Despite the sharp increase in merger and acquisition interest and investment growth in OCIO firms, standardization is still lagging behind. For decades, traditional money managers have had standardized and validated track records to show to prospective clients. Many institutions won't invest without a GIPS-compliant track record of at least three to five years. In stark contrast, many institutions will often hire an OCIO to run their entire portfolio without so much as asking to see a track record.
Many OCIO firms do not volunteer their performance history, and some will not provide it even if requested. One reason given is that the performance of an OCIO firm's clients can vary, as management is often tailored to individual clients. This may be true in theory, but in practice, many OCIO processes, especially those newer to the discretionary business, have simply not been consistently applied among their client base.
With the stampede of assets flowing into the OCIO market, many of today's OCIOs were originally traditional consultants that simply added discretion to their incumbent relationships in order to join the market. For some, this created an environment lacking uniformity among their books of business, as well as in their implementations.
As a result, performance histories are often opaque, creating an environment where an OCIO might provide selective, cherry-picked composites. Other times, they hedge around questions about performance, stating performance can vary entirely based on the client's situation.
All too frequently, evaluations are made without regard to demonstrated investment capability altogether, instead having been reliant on relationships, representative client lists, credentials and compelling marketing — especially when not led by a competent search consultant.
Similarly, fees and cost arrangements have been inconsistent across the board. Some OCIO firms charge basis-point fees, while other firms charge fixed fees or even performance-based fees. Some firms have fees embedded in commingled vehicles, while others charge different fees for different asset classes.
However, the same commingled vehicles that may obscure or complicate fee evaluation may also add cost savings due to economies of scale at the submanager level. There is no easy answer to the question, "Which model is best?"
Evaluating OCIO services and capabilities requires more than the ability to administer an RFP, often putting the institutional client at a disadvantage. Organizations that hired an OCIO in the past five years, but did not use a well-established method for evaluation, will likely re-evaluate their OCIO relationships to validate their selection or make a change if warranted.