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Outsourced Chief Investment Officer Model 2013 EXECUTIVE BRIEFING
a park alpha
www.parkalpha.com | www.swfinstitute.org
May 2013
EXECUTIVE BRIEFINGWhat is the Outsourced Chief Investment Officer Model (OCIO)?
Essentially, the outsourced chief investment officer (OCIO) model permits the advisory firm to manage the client portfolio on a discretionary basis – allowing the firm to make changes (with prescribed limits) in investments. The OCIO model behaves in a similar capacity as professional investment staff.
OCIO Model Drivers
At times, the traditional governance model may have murky definitions of roles and responsibilities. Without clear governance and roles, multiple operating redundancies and inefficiencies will arise. The outsourced chief investment officer model is not suitable or practical for every investor. The OCIO model for supplying financial advice and managing investments has gained significant traction.
In the 1980s and early 1990s, investing was less complex than it is today. The world is highly interconnected and markets increasingly volatile. There are accepted views that returns will be low for the near future.
There are many major factors driving demand in the OCIO model space. Having additional fiduciary oversight on selecting the proper asset allocation mix is a driver. Implementing and monitoring investments are also factors. The difficulty of sourcing and engaging investment managers is an arduous undertaking. Another factor is monitoring the performance and risk of the portfolio. An issue for smaller investors is accessing top-tier managers and special opportunities.
All these factors stem down to a lack of internal resources. Firms that have little assets and small staff face operational constraints. This connects to the ability to not act fast enough on market trends and investments. Smaller internal resources inhibit a firm to take on tactical investing or opportunistic deals.
Are there different degrees of the OCIO model?
Yes, there are variances of the OCIO model. Some range from a delegated consultant with additional responsibility to a firm accepting all roles of internal investment staff.
How does the OCIO model fee structure compare with traditional investment consultants?
Total costs for the OCIO model tend to be higher. OCIO fees are usually a percentage of assets. Level of service and the amount of discretion taken on by the firm are drivers of fees. Investment manager fees remain the same, charged in addition to the OCIO fee. OCIO costs are less transparent than traditional investment consultants.
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Firms that offer the OCIO model
Traditional Banks and Brokerages
Investment Consultants
Defined Benefit Actuarial Firms
Mutual Fund Firms
Source: Park Alpha
When it comes to tactical investing or special opportunities, which model is faster to act?
The OCIO can move capital faster into assets or managers since it has full discretion compared to traditional investment consultants. Traditional investment consultants can make strategy or manager recommendations on such investments - this increases time delay and execution.
What are contractual agreements like?
With the OCIO model, the investor will have a contract with the OCIO firm. The OCIO firm will contract with investment managers. In the traditional investment consulting world, the investor has separate contracts with the consultant and investment managers.
Noteworthy Challenges
There are challenges to selecting an outsourced chief investment officer. There is no industry standard and it is hard to evaluate firms on an apples-to-apples basis. There is risk in outsourcing capital to an incompetent advisor.
Leaving an OCIO relationship is much more difficult than terminating a traditional investment consultant. The OCIO relationship is entrenched in every aspect of selecting, investing, and monitoring the portfolio.
FIDUCIARY DUTIES ARE ENLARGED AS OCIO HAS DISCRETION ON INVESTMENTS.
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Please note that this white paper is intended to provide interested entities and persons with an insight on the capital markets and is not intended to promote any firm or manager, nor does it intend to advertise their performance. All opinions expressed are those of Park Alpha, the consulting division of the Sovereign Wealth Fund Institute, Inc. The information in this report is not intended to address the needs of any particular investor.
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