As interest in OCIO or outsourced investment management continues to grow, particularly with its ability to maintain the long-term governance targets of plan sponsors while being flexible in responding to current market pressures and the continuing Covid-19 pandemic, a careful consideration of OCIO models is important in helping to create a good fit. The OCIO can be an investment manager with proprietary products, a manager-of-managers, or a consultant, or hybrid approaches between these structures. “As part of PNC Bank, we have a full-service OCIO platform where we're able to offer clients a full set of solutions from custody to investment management,” said Stacey Herndon, Senior OCIO Investment Advisor at PNC Institutional Asset Management®, at Pensions & Investments’ The Evolution of OCIO virtual series.
Full-Service OCIO Approach Offers Flexibility and Customization
“Our full-service solution uses the manager-of-managers model with an entirely open architecture platform, where we can construct portfolios with the best of the best managers, not relying exclusively on our own product,” said Herndon, at the session titled ‘Examining Options, Structures and Selecting a Model.’ Her experience is in the not-for-profit space or Endowments & Foundations, she said, adding that she also chairs the Investment Committee of a foundation that is currently undergoing an OCIO search.
Having that full-service approach offers flexibility to clients as “we can respond to being more passive in structuring a portfolio, depending on client needs, or moving to rely more on certain types of active managers, depending on where we are in the business cycle. We truly have a very flexible model that allows us not only to adapt to specific client needs and goals but also to adjust for where we are in the business cycle and different market environments,” Herndon said. For an asset owner starting an OCIO search, “the different service models themselves are very important in understanding the exact services that you're going to get and having a clear expectation of your OCIO.”
While the OCIO model and structure is important, a more qualitative self-assessment by the board and investment committee is important in understanding the types of strategy or decisions it wants to retain and the type of relationship it wants with the OCIO, Herndon said. “The ability to trust your advisor as a strategic partner and know they will always have your best interests at heart, for me, is very important,” she said. Also think about the capabilities of members of your investment committee, she added. “Are they going to accept relinquishing some control over the investment decision-making?”
“Whenever you have an investment committee board, everyone has an investment adviser that they know. Everyone has relationships in the industry,” Herndon pointed out. “My own personal view is that using a strong OCIO search consultant really helps to distance the board from having undue influence on the decision and the consultant also helps you to decipher information.” Having a search consultant is better from an asset owner perspective and from a board fiduciary perspective, she said. “My own experience with RFPs is that what you get from firm A is not always what you get from firm B or C. Search consultants have the ability to standardize the data and present it in a way that allows boards to make decisions more effectively.” The search consultant also helps the OCIO, she noted. “If we’ve submitted an RFP, it helps to be able to have someone to go to with questions, who can continually move the process forward, and who provides feedback, which makes the process a lot smoother for everybody.”
As more asset owners look to incorporate diversity, equity and inclusion considerations into their portfolios, the OCIO can take different approaches. “From our perspective, the starting point is how large is the pool of assets? Because once you start breaking down into asset classes, you may get to the point, particularly in emerging markets, where it a little bit harder to execute on for obvious reasons,” Herndon said, adding that SRI or ESG screens are clearly more viable for large cap exposures. “We typically will use separately managed accounts. Whatever the specific criteria are for that client, we screen managers and see how they score on that metric. If you're looking for an ideal score, you may find that some managers don't quite meet the mark that others do. And so there’s nuance and tradeoff in terms of how boards really want to approach these considerations,” she noted.
Herndon shared the situation of a current client who is very concerned about freedom of the press.
“When we went through and screened out countries that didn't support freedom of the press, by the time we got to emerging markets, there wasn’t a diversified set of investments left once you screened out all of the undesired countries. So, while you can go as deep as you want, there’s also a little bit of art to it, and what you may find is that, depending on how strict your criteria are, you might end up without emerging markets,” she said.
As asset owners also look to widen their support of diversity by partnering with OCIO managers who are women and minority-friendly companies, it is important to look at the ownership structure of an investment company, Herndon said. “We don't just want to see how many minorities work at the company because if they're all in operations and not actively involved in driving the revenue of the organization, to us that's less desirable. We look at who sits on the board and the investment committee, as a way of judging the overall commitment to diversity.’”
“We also score our managers in terms of the underlying investments that they make,” she added, noting “We use different screens that can get pretty granular. It just depends on how detailed or specific a client wants to get with having their assets reflect their mission.” PNC’s overall approach is to customize the mission-aligned portfolio. “I have clients that are Catholic organizations and clients that are Unitarian, and their interests are entirely different. So there is no single screen, based on our experience, that fits the need of every client.”
The OCIO industry has increased significantly with over 100 firms offering different structures and models. “There’s going to be a considerable amount of consolidation, and one of the biggest trends driving this is the fee contraction,” Herndon said. As asset owners require more custom portfolios, in sophisticated asset classes and ESG considerations, the OCIO will need economies of scale to remain viable, she noted “Coming from a large bank that's heavily resourced, that has the ability to handle specific client needs, that has the thought leadership as it relates to SRI or ESG, and that has the appropriate technology build out, that is what is needed to appropriately cover our clients.”
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