Why OCIO Services Are Taking Root in New Markets
Outsourcing the chief investment officer position, a concept
once embraced primarily by frozen corporate defined benefit
plans, is becoming increasingly popular with broad swath of
asset owners. Chief Investment Officer spoke recently with
Stephen Cummings, chief executive officer of Aon Hewitt
Investment Consulting Inc., one of the fastest growing
providers of outsourced chief investment officer solutions, to
find out where and why demand is growing—and how new
users of the OCIO model can make it work for them.
CIO: Where are you seeing new demand for OCIO
STEPHEN CUMMINGS: When the OCIO marketplace started
gaining traction about a decade ago, demand was mostly
from corporate sponsors of frozen defined benefit plans on a
de-risking journey of some sort. Their plan was no longer an
active employee benefit, and they wanted to minimize time and
energy spent on it. Now growth is coming from all sorts of areas:
active corporate defined benefit plans, smaller public retirement
plans, endowments, foundations, and, most recently, participant-
directed retirement plans—particularly 401(k)s.
CIO: What’s driving this new interest?
CUMMINGS: Typically, it’s a desire by certain plan sponsors
to delegate responsibility. Many plan sponsors are not in the
investment business, and the OCIO model lets them outsource
that responsibility to a full-time investment advisor, which may
provide better outcomes and allows them to focus on their area
of specialization. A third driver is speed of decision-making. It’s
not uncommon for institutional investors to meet quarterly and
need three to nine months to discuss and implement a new
investment idea. Under the OCIO model, investment ideas can
be implemented very quickly by investment professionals who
are thinking about those issues every day and have discretionary
authority to act on the client’s behalf. Sometimes it’s economies
of scale; often the cost of the investment program decreases. In
the endowment and foundation space, I attribute growing use of
the OCIO model to an increased awareness of the importance,
and challenges, of investing in illiquid assets such as real estate
and private equity, where you want the powerful economies of
scale associated with commingled investments but have to be
thoughtful about how and when liquidity is provided, such that
the actions of one client don’t have an adverse impact on others.
CIO: Are any external factors contributing to the
interest in OCIO services?
CUMMINGS: We’re living in an age of decreased return
expectations. Any advantage you can get from speed of
implementation or lowering of costs—even a small advantage—is
just that much more valuable in a low-return environment. Couple
that with the regulatory scrutiny that’s being applied to retirement
plans, particularly in the 401(k) arena, where there have been a
lot of class-action lawsuits about the cost and appropriateness of
individual investments, and many plan sponsors are saying they
don’t want to be their own investment officer. They want someone
truly expert in the space.
CIO: Is the OCIO product itself changing?
CUMMINGS: In the early years, OCIO was an all or nothing
proposition. Today it’s not. One of our oldest and longest-standing
OCIO clients uses OCIO for alternative investments, for example,
but retains decision-making for publicly traded stocks and bonds.
CIO: How can institutions know when outsourcing
the CIO function makes sense for them?
CUMMINGS: There’s no single triggering event, but one common
sign is that the sponsor is feeling less confident about the decision-making process for the investment program they’re responsible for
overseeing. We have observed a tendency, particularly in times
of lower investment expectations and high uncertainty, for plan
sponsors to question whether this continues to be something they
should be doing on their own.
CIO: Defined contribution plans have different needs
and objectives than defined benefit plans. What do
the former need to think about when outsourcing the
4/14/17 11:31 AM