Endowments and Foundations Increasingly Want Their Top Advisors to Act Like OCIOs

As institutional investors navigate an increasingly complex market environment, they’re outsourcing more of their functions to managers and consultants.

Illustration by II

Illustration by II

Institutional investors increasingly want their most trusted advisors to function like outsourced chief investment officers.

In the next five to seven years, a third of endowments and foundations want their most trusted advisors — usually investment managers — to handle their portfolios like OCIOs, according to NEPC’s 2022 governance survey published Thursday. The survey included responses from organizations including public and corporate pensions, foundations, defined contribution plans, healthcare organizations, and endowments.

This increasing reliance on managers and consultants was recorded across fund types, with 19 percent of healthcare funds and 17 percent of defined contribution funds also anticipating that their most trusted advisors will act like OCIOs in the near future, up from 10 percent and 13 percent, respectively.

Among endowments and foundations, 26 percent said they currently view their most trusted advisors as investment managers, which NEPC defined as a “consultant or manager who handles everything like an OCIO.” Thirty-two percent said they see their most trusted advisors taking on this role in the next five to seven years.

“That’s a trend that’s been going on for a while now,” Steve Charlton, NEPC partner and head of client solutions, told Institutional Investor. “At least in the last six or seven years, endowments and foundations have been turning more and more to OCIO-type organizations to manage their assets.”

As institutions attempt to navigate increasingly-complex markets and develop more advanced portfolios with exposure to alternative investments like hedge funds, private equity, and private debt, they may need additional expertise from OCIO providers who have more experience in these areas, Charlton said.

Among the asset owners surveyed by NEPC, 43 percent described their most trusted advisor was a partner, someone with whom they work closely to develop their investment programs. About a quarter said they have advisors (“I make the decisions, but almost always do what they recommend”), while 15 percent said they use a consultant as a key source for information and perspective. Twelve percent identified their most trusted advisor as an investment manager who acts like an OCIO, with 17 percent expecting their top advisors to take on this role in the next five to seven years.

“This survey is reinforcing our belief that more and more investment committees or brand sponsors or whoever it might be are interested in turning over additional responsibilities to their trusted advisor,” Charlton said.

NEPC also asked respondents about the degree to which they consider diversity, equity, and inclusion issues — something which 80 percent agreed was an important consideration in their investment programs.

However, respondents from pension plans (both corporate and public), defined contribution plans, and insurance organizations were slightly less likely to indicate DEI as an important aspect of their program. Specifically, 38 percent of respondents from these organization types said that DEI was not important, significantly higher than the average of 20 percent.

Meanwhile, endowments and foundations were slightly more inclined to say that DEI initiatives were “extremely important” to their organizations. Nineteen percent of respondents from endowments and foundations answered “extremely important” versus 18 percent overall.

This discrepancy may be a result of endowments’ and foundations’ more recent adoption of DEI issues compared to pension plans, according to Sam Austin, NEPC partner and governance board member. Austin said pensions were at the forefront of DEI initiatives in the eighties and nineties. Other institution types have started to catch on in more recent years, particularly after the murder of George Floyd in 2020 and subsequent civil rights protests.

“Endowments, foundations, and healthcare organizations have increasingly caught fire over this issue over the last two and a half years, going back to that catalyzing event of George Floyd,” Austin said.

Austin said endowments and foundations now place a greater emphasis on aligning their organizations’ missions with their investment portfolios than they did ten or 15 years ago.

“The intensity of the issue is more front and center and it’s a fresh topic for the endowment and foundation world, whereas it’s been an issue that’s been on the table for pensions for much longer,” Austin said.