolio. The analysis also estimated that it would reduce KPERS’ funded ratio by approximately 10% and lower it to the same funded level it had a decade ago.

“However, the actual long-term cost effect to KPERS would depend on the extent of the required divestment and restructuring of the investment portfolio,” the analysis stated.

The bill now heads to the desk of Kansas Governor Laura Kelly, a Democrat. Although Kelly has not publicly commented on whether she will sign the bill into law, fellow Democrats voted against the legislation in the Republican-controlled Kansas Legislature.

Meanwhile in South Carolina, the state’s House of Representatives passed the ESG Pension Protection Act. The bill requires South Carolina’s retirement system to consider only “pecuniary factors” when making investment decisions and prevents it from considering ESG factors.

The bill would also require the state’s retirement system to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of the system. To accomplish this, the retirement system would have to manage the proxy voting in-house, hire an external proxy adviser or fully delegate the proxy voting to an external investment manager.

According to a fiscal analysis of the bill by the South Carolina Revenue and Fiscal Affairs Office, managing the proxy voting could cost the retirement system as much as $1 million if it does it in-house. It would cost the system $292,000 to hire an external proxy adviser, and delegating the proxy voting to an external investment manager would be of no cost to the retirement system. The report added that the retirement system is not sure which of the three scenarios would fulfill the requirements of the bill.

After passing the state House of Representatives, the bill was sent to the state Senate and was referred to its finance committee.

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Tags: anti-ESG, Bill, ESG, Kansas, Kansas Public Employees Retirement System, KPERS, Legislation, South Carolina