OCIO - Outsourced Chief Investment Officer

OCIO stands for Outsourced Chief Investment Officer. The term refers to the full or partial outsourcing of an organisation’s investment decision making process to a third party, such as an asset management firm or investment consultant. In delegating investment tasks to a third party, the organisation typically retains some level of investment decision making responsibility—often maintaining control over the strategic asset allocation—while they transfer other duties, such as portfolio implementation, manager selection and oversight, and risk management. This retention of some investment decision making responsibility is the main differentiator from the more widely adopted fiduciary management model, where typically all decisions around the implementation of the client’s investment objectives are delegated to a third party.

In 1987, a group of senior staff members of The World Bank pension investment division left to form Strategic Investment Group. Then-Chief Investment Officer, Hilda Ochoa-Brillembourg, conceived of Strategic as an “investment department for hire” for institutions that need significant expertise and resources to manage their assets, but are unable or prefer not to hire a chief investment officer and internal investment staff. A year later, Jonathan Hirtle coined the term “outsourced chief investment officer” when he co-founded Hirtle Callaghan & Co. 

The Outsourced Chief Investment Officer (“OCIO”) model has become more and more popular since that time and since then the industry has grown rapidly, with well over 100 firms providing some level of these services. Assets under management have reached nearly $2 trillion and are expected to top almost $3 trillion over the next several years. How much of that growth has been driven by the firms’ current clients switching from advisory to OCIO services remains to be seen. 

When an asset owner decides to partner with an OCIO, it is typically because the institution does not have sufficient resources or expertise to manage investments directly, especially given the ever-increasing complexity of global markets.

The job of managing the investment portfolio generally falls either to an investment committee, which typically meets less than ten hours per year, or internal finance personnel, who are also charged with overseeing the operating finances of the organization. In each case, the structure does not typically allow for the focused attention necessary to manage a complex institutional portfolio prudently and efficiently.

A dedicated OCIO (Outsourced Chief Investment Officer) typically focuses on OCIO services, tends to have a smaller client base, and uses an open architecture approach to manager selection. This is referred to as a “conflict-free” business model, because there are no ancillary business lines, and no opportunity for the firm to earn additional fees as a result of its allocation decisions. This model can best align the provider’s interests with the interests of its clients.

An OCIO arrangement allows asset owners to tailor their service to their specific governance and portfolio needs. Typically there are many aspects of strategy implementation where outsourcing is a desirable outcome from a governance perspective. These operational aspects are too time consuming for a client to process and outsourcing allows the client to use their time budget on setting and monitoring investment strategy.

An OCIO provider will have meaningful teams that are set up to process strategy implementation efficiently in a scalable way, stretching from the selection of underlying fund managers, rebalancing, and liquidity management.

What Will Change if the Investment Committee Hires an OCIO?  

An OCIO typically will assume responsibility for all the day-to-day tasks involved in managing the portfolio. The investment committee’s responsibility for those tasks then shifts from direct action to oversight of the OCIO’s execution and performance of those tasks.  

It’s important to understand that an investment committee cannot absolve itself of its fiduciary duties by hiring an OCIO. With the right co-fiduciary partner, however, the investment committee can spend less time hiring, monitoring, and firing managers, and more time on its essential roles of strategic direction and oversight.  

Does Hiring an OCIO Mean the Investment Committee Loses Control? 

Some investment committees fear they will lose control of the investment portfolio if they hire an OCIO; however, they fail to recognize the fundamental loss of control that is already occurring, because the investment committee is too distracted by the day-to-day minutiae of manager selection and monitoring to focus on the organization’s big picture goals. In fact, a good OCIO relationship can result in better effective control, by allowing the investment committee to concentrate its efforts on determining the optimal strategic direction for the portfolio and serving as a "second set of eyes" on the OCIO's implementation. Further, an investment committee does not have to give away more authority than it wants to, and it can always take back any delegated authority. It can keep meaningful control over the investment process in various targeted ways, including: creating lists of restricted securities, placing limits on allocations to certain assets classes, and establishing credit quality requirements. 

what is the difference between using an OCIO and hiring an investment consultant?

A consultant provides investment expertise (and, in some cases, other financial services) on a periodic or a flexible, “as needed” basis. A talented consultant can be an excellent choice for an investment committee that needs guidance primarily on a high-level basis or with specific, complex issues and that has sufficient time, resources, governance infrastructure, and motivation to implement the organization’s investment plan.   

The main differences between an OCIO and a consultant involve levels of service and methods of compensation.  An outsourcing firm that doesn't offer all three of these elements is not a true OCIO.

• An OCIO is a fiduciary

• An OCIO has investment discretion and is directly accountable for performance

• An OCIO is financially independent of the managers and other service providers it chooses for the organization

Why should OCIO’s become GIPS compliant?

Only about one quarter of all Chief Investment Officer (OCIO) firms claim compliance with the Global Investment Performance Standards (GIPS®), largely because firms feel like the standards don't fit their business model. This leads to a lack of standardization and comparability of investment performance across OCIO managers.

• OCIOs are becoming subject to the same due diligence requirements as other money managers.

• RFPs have started requiring managers to provide composite performance instead of representative account performance.

• RFPs have started asking for, and in some cases requiring, compliance with the GIPS standards.

Exposure Draft of the Guidance Statement for OCIO Strategies released for public comments

The CFA Institute organized an OCIO Working Group in 2022. Composed of many industry experts the OCIO Working Group sought to determine what guidance was needed by firms that offered OCIO strategies and claim compliance with the GIPS Standards for Firms. After over a year of consultation, the OCIO Working Group has issued the Exposure Draft of the Guidance Statement for OCIO Strategies. The public comment period ended in November, 2023, however a link below is provided to the exposure draft until the official guidance statement is finalized.

Exposure Draft of Guidance Statement