Consultants have long played a role in helping private foundations invest their assets, with 77% of organizations with $500 million or more in assets using them, according to a 2013 Council on Foundations-Commonfund study, the most recent data available.
While consultants' primary contributions are performance attribution and measurement, asset allocation and rebalancing, and manager selection, foundations are increasingly looking to partner with an outsourced chief investment officer to meet growing demands on their time and resources.
The outsourcing trend is particularly true for foundations turning more to alternative investments, which can take more resources to manage and monitor over multiple investment cycles when gauging their effectiveness for a particular organization.
“My sense is that the "build vs. buy' threshold is increasing when you talk about more asset classes like private equity and hedge funds,” said Ronald Klotter, a managing director at Strategic Investment Group in Arlington, Va., whose 10 OCIO foundation clients have $11.4 billion in assets. Mr. Klotter, a former executive with RVK Inc., is even hearing that from foundations with more than $1 billion in assets.
“There's more complexity around these types of investments, especially if we start to see bumps in the road,” said Mary Jane Bobyock, director of non-profit advice at SEI Investments Co., Oaks, Pa. Some foundations just want to outsource the alternatives because there is more due diligence involved, OCIO officials say.
Perella Weinberg Partner's outsourced CIO group, for example, has a staff of 42, including a risk management head and 22 researchers.
While outsourcing has long made sense for smaller foundations, “we are seeing larger pools of private foundations asking for information about outsourcing,” said Ms. Bobyock. “They've seen a lot of growth exponentially in the recent past and they are asking, "should we be more nimble?' It's being viewed as more of an option as you go up in asset size.”
Perella Weinberg was hired last year as the outsourced CIO of the $860 million Rockefeller Brothers Fund, New York. According to the Council on Foundations-Commonfund study, 30% of the 153 foundations surveyed substantially outsourced their investment management function in 2013. Of the 26 foundations with more than $500 million in assets, three reported substantially outsourcing investment functions.
Larger foundations looking to outsourcing has also spurred more competition among OCIO firms in the last few years, which is expected to lead to consolidation in the coming years.
Like consultants, outsourced CIOs come in several models. On one end is The Investment Fund for Foundations in Radnor, Pa. which offers a multiasset fund for foundations. At the opposite end are firms that offer a menu of services that include long-term strategic asset allocation, tactical rebalancing, manager due diligence and execution.
With foundations' smaller investment teams, “there is a trend to be interested in a broader business partnership with (us),” said Margaret Chen, managing director of Cambridge Associates LLC. “The relationship goes beyond portfolio management.”
Either way means that someone is constantly tracking a portfolio's performance. “And there are discussions that are more forward-looking,” said Sarah Clark, managing director of Commonfund's strategic solutions group in New Canaan, Conn. “During the recession, we were fairly dynamic, trying to capture more (opportunities) as it came back. That's why there's more interest in outsourcing, because there is always someone looking at the portfolio.”
Mr. Klotter of Strategic said that a foundation's investment committee shouldn't worry that outsourcing diminishes their importance. Despite a common misperception, the investment committee's role “is no less important and the policy committee is extremely involved,” he said. “The goal is to use the committee's time well, and soliciting managers is probably not the best use of time for them.”
As personal wealth increases, “new foundations are being created all the time, and it is an opportunity to create a different governance structure and they go straight to outsourced CIO,” said Ms. Chen of Cambridge Associates. “OCIO has become an accepted model and private foundations can be early adopters.”