Why the OCIO Industry Will Keep Getting Bigger

Use of outsourced CIOs is expected to grow at an annual rate of more than 5 percent through the end of 2024, according to Cerulli Associates.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Outsourced chief investment officers are in high demand after delivering strong results during the pandemic, according to a report by Cerulli Associates.

The research and consulting firm expects the OCIO market to grow at 5 percent annually for the next three years, a faster pace than the broader institutional market.

Over the year ending March 31, the broad market AlphaNasdaq OCIO index, which measures all account-level returns reported by 39 OCIO providers, rose 30.69 percent. According to Laura Levesque, associate director of Cerulli’s institutional division, this shows that OCIOs brought robust financial recoveries to their clients in the year following the start of the pandemic.

OCIOs often combine different asset classes like cash, real estate, bonds, and stocks to meet the risk levels that their clients can take. These multi-asset strategies are crucial during market dislocations like those caused by the Covid-19 pandemic, according to the Cerulli report.

A multi-asset class portfolio “has the benefits of the entire portfolio having more efficient management,” the report said. “It reduces portfolio overlap, improves fees, and allows for faster reactions to market events.”

While multi-asset solutions are not unique to OCIOs, the strategy’s potential is brought to the next level by OCIOs that deliver customized strategies to clients, according to OCIO consultant Dennis Sugino.

“Their role is to help clients determine how much risk they want to take in the portfolio and then to design an asset allocation of different asset classes that fits that level of risk that they are prepared to take,” he said.

Another factor driving growth in the OCIO space is the continuing low-rate environment, Levesque said. In-house investment committees who have found it challenging to deliver high returns under low interest rates have turned instead to OCIOs, who are better connected and have more resources.

“Twenty years ago, when interest rates were high, it was really easy to make sure you get the return you needed to fund your pensions,” Levesque said. “That’s a lot harder now, especially for smaller organizations.”

OCIOs also provide investment advice across different industries and asset classes, which is helpful for smaller investment organizations and local community funds, according to Sugino.

“The OCIO as a structure has really lent a discipline and expertise in the whole investment process,” Sugino said. “Its growth has been constant and inevitable.”