2020 Outsourced-Chief Investment Officer Survey

2020 Outsourced Chief Investment Officer Survey

Absolute return is chief goal of CIOs who farm out running their money to third parties.

What’s the chief reason that institutional investors hire an outsourced chief investment officer? A quest for absolute return. That’s the key finding in our 2020 OCIO Survey, with 66% saying they sought that goal. 

That soundly beats de-risking (34%), which shows that an appetite for gains is exceeding that for caution amid the continuing bull market. The survey, which ended February 10, hasn’t fully reflected the possible influence of the coronavirus on investments. None of that’s to say that asset owners are oblivious to possible trouble. Some 68% believe that better risk management is important or very important—21% said it was not important.

The bulk of OCIO clients, namely 59%, farm out all of their portfolios, versus 21% who outsourced less than 25% of their holdings. That’s a sort of barbell distribution, showing there’s not a lot of middle ground in outsourcing: You are either all into OCIO or you keep a very large chunk in-house.

The challenge of those who dispatch only a minority of their assets to third parties, certainly, is that they need to keep a close eye on what the OCIO managers are doing, so they aren’t investing at cross-purposes or over-concentrating in one area.

Outsourcing the whole $922 million in endowment enables Arizona State University Enterprise Partners to “get a holistic view of the portfolio,” said the organization’s CIO, Jeff Mindlin. For the fiscal year ending last June 30, the ASU entity had a 10.2% return.

The reasons given by those who won’t consider outsourcing, to be sure, display a high confidence in their own prowess. A daunting 69% of them feel it is important or very important that they have sufficient internal resources and expertise to manage their own investments. They feel they don’t need any additional fiduciary oversight and are satisfied by the speed with which they can get things done.

Almost two-thirds of the survey respondents ceded total control of investment management, particularly when it came to hiring and firing managers. Known as “full discretion,” this lets the OCIO make those decisions without consulting the client. Of course, the asset owner’s investment committee will lay out broad strategies, such as a target asset allocation.

The ASU body has half of its money in passive vehicles and the rest in the likes of private equity. The asset manager it hires “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 thing changed if we want to.”

Our survey presents a telling snapshot of the OCIO terrain. Corporate pensions made up 40%, with defined benefit plans at 28%, and public pension programs at 17%. Some 35% had portfolios of $5 billion or more, and 30% were in the $1 billion to $5 billion range. Not a single respondent admitted to having performance fees. —Larry Light

Methodology:

Responses from 86 asset owners, aggregated for the charts that follow, were accepted for the survey from January 24 to February 10, 2020. CIO would like to extend a special thank you to all those who submitted responses for the survey, as well as those vendors, asset owners, and consultants who helped the CIO editorial and survey teams construct the survey. For more information, contact surveys@strategic-i.com.