Institutional investors are increasingly outsourcing their investment management functions due to the rising complexity of managing those portfolios. Many turn to Outsourced Chief Investment Officers (OCIOs) who serve as investment managers and fiduciaries for institutional investors of various sizes and investment objectives, including endowments, foundations, pension plans and family offices.
The OCIO function may take one of several approaches, depending on the OCIO firm’s preferred investment/business model and the needs of its clientele. The three most common are the Single Portfolio, Building Block Portfolio, and Fully Customized Portfolio.
Single Portfolio: The one size fits all approach
The simplest approach, the Single Portfolio, consists of a basic portfolio of stocks and bonds purchased through a fund. The OCIO pools assets from multiple clients and manages them as one portfolio to achieve economies of scale. The overall asset mix is set at a level such as 60/40 or 70/30 equities/fixed income and the client benefits from the OCIO’s informed judgement regarding any reallocations. Often the choice for institutional investors managing approximately $1 million to $10 million, this ‘off the shelf’ fund approach offers clients with few internal staff resources, portfolio liquidity and professional oversight but limits asset choice, transparency, risk management, and reporting frameworks when you have limited tools available.
Building Block Portfolio: Customization at the asset allocation level
Similar to the Single Portfolio, this approach is operationally efficient, but it also provides customization at the asset allocation level. Clients benefit from strategy diversification and asset mix exposure by owning shares in a single fund of funds per investment strategy, potentially including liquid alternatives. This “hybrid” Building Block Portfolio is generally suitable for investors managing approximately $10 million to $50 million. Clients receive broader professional management from the OCIO, but risk management options, liquidity and portfolio flexibility are restricted. For example, clients cannot change the underlying holdings, which adds challenges in managing legacy investments.
Fully Customized Portfolio: Customization at the asset allocation and manager levels
This customized approach is the most robust, designed to closely resemble an internal CIO and enables clients to more precisely set and achieve their specific investment goals. This option is truly an extension of internal staff. The OCIO constructs customized portfolios by both asset allocation and manager selection, and targets performance around benchmarks and risk/return relationships approved by the client’s investment committee. Specific governance, liquidity, transparency, investment needs and reporting requirements are all considered. This portfolio is fully portable and allows for the inclusion of less liquid alternative funds among a diverse range of strategies, which provide long-term return potential unavailable in the other investment models. Legacy holdings are integrated seamlessly into the total portfolio. The Fully Customized Portfolio is generally best suited for investors managing at least $25 million, or $50 million if exposure to private equity and/or private credit strategies is requested.
Conclusion
Regardless of the OCIO model, an outsourced investment management relationship should lead to a true long-term partnership. Each client is entitled to excellent reliable service. The OCIO is a critical, ongoing source of deep resources, expertise, and scalability, providing accountability and stewardship. Furthermore, while portfolio performance is a function of the underlying investments and each client’s risk/return appetite, OCIO performance benchmarks are available and evolving. Whether the OCIO’s investment approach reflects a single building block, fully customized portfolio or a hybrid, each investor – the OCIO client – should carefully consider the scope and requirements associated with their institution’s objectives in conjunction with the selection of a long-term partner.
