If you haven’t taken our OCIO 101 class, you may wish to start there. It covers what OCIO stands for (outsourced Chief Investment Officer), what its namesake Chief Investment Officer does, and what kinds of investment firms offer OCIO services.
Today, we’re diving a little deeper into the OCIO landscape. Deciding to hire an OCIO is one important decision an Investment Committee can make, but it is not the only one. Once an organization has chosen to move to an OCIO model, it must select between the myriad options that bear the “OCIO” label. The three OCIO models we will discuss today, which we think of as a spectrum, are:
This class, OCIO 102, is dedicated to helping you make sense of those labels to find the OCIO model that best fits your organization’s needs. We also offer some tips to organizations embarking on a search for each model.
At one end of the spectrum are one-fund OCIOs (at least, this is what we call them at Alpha Capital Management).
These are complete solutions, primarily for endowments and foundations, and they are typically managed by spin-outs of large endowment teams like college universities. When an institutional investor engages a one-fund OCIO, the institution’s assets are combined with all the firm’s other clients in a pool and invested in the same asset allocation with the same managers. One-fund OCIOs typically invest in a version of the Endowment Model, with heavy allocations to illiquid alternative investments.
Alpha Capital's Search Tips for One-Fund OCIOs:
At the opposite end of the spectrum from one-funds are custom OCIOs.
This model looks and feels very similar to legacy investment consulting relationships. Custom OCIOs take a collaborative approach to many of the high-level portfolio decisions that one-fund OCIOs make on their own – liquidity, return objectives and risk tolerance, asset class weights, and idiosyncratic portfolio decisions like values-based investing. On these big-picture topics, there is no functional difference between a custom OCIO and a traditional non-discretionary investment consultant. The line in the sand that separates custom OCIO from non-discretionary consulting is the ability to hire and fire investment managers without approval from the organization. Once the Investment Policy Statement has been collaboratively created and agreed upon, the custom OCIO has discretion to make day-to-day portfolio decisions, and it has the operational authority to do so.
Alpha Capital's Search Tips for Custom OCIOs:
Hybrid OCIO is another term that is used by Alpha Capital but not necessarily across the industry. These solutions lie somewhere between custom and one-fund OCIOs on the spectrum.
The distinguishing characteristics of this model are the ability of the client to customize asset allocation (shared with custom OCIOs), and the pooling of some (but not necessary all) client assets (shared with one-fund OCIOs). Hybrid OCIOs often pool client assets within asset classes (e.g. all clients own the same Global Equity vehicle, but the allocation to Global Equity varies based on the individual client’s asset allocation). Some of the earliest OCIOs in the industry use this model.
Alpha Capital's Search Tips for Hybrid OCIOs:
Other Models Exist
You should now have a solid understanding of the main OCIO models available today. Unfortunately, life isn’t quite as simple as our charming illustration makes it seem. The OCIO industry is in a state of growth and evolution, and there are many variations between custom OCIOs, between custom and hybrid OCIOs, and even between one-fund OCIOs.
One example involves a client veto. Some OCIOs offer clients a defined window of time (e.g. 72 hours) to veto an investment manager change. You may question whether this is truly an OCIO model (remember, the line in the sand is whether an OCIO can make changes in the portfolio without the organization's approval), but it is often sold as such.
Another example involves a fund-of-one at a one-fund (yes, you read that right). As one-fund OCIOs mature, some have started offering clients the ability to customize at the margin. For example, a client with significant illiquid legacy positions may not be able to fully invest in a one-fund’s illiquid portfolio while staying within the liquidity requirements of the organization. This client can get a fund-of-one where the liquid assets of the portfolio are invested like the one-fund but the illiquids are the client’s legacy assets rather than the one-fund’s illiquid portfolio.
Therefore, it is important that your organization looks carefully at each OCIO provider (even if they appear to use the same model) to understand key parameters around discretion, consent, liquidity, fees, investment experience, portfolio management, trading, and other criteria before you hire one. The better designed your RFP is, the easier this process will be for you.
Brad Alford, CFA