Asset owners considering the transition from using consulting firms in an advisory role to a fiduciary role heard from representatives of three leading OCIO firms at eVestment’s recent EI3 conference in Atlanta.
Brian Binkley from Vanguard, T.J. Kistner from Segal Marco Advisors and Aon’s Mike Sebastian covered similarities and differences between the two approaches and offered key takeaways specifically for asset owners.
Comparing the Two Models
Board members who have grown weary of the time and complexity of investment duties are often drawn to the OCIO approach. While the asset allocation process is generally similar and specific to each client, speed of portfolio implementation resulting from an expanded governance role is one of the key differences between traditional consulting practices and the OCIO approach.
For Sebastian, “An OCIO client can act faster and in different ways on our recommendations. This allows for some changes like being dynamic with asset allocation that are just not possible for most advisory clients that act based on a slower schedule. It’s easier to do with an outsourced CIO.”
“From a traditional advisory perspective,” added Kistner, “the timeline of events between when an investment idea is generated and when it is ultimately implemented in a client portfolio can take months, quarters, even years depending on the complexity of the client and how often their board meets. By having a committee structure in place that meets on a regular basis, we can make fast and timely investment decisions and can implement those decisions within client portfolios.”
Measuring OCIO Success
Asset owners considering engaging an OCIO often ask how they can compare track records across the universe of candidates and, as more OCIO shops open for business, panelists said they expect prospects and clients to ask for peer comparisons. But while comparing an individual client’s performance to the account’s strategic asset allocation is fairly straightforward, performance comparisons to other OCIOs is another matter.
“This is an area we really struggle with simply due to the fact that there really is no good way to do it because there is such a large and diverse pool of assets and differing client circumstances. It’s very difficult to combine all of this into some sort of composite and provide any sort of meaningful interpretation of what that may mean,” Kistner said.
Segal Marco Advisors
One area where cross-OCIO performance may be available is the National Association of College and University Business Officers (NACUBO) database, Binkley suggested. The only drawback is that NACUBO only tracks endowments and foundations. “That’s one place where we can compare our performance and models,” he said. “But the challenges exist.”
Fees, in addition to performance, are an area where comparing OCIO candidates is a complicated but necessary step in the evaluation process, Binkley said. “Fee transparency is key. What is the OCIO getting from their advisory fee but also the all-in fee if you include investment management costs? Not everyone quotes it on a like-for-like basis.”
Expanding Reach and Pooling Assets
While OCIO’s incubation may have been in the Endowment and Foundation arena, the panelists reported increasing interest from asset owners representing a wide spectrum of plan types and sizes.
“We are seeing a variety of mandates from small, mid-size, and even mega plans that are outsourcing some or all of the program, whether it’s full-plan delegation or partial-plan delegation,” Sebastian noted, including new plan segments like Taft-Hartley plans and public funds. “There are a lot of things driving OCIO growth including increasing regulation, fee transparency, and fee pressure,” he added.
Part of the value-add proposition OCIO offers small and mid-sized asset owners involves increasing access to alternative investments that typically carry high minimum investment sizes beyond the reach of smaller plans.
“Some investors don’t have access to certain products within the alternative space,” Kistner said. “For clients on the smaller end of the spectrum, for example, you can take a $100 million client and pool them with $11 billion in assets. Now they have $11 billion in purchasing power and $11 billion in scale. They’re able to access unique idiosyncratic opportunities, especially in private markets, that they might not otherwise be able to access through a traditional advisory relationship.”