How to measure OCIO performance

The outsourced CIO model has exploded, controlling $3 trillion in institutional assets, more than triple the level of 15 years ago. But there is still some way to go to improve the transparency that asset owners need from the OCIO providers entrusted with the management of holdings.

Three OCIO experts appeared in a webcast hosted by the CIO on Thursday (click the previous link to view the recorded video), outlining the progress that has been made and what they think still needs to be done. On the plus side, the new OCIO standards are being studied by a CFA Institute-sponsored task force, and performance metrics are now available from Nasdaq.

Guests on the webcast, hosted by CIO executive editor Amy Resnick, outlined methods “to bring more transparency,” according to panelist Daniel Brickhouse, head of product management for Nasdaq Analytics. Nasdaq, in partnership with consultant Alpha Capital Management, launched a series of indices in 2019 to track different groups of allocators. In 2022, its broad market index lost 15%.

This measure gives asset owners a benchmark against which to compare the performance of their own OCIOs. But Brickhouse pointed to other issues, such as the difficulty stemming from an OCIO choosing to realign an asset allocation it takes on. “It’s hard to just liquidate positions,” he noted, citing the cost and effort involved.

Such challenges are the impetus behind the CFA Institute’s effort to revise its Global Investment Performance Standards, or GIPS, to evaluate external investment chiefs. These guidelines, which investment firms around the world use to ensure full and fair disclosure of financial performance, address such issues as how to account for fees.

Different types of allocators — defined benefit pension plans and university endowments, for example — require different standards, explained panelist Karin Vincent, senior manager of global industry standards at the CFA Institute. She is part of the working group.

In evaluating the assets an OCIO provider takes on, the outsourced investment manager can use a “performance threshold to see whether to keep them,” Vincent said. The CFA Institute plan will be presented in late summer for public comment.

Measuring OCIO performance and methods is not an easy thing, according to expert Gregory Metzger, senior consultant at North Pier Fiduciary Management, which advises asset owners. Questions arise, for example, related to the valuation of illiquid assets. What is needed to evaluate OCIOs are investment performance templates, he said. Otherwise, there is a danger that OCIO will be “data picking”.

He likened the assessment required to baking a cake. “You can’t just look at the ingredients,” he said. “You should also look at the baker.”

How long should the OCIO connection last? Metzger answered: 10 years, although the provider must be reviewed every three. “The reason most OCIOs are replaced is not performance,” he said. “It’s a service.” An OCIO might not communicate well with a client’s investment committee, for example.

Because of the diversity of distributors, a universal model is not possible, the panelists pointed out. The relationship between the asset owner and the OCIO provider needs to be “personalized,” Metzger said. But for owners, he added, “then there’s the challenge of benchmarking them” against other OCIO firms to see if clients are getting their money’s worth.

Related stories:

OCIO Industry Set for strong growth, alternative expansion

Use of OCIO services by corporate pension sponsors rises while interest in risk assets declines, survey finds

CFA Institute: Let’s figure out how to measure OCIO performance

Tags: CFA Institute , Daniel Brickhouse , GIPS , Gregory Metzger , Karyn Vincent , Nasdaq , North Pier Fiduciary Management , OCIO , outsourced chief investment officers

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