Ten things you should know about OCIO:

1. What is OCIO?

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.

2. Who can benefit from OCIO?

We believe that OCIO works for all types of investors that want to retain a degree of control over the implementation of their investment objectives whilst using the investment management skills of an OCIO firm. Once a niche subsector, the outsourced chief investment officer industry is now the fastest-growing segment in asset management¹. Institutional investors such as defined benefit schemes, defined contribution plans, insurance companies, wealth managers and non-profit organisations partner with outsourced CIO providers to satisfy a range of objectives. These include optimising governance structures, efficient strategy and journey plan implementation, satisfying regulatory reporting, lower operational and key person risks and lower costs. We are finding that OCIO conversations, outsourcing while retaining some degree of control, tend to take place with asset owners responsible for a material asset base.

3. What should you look for in an OCIO provider?

An OCIO needs to be able to deliver the key aspects of any investment program; namely, strategy advice, strategy implementation, regulatory adherence, and all elements of fund management. Further, the ability to construct the offering in a modular way so that clients can tailor the approach in line with their own preferences, e.g., full/partial/closed or open architecture is important, and that is how we offer OCIO to asset owners.

We also believe it is important to test an OCIO on their ability to put themselves in the clients’ shoes and truly demonstrate that they have clients’ best interests at heart. At Schroders, we have ex-asset owner practitioners within our OCIO team, who have experienced first-hand how challenges manifest and should be solved for clients.

4. How can an outsourced CIO or OCIO model improve governance?

We rarely come across an asset owner that feels their investment decision making governance structure is perfect. A modular OCIO arrangement allows asset owners to tailor their service to their specific governance and portfolio needs. Typically, when we engage with asset owners, we find 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.

5. How can outsourced CIO supplement resources?

Typically, there are capacity constraints at the asset owner end when it comes to strategy implementation. An OCIO/Fiduciary Management 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. In addition, clients will benefit from the vast internal capabilities within the wider business, where specialists on ESG (Environmental, Social and Governance), legal matters and asset class investors can all be drawn upon.

6. How can investment outsourcing help improve access to alternative investments?

The asset owners exploring alternative investments have historically made direct investments in fund managers that specialise in alternatives. However, building diversified exposure and monitoring/selection of alternatives managers can be challenging and is somewhere an OCIO can assist. Again, we believe that a modular offering is important to offer to asset owners. We have helped clients put in place different access mechanisms, such as a program of direct investments, selecting a “one stop shop” diversified alternatives manager or tailored fund of fund programs to create broad and effective exposure to alternative and private assets.

7. How can CIO outsourcing help with cashflow matching and liquidity management?

We believe cashflow driven investing (CDI) needs central portfolio implementation from an OCIO, or ‘framework manager’, to pull together the information from various portfolios, e.g., to effectively combine LDI (Liability Driven Investment) and fixed income managers, and regularly monitor that the CDI approach is on track. This framework manager can also assist in designing the CDI approach to cater for the evolution of an asset owners’ cashflow needs over time. The OCIO provides the mix of skills around technical advice and investment management that we feel are required from the framework manager.

8. How fast are portfolio changes implemented?

The OCIO portfolio management teams are looking at the portfolio and key metrics daily. The ability to react quickly and implement efficiently when required is therefore inherent in the way that OCIO teams are set up.

Implementation is one aspect around speed but another area to not lose sight of is on decision making. The OCIO arrangements are integrated into our asset owners’ governance protocols, and we seek to set up efficient turnaround times when the OCIO makes a proposal so that time is not lost when decisions are required by the client.

9. In times like today, how would your OCIO handle a downturn?

That depends on the degree of delegation from the client and their objectives. Regardless of the set level of delegation, maintaining communication with clients in testing market conditions is critical. For example, many pension schemes have found themselves ahead of funding plans due to rising government bond yields and the action has been to lock in improvements. Whereas the engagement with the growth portfolio for investors has been to cut risk considering the market uncertainty, where the OCIO has the authority and portfolio management systems to take such action efficiently or, when appropriate, seek approval to cut risk from the client and then implement.

10. How has the transition gone so far and how do you see the relationship developing?

Centrica was a key new OCIO client this year. The client experience here was seamless with no interruption to the ongoing management of the investment arrangements. The team left Centrica on a Friday and were able to log in as normal when they arrived at Schroders the following Monday. The team is benefiting from the ability to access a wider group of peers and subject matter specialists. May and June 2022 were particularly busy months from an investment operations perspective as gilt yields rose, and the client was “shielded” from the associated activity; this shielding was very welcome given that they were amid an actuarial valuation negotiation. This allows the engagement with the client to be focused on strategic matters going forward, which is where they want most of their time budget to be spent. They have requested the OCIO takes the lead on the journey planning work that will come out of the actuarial valuation.

[1] Source: Chesnut Advisory Group, “The Widespread Impact of OCIO Growth”, 24 Jan 2022