Efforts underway now to come up with outsourced CIO reporting standards could be one means of making what remains a crowded, opaque market segment easier for institutional clients to navigate.
Or not, depending on whom you ask.
Scott Perry, a partner with Boston-based NEPC, counts himself among the optimists, holding out hope that an ongoing CFA Institute exercise charged with creating rules of the road for OCIO reporting could lay the groundwork for more consistent reporting of OCIO track records and performance over the coming six to 12 months.
He said coming guidelines — "an important next step for the rapidly expanding OCIO solutions market" — should help stakeholders make more informed decisions about the options available to them.
"Historically, it has been hard for stakeholders to do an apples-to-apples comparison of OCIO track records," Perry noted.
The coming guidelines, while not perfect, will move in the direction of making such comparisons possible - considerable progress for a market segment that retains “a little bit of the Wild West” about it, he said.
In P&I’s latest annual survey of OCIO providers, NEPC reported $106.6 billion in worldwide institutional outsourced assets under management as of March 31, up 73% from the year before.
At present, “there’s no industry standard” to dictate whether a manager responsible for a $50 billion client’s $5 billion target-date fund would report $5 billion or $50 billion in OCIO assets, noted Ravi Venkataraman, managing partner and co-owner of Chestnut Advisory Group, a Westport, Conn.-based boutique management consulting firm focused on asset managers and investment solutions providers.
Other OCIO veterans agree uniform standards will be a significant step forward for the industry.
The move toward global investment performance standards, or GIPS-compliant composites, for OCIO providers would amount to a “pretty big shift,” said Mark Andersen, San Francisco-based senior vice president and manager of Callan’s trust adviser group.
“We’re all kind of waiting to see what the outcome is and what the guidance will be prospectively,” he said.
The CFA Institute introduced global investment performance standards to replace country-specific standards in 1999, with all 25 of the world's largest asset management firms, and 85 of the top 100, claiming compliance with GIPS for all or part of their businesses today, confirmed Ken Robinson, the CFA Institute's director, global industry standards.
OCIO clients haven’t historically demanded GIPS-compliant returns but over the next five years — and probably much sooner — such reporting is likely to become “table stakes” for OCIO firms, Andersen said, adding that competitors without the capabilities and methodologies to present those returns to prospects could face headwinds.
For Callan’s part, “we’re at the doorstep,” he said. “There’s a very long process to put together all of the historical returns and all of the procedures necessary to say you’re satisfying all the requirements that have been laid out. We expect to take that step in the second half of 2024, so the overwhelming majority of the work is done now. We’re in the verification process,” he said.
Callan reported $33.7 billion in worldwide institutional outsourced AUM as of March 31, up 45% from the year before.
Opposition to standardization
But some OCIO veterans say they are either philosophically opposed to standardization efforts or not ready to commit to new standards until final recommendations under the CFA’s auspices can be reviewed.
The CFA initiative, like similar attempts to forge collective reporting standards, are “trying to turn a service into a product,” said Jonathan Hirtle, the OCIO pioneer who helped launch Hirtle, Callaghan in 1988.
“We come from an industry that’s all about products,” something OCIO was designed to replace, Hirtle said.
Efforts being made now suggest the industry doesn’t really have a good feel for what a CIO does, he said. “The money manager is like a role player … a character actor. The CIO is a writer, director,” said Hirtle. How can the “terrific, broad solution set” for that more expansive role be captured by a composite index, he asked.
In P&I’s latest ranking, Hirtle, Callaghan reported worldwide institutional outsourced AUM of $12.7 billion as of March 31, up 5% from the year before.
Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management, likewise expressed concern about how a market segment with so many working parts can be successfully standardized.
“There’s constant chatter around the best way to display performance relative to indices for OCIO mandates (but that’s) a pretty challenging thing to do when every single mandate is different,” Braude noted.
One proposal under consideration calls for bucketing mandates based on high level allocations to liability-hedging or risk-mitigating assets, potentially a move of questionable value when there can be so many nuanced differences under the hood, he said.
“We obviously think there’s a lot of benefit to ensuring that we have GIPS-compliant performance compositions but ultimately if we don’t think that the proposed solution is appropriate then we’ll have to assess what the next steps are at that point,” Braude said.
Goldman Sachs Group reported $328.9 billion in worldwide institutional outsourced AUM as of March 31, up 33% from the year before.
Karyn D. Vincent, senior head, global industry standards with the CFA Institute, said "we expect to issue the final GIPS Standards Guidance Statement for OCIO strategies by 31 December 2024."
Crowded field
If deep-seated differences remain when it comes to the value of OCIO-specific GIPS composites, there's broad agreement that the universe of OCIO providers remains crowded — even with a recent pickup in high-profile M&A activity — and difficult for prospective clients to vet.
An ever-broader embrace of the OCIO model makes it easier for institutional investors to decide to outsource their plan assets but selecting a provider has arguably become harder because there are so many OCIO firms out there and “so many nuanced differences and ways you can engage an OCIO,” said Timothy Yates, president and CEO of Commonfund OCIO.
“If you walk into an ice cream store (and) you’ve got vanilla, chocolate and strawberry, it’s an easy decision. If there are 47 different flavors, all of a sudden it’s a much harder decision,” he said.
Commonfund reported $14.6 billion in worldwide institutional outsourced AUM as of March 31, up 20% on the year.
“The biggest challenge for our industry has been the mass proliferation of organizations that call themselves OCIOs but pursue different models, different value propositions, different discretionary engagement and styles,” agreed Matt Bank, a partner, deputy CIO and head of the client portfolio management group with Global Endowment Management, the Charlotte, N.C.-based OCIO that broke away from Duke University’s endowment team in 2007.
“There’s been a general muddying of what the term means, which makes it much harder for institutions to sort out what they ought to do (and) what’s in the best interest of their organizations,” given the fact that typically the committees making those decisions are staffed by volunteers relying on their own experiences and opinions to manage the pools of capital they oversee, Bank said.
“It’s highly competitive, with a lot of players and still limited consolidation,” noted NEPC’s Perry. Meanwhile, there are three major categories of OCIOs — those linked to asset managers, investment consulting firms and endowment boutiques, he said.
According to research by the Chestnut Solutions Institute this year, at the close of 2023, 51% of worldwide outsourced AUM was managed by OCIOs with consulting firm roots, 41% by asset manager-linked OCIOs and the remaining 8% by boutique OCIOs.
Chestnut’s Venkataraman said the preference of some clients for OCIOs that use third-party managers as opposed to in-house products can favor providers connected with investment consultant shops.
According to P&I’s latest OCIO survey, internally managed worldwide institutional outsourced AUM rose 12% over the 12 months ended March 31 to $489.4 billion even as U.S. institutional outsourced AUM was dropping 5.3% to $225.5 billion.
Some industry veterans predict consolidation is poised to pick up over the next few years.
Over a long period where markets were going straight up and interest rates were very flat, it was relatively easy to hang out a shingle as an OCIO and the number of providers went up and up, but that moment in time is over, said Michael Cagnina, senior vice president and managing director of SEI’s institutional business.
Some of those firms are finding themselves hard-pressed to deal with the current, more complicated market environment, which will lead to more transactions to come in the OCIO space, Cagnina predicted.
SEI reported $90.6 billion in worldwide institutional outsourced AUM as of March 31, up 3.9% from the year before.
