Improved governance and risk management are other reasons institutional investors seek the services of OCIO providers, as well as increased nimbleness — an OCIO is typically able to react faster than a committee that might only meet as often as every quarter.
“The investment market has gotten a lot more complex,” said Mark Brubaker, a Pittsburgh-based managing director of Wilshire Associates Inc. “It's difficult for small and midsized pension funds to stay on top of everything.”
Although several industry insiders agreed there are many advantages to an institutional investor hiring an OCIO, it also comes with several challenges and risks. The first challenge, of course, is knowing where to find the right OCIO.
“There are a lot of providers. Some people stepping into this get overwhelmed by the number of providers and types of models out there,” warned Tom Murphy, senior partner and U.S. head of fiduciary management at Mercer, Boston.
Mercer's outsourced AUM grew 22% over the year. “There's been a huge growth in this area,” he said.
Joseph W. McInerney, managing executive of Chicago-based Northern Trust Asset Management's multimanager solutions unit, said the biggest challenge for defined benefit plans can be not meeting liabilities or return targets.
“They realize that they need to stay involved in the decisions and need to understand them,” said Mr. McInerney. “So we think educating them on regulatory changes or policy changes or market movements (is important), so those are the things we can work with them.”
On the endowments and foundations side, Mr. McInerney said risk management is the chief concern.
When it comes to finding the right OCIO provider, Geraldine Watson, vice president for finance and operations at the $860 million Rockefeller Brothers Fund, New York, said that it's not a quick or easy process. “A successful search for an OCIO requires much time, consideration of key criteria and active engagement of the investment committee and management, or a subsection of it, to assess the qualifications of the OCIO pool,” Ms. Watson told P&I. “Investment prowess, OCIO support structures and collaborative spirit are all key components.”
When seeking an OCIO provider, Ms. Watson advised: “One of the most important things (investors) have to think about is: what type of structure do you need to meet your objectives? Commingled or customized?”
Rockefeller Brothers Fund has used Perella Weinberg as OCIO provider since February 2014.
For investors who want to find independent evaluators of outsourcing managers, there are a couple of different options.
“You can go to big consulting shops,” said Sarah E. Clark, managing director and head of the strategic solutions group at Commonfund. “You just have to be aware of a possible conflict of interest. Some walk (the investors) through the whole process, some of them don't.” Five of the 10 largest OCIOs by assets under management — Russell, Mercer, Cambridge, Towers Watson and Aon Hewitt — would classify as big consulting shops.
Ms. Clark added: “There's a whole cottage industry building up around the OCIO business. There's more and more people out there to help.”
Mr. McInerney suggested one way for investors to find independent evaluations of OCIOs. “A few consultants have now moved into the outsourcing space. But there are some small- to midsized consultants that can provide due diligence on those investment outsourcers, like RVK for example,” which doesn't have an OCIO business, he said.
Mr. McInerney said it's wise for asset owners looking to hire an OCIO to seek out other asset owners using outsourcers and ask about their experiences. “Seeking users of outsourcers is really important. The size of the business and years of expertise are all considerations, along with the big one — cost,” he said.
One of the biggest roadblocks to finding the right OCIO, however, is finding a way to compare, sources said. Sources agreed there is no unified method of measuring performance among OCIOs, which can be a large hurdle for institutional investors.
“If you're looking for an OCIO provider, it's often hard to get apples-to-apples comparison,” said Mercer's Mr. Murphy. “We've got over 200 clients across the U.S. They've got different benchmarks and different objectives, so sometimes it's difficult to come up with comparable compasses.”
Mr. Brubaker agreed. Managers have strategies that can be measured against similar strategies of other firms, he said, but investment outsourcers have many different models and approaches since their services are customized on a client-by-client basis.
“It makes comparing services among OCIO providers very difficult. And there's very little information out there,” he said.
Mr. Brubaker added that although this may improve in the future, it will never be an apples-to-apples comparison. “So then it becomes very subjective for each asset owner to determine what's most important to them,” he said.
“That's really the $64,000 question,” said Ms. Clark. “We find that when a committee outlines their expectations of what they're looking for before sending out an RFP, they tend to be more successful.”
Ms. Clark added that since there are so many models out there, an institutional investor seeking an OCIO needs to know what its needs are before beginning a search.
Focus Consulting Group's Mr. Falk suggested one way to compare OCIO providers “is to require OCIOs to report performance numbers, even if it's an asset class-by-asset class case, just to see if they're adding value.”
As both technology and the global investing landscape continue to evolve, investors want to be aware of the latest innovations in outsourcing — and be aware of where they're coming from.
“Markets continue to evolve, so you want to make sure that you find an OCIO that has an eye toward how markets are evolving. So you want to make sure you are ahead of the curve, not playing catch-up,” advised Ms. Boedicker.
She also noted that risk analytics and upgrades in the back office are going to be big areas of continued innovation in the industry.
Looking forward, sources said that they expect the sector to continue experiencing growth.
“It's becoming a more cost-effective solution for asset owners,” added Mr. Brubaker. “It's becoming more attractive to even the larger asset owners out there.”