The OCIO market is one of those segments of the investment world that is seeing a significant increase in growth. Not only are managers that were created solely as OCIOs finding new opportunities, more traditional managers, including large fund complexes, are also being drawn into this market. And so, the question understandably arises: how to evaluate performance.
Valter Viola's recent commentary, "Proper ways to evaluate performance of a potential OCIO," provided an analytical assessment of some of the challenges that lie in this space, as well as helpful evaluation metrics. One area we see increased interest was overlooked: requiring compliance with the Global Investment Performance Standards.
There was, and probably to some extent, still is, confusion as to the appropriateness of the standards for OCIOs. This is unfortunate, since its applicability has always seemed obvious to us. We have several OCIO clients as verification clients, with more showing interest in our services on a regular basis.
The GIPS standards have long been recognized as the "gold standard" to compare managers. In addition, we are seeing more asset owners complying.
There will always be constraints on what an OCIO manager can do, just as there are constraints on those asset owners who elect to comply. This does not diminish the value of compliance. OCIOs can group similar clients together, as well as carve out segments of client holdings into asset class composites, to provide prospects with great visibility into their past performance.
The standards are flexible, while at the same time providing rules for calculations, policies and procedures, composite construction, and reporting.
As Mr. Viola suggested, returns before fees are key, and the standards allow for both gross- and net-of-fee returns. Arguably, gross returns are preferable for all prospective clients, since fees can vary considerably across managers, as well as across time.
The starting point for OCIO evaluation should be with mandating compliance with GIPS. For comparability of managers, nothing beats these standards. Beyond that, the evaluation can extend to whatever depth or breadth the institution feels is appropriate.
David Spaulding is the founder and CEO of the Spaulding Group Inc., Somerset, N.J. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I’s editorial team.