Demand growing, but searching and hiring not necessarily easier

The growing popularity of OCIOs is making it easier for asset owners to access the right providers, but sources are split over whether the search and hiring process is getting easier for institutions.

Many asset owners are concerned about the logistics of moving from third-party investment managers, custodians and benefit providers to an OCIO, but that part of the hiring process is getting easier as the outsourced investment industry matures, said Thomas J. Kennelly, Boston-based managing director and global head of OCIO investment strategy at the investment solutions group of State Street Global Advisors.

"Having an effective transition plan to an OCIO model that maintains market exposures, ensures links to custody and participant record-keeping, and provides quality committee and board reporting are a few of the challenges that experienced and deeply resourced OCIO providers can help with, delivering a seamless transition," Mr. Kennelly said in an email.

Ryan Lennie, Pittsburgh-based managing director at Wilshire Advisors, said that with the help of search consultants, asset owners are getting better at making their hiring decisions.

"The OCIO market is extremely competitive, which gives asset owners a lot of flexibility to find the approach that will be the best fit for their organization," he said in an email. "As the hiring process has matured, asset owners are demonstrating a better understanding of what will suit their needs and finding an effective partner to fill that role."

Wilshire had $21.5 billion in outsourced AUM as of March 31, down 6.9% from a year ago.

About eight years ago, Temple University evaluated various investment models, ultimately zeroing in on an OCIO model for its endowment, pension and post- retirement funds, said Ken Kaiser, the university's senior vice president and chief operating officer.

"We went through a pretty rigorous RFP process where we hired a consultant to help us because it was pretty complicated and the universe of possible OCIOs is vast," Mr. Kaiser acknowledged.

Temple officials ultimately selected Strategic Investment Group to manage all of its $803 million endowment, along with $68 million and $361 million in pension and post-retirement assets, according to board documents.

Mr. Kaiser said the OCIO has "professionalized" the school's investment operation.

"They have strengthened our board's fiduciary responsibility to the university by making sure that we are getting the best guidance, best advice, and best execution of all of our investments vs. being driven by a board that is not investment professionals."

He added: "From a staff perspective, it (the OCIO model) really shields the staff from what I would call nonsense where you are being asked by the board or others to 'talk to this firm' and it turns out to be a firm with local political ties trying to get a piece of the endowment or something. It's very easy to punt that to the OCIO, and in most cases, those firms don't make it through the OCIO's filter."

The ability to change course quickly in fast-moving markets is another benefit of the OCIO model, Mr. Kaiser said.

"Prior to working with an OCIO, if something was happening and we needed to make a move, you'd have to wait until the next investment committee. You'd possibly have to bring in two or three managers. So by the time you're ready to make a move in response to something or in anticipation of something, it's too late. With the OCIO they just execute where appropriate."

Temple's board set the asset allocation according to an investment policy statement the board created with input from the OCIO, which then executes on allocation decisions. The OCIO is responsible for all of the risk management, and hiring and firing of managers. A separate consultant monitors the OCIO, which Mr. Kaiser declined to name.

Mr. Kaiser said going through the OCIO RFP process helped crystallize Temple's investment philosophy because staff had to get specific about what they wanted the OCIO provider to do.

"I think the big misconception is that the investment committee is not fulfilling our duty if we give an OCIO full discretion over our portfolio," Mr. Kaiser said. "However, through our research, as we were deciding on which investment model to select, everything pointed to us actually improving on our fiduciary duty and fulfilling our responsibilities with an OCIO as long as we are monitoring them and not just handing them the keys and walking away."

SSGA's Mr. Kennelly noted that the recent banking crisis is "prompting searches for heightened safeguards." Among non-profits, he has observed an "increase in searches to replace existing OCIO arrangements for better fees, additional services and improved risk analytics to enhance overall governance."

SSGA reported $152.9 billion in outsourced AUM as of March 31, making it the sixth-largest OCIO in P&I's database, down 15.9% from the prior year.

Jennifer Kruse, New York-based U.S. OCIO leader at Mercer, cautioned that while her firm is definitely seeing an increase in OCIO searches and hires, it is unclear if this is market-driven, or if it's due to "business prioritization of resources and expertise."

Mercer is the largest OCIO firm with discretion in P&I's database, with $337.7 billion in outsourced AUM as of March 31, down 8.8% from a year earlier.

Search activity for OCIOs has indeed "picked up quite a bit," acknowledged Kane Brenan, Radnor, Pa.-based CEO of TIFF Investment Management, adding that "several search consultants have said 2023 is shaping up to be the busiest year so far."

Mr. Brenan agreed with Mr. Lennie that the OCIO hiring process has gotten easier with the use of third-party search consultants.

"The search consultants make the evaluation and selection of a provider much less time-intensive," he said in an email. "Organizations lean on search consultants to help them understand what they are looking for in a partner and which partners provide the desired attributes. The search consultants also provide clarity around OCIO provider investment approach, historical results, and transparency around fees."

TIFF had $8.3 billion in outsourced AUM as of March 31, up 6.4% from a year prior.

But Steve Charlton, Boston-based head of client solutions and partner at NEPC LLC, countered that the hiring process is not getting easier.

"The growth of third-party evaluation firms as the stewards of OCIO searches has required the OCIO industry to invest in additional resources and capabilities to answer more in-depth questions coming from TPEs," he said in an email. "TPEs generally take a deeper dive during the due-diligence process relative to asset owner-driven RFPs, so the hiring process is not getting easier in the OCIO space."

NEPC reported $61.5 billion in outsourced AUM as of March 31, slightly below its $61.7 billion figure a year prior.