6 keys to choosing the right outsourcer

Not long ago, the definition and scope of an outsourced CIO was narrowly defined. It generally meant investment management — a traditional consulting model in which the process of interviewing managers was delegated to an outside provider.

Over time, however, as institutions' internal staffs have been reduced and stretched, the definition has expanded and evolved in kind. While OCIO was once regarded as merely an investment advisory function, it now can be about a total partnership that delves into deeper issues than an institution's investment portfolio.

Today, few successful OCIO relationships are based on the concept of a “holistic OCIO.” Simply put, value-added OCIO providers must no longer view an institution through a purely investment-related, or even finance-related, keyhole. Many institutions require a broader and deeper approach — one that addresses wide-ranging institutional factors that extend well beyond investment management.

In many respects, a holistic OCIO relationship is an investment partnership that one would expect to have within one's own internal offices. The OCIO becomes an extension of the investment office, including:

• answering any and all questions regarding investment management;


• assisting in any required education to the board and/or investment committee;


• taking accountability for investment performance, ongoing oversight and risk management; and


• working with other committees (e.g., finance, development), as well as senior staff, to ensure all the needs of the institution are understood

Finding an OCIO that can view your institution from a holistic perspective isn't easy. Here are six key queries to pose to OCIO candidates to determine whether you've found one that places a priority on managing the total portfolio.

A holistic OCIO relationship begins with an OCIO taking the time to understand the unique intricacies of your institution, and becoming involved in not only financial aspects but also the institution as a whole.

This means asking about more than returns and risk profiles, more than limitations and budgets, more than asset pools and portfolio management. It means beginning the conversation (and eventually, the engagement) further up the operational food chain by gaining an understanding of an institution's mission, strategic goals and plan, business issues and concerns, and the role of the asset pool. Based on these myriad factors, the provider can conduct an analysis and develop an investment plan that includes a five- to 10-year forecast as one of its components.

As the OCIO model has evolved and expanded, a number of financial players have entered markets they, frankly, might not understand — such as nonprofit institutions.

Consider this: The key variable in a holistic OCIO approach is the institution itself. Each endowment or foundation has its own strategic needs, objectives and mission. It is the OCIO's responsibility to conduct the upfront due diligence to determine the interplay among each of those factors, understand the issues and develop solutions to meet objectives.

The traditional OCIO model focused largely on owning the investment pool. But a holistic OCIO helps achieve institutional objectives by moving beyond mere investment policy and also addressing other components of policy design, such as:

• operating policies, which may include debt policies as well (e.g., do you have capital assets, such as buildings owned, on your balance sheet?);


• investment policies, including maintaining a risk/return profile that will achieve stated objectives, and rebalancing the portfolio as internal and external conditions dictate; and


• budget policies, in which the OCIO helps define formulas as well as long-term expectations for and analysis of liquidity, spending and payout patterns.

Because a holistic OCIO touches an institution's functions beyond investments, the provider must team with more players than just the investment committee.

A key to success in making this collaboration work is defining and delegating roles and responsibilities between the institution and the OCIO. That means first defining the board's expectations and demands, then determining what functions the investment committee chooses to delegate to the OCIO.

A holistic OCIO relationship also extends to the back office — offering formidable back-office resources and capabilities that go well beyond investment management. For example, they may offer a team of operations and custody professionals who collaborate with the custodian of portfolio assets, handle capital calls and work with auditor valuations.

A holistic OCIO stays constantly on the cutting edge of market and industry trends, conducting ongoing research and calling your attention to its findings on a regular basis. This is critical in implementing investment policy, because it informs the strategies, asset allocation and policy goals that the OCIO and institution develop together.

It's not only today's trends that the OCIO must monitor; it's tomorrow's as well. The marketplace changes, so do internal goals. Strategies require adaptation and enhancement over time. And when it does, the OCIO must provide the very latest industry information from which to make critical adjustments to portfolio and policy (another reason that a non-profit specialist OCIO is so important) — and to execute in an efficient, cost-effective manner.

When it is time to build your portfolio, a holistic approach pays true dividends. A holistic OCIO recognizes the construction of the portfolio hinges on multiple factors, including long-term investing goals, liquidity needs, in-house resources and other institutional mandates.

In aggregate, those variables will dictate not only the components of the portfolio but of the investment program as well. Would the institution benefit from separate accounts, hiring individual, dedicated managers? Is a funds-of-funds approach more appropriate? Institutional commingled funds, passive index funds, and/or exchange-traded funds? The decision drivers are not just financial issues. A holistic OCIO brings a total institutional perspective to the portfolio construction process.

The outsourced CIO model has evolved. Once, it was merely an investment advisory function. Today, however, OCIO is about a total partnership, one that expands the aperture beyond an institution's portfolio.

Choose wisely, and you will have a trusted fiduciary partner who takes a broader and deeper approach to your institution and addresses myriad factors that extend well beyond investment management. That's how you benefit from a holistic OCIO.

Sarah Clark is a managing director and head of Commonfund Strategic Solutions Group.