Taking a wide-angle view of the outsourced CIO

Things aren’t always as they appear — especially if one’s perspective is limited.

Take non-profit institutions’ investment plans, where a too-narrow focus can be quite problematic. If an outsourced CIO restricts its focus to simply the investment pool and investment policy, I contend that the institution is being done a disservice — one that could result in a strategy that does not address its unique short- and long-term needs.

Enter the “holistic OCIO.” Under this approach to the OCIO model, a non-profit institution is viewed not merely through an investment-related, or even finance-related, lens. Rather, a holistic OCIO addresses wide-ranging institutional factors that extend well beyond investment management.

A holistic OCIO approach is a total institutional partnership that one might expect to have within the organization’s own internal offices. In my experience, this relationship begins with taking the time to understand the institution as a whole, not just its finances. 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 the engagement) further up the operational food chain — that is, by gaining an understanding of mission, strategic goals, business issues and concerns, and the role of the asset pool.

In short, a holistic OCIO focuses on gleaning the nuances of the total organization in order to build an efficient portfolio designed to meet that organization’s unique requirements.

Take an educational institution, for instance. A holistic OCIO doesn’t simply zoom in on the organization’s balance sheet. It pulls back for a wider view, and poses probing questions such as: Where does the investment pool or endowment pool fit within the framework of the overall mission of the institution? Does it represent a portion of revenues? Is it intended to support daily operations?

Regarding that last question, the discussion can quickly lead back to balance sheet issues — that is, reviewing the institution’s assets and liabilities. Most institutions, of course, have a strategic plan, typically of the five-year variety. But such plans can succumb to unexpected financial realities. A holistic OCIO can examine that plan and identify problematic pressure points and potential revenue shortfalls.

If, for example, a school’s expenses run too high, its endowment may need to help fund operational costs. That can especially be the case in today’s competitive environment, where many institutions are reluctant to raise tuition. Factor in the additional financial requirement of offering scholarships and financial aid, and the success formula can get rather complicated.

Now add facilities and property into the mix. To fund construction of the new field house or dorm building or science center, debt financing and/or a capital campaign is generally a given. What is often overlooked, however, is the cost of managing the building once it opens: Did oil prices just rise? Did the local utility increase its rates again? Ongoing property and facilities maintenance — as well as unexpected equipment repair and replacement — may place an ever more onerous burden on the institution’s assets.

Foundations have similar operational and balance sheet issues, with a couple of twists. While the primary outlays here — grants, whether individual or multiyear — are relatively predictable, they can be not only varied, but unexpected.

For example, consider a community health-focused foundation whose overhead includes procuring or updating patient technology (which tends to grow obsolete at a rapid rate). During flush economic times, purchasing additional treatment equipment to expand the organization’s positive community influence is a worthy initiative. But when a market correction occurs and cash flow weakens, adjustments need to be made quickly, and tough questions need to be asked and answered. How long is the stress environment expected to last? Can the organization ride it out? Should it scale back operations to reduce overhead? These are questions that a holistic OCIO can help address.

The fact is if an OCIO is not taking the proper time —and proper perspective — to learn all of an institution’s circumstances, priorities and current and future requirements, they aren’t doing justice to the position. A holistic OCIO conducts this critical due diligence, then advises the institution on how certain plans, decisions and investment strategies will impact the organization’s asset pool—and, in turn, its short- and long-term goals. In short, a holistic OCIO is more than an investment manager; it’s an adviser who can align the portfolio with the organization’s overarching strategic plan.

Nearly any OCIO can enter a room and create a portfolio designed to create a modest and steady revenue stream for spending needs. But the problem with this all-weather strategy is that it does not account for sudden, unexpected cloudbursts. A low-rate, one-size-fits-all return may not be sufficient to meet the spending requirements of a dynamic organization—or any organization, for that matter, encountering a substantial or unexpected spending need.

Conversely, when a university’s OCIO acts holistically and inquires about future facilities needs — say, plans for a new arts center in three years — that OCIO can begin to prepare and account for the expense now, and recommend an investment strategy and course of action accordingly. Similarly, if a community foundation is beginning to enter multiyear grants, a holistic OCIO will factor that circumstance into construction of the portfolio.

Another advantage that a holistic OCIO provides is the kind of agility that’s required to quickly adapt to changing circumstances.

Sometimes, financial planning and asset/liability matching can be straightforward, as when pension assets need to be accounted for and amortized. However, more often, planning must be adaptive enough to respond deftly to changes, whether internal or external. These are the times when it pays to have a partner who has already taken the time to understand the total organization of the institution and can make quick course corrections in investment strategy to react to shifts in the landscape.

Generally, an OCIO develops an investment plan based on an institution’s objectives and spending needs.

A holistic OCIO, on the other hand, steps up proactively, gains an understanding of the institution’s current and future assets and liabilities, makes recommendations on what spending can be supported and when, and then develops a well-informed investment plan.

In short, what a holistic OCIO brings to the table is prudent perspective — one that takes a wide-angle view of the nonprofit institution’s situation. Only then, with all variables factored into the financial equation, is number crunching appropriate and the success formula put into action.

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