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Fear and Loathing in the Outsourced CIO Market

BlackRock is expanding its presence in the crowded OCIO marketplace, putting further pressure on similar firms that are already under the gun.

  • Imogen Rose-Smith

The outsourced CIO (OCIO) business has taken off over the past decade, but an increasingly crowded marketplace is making it hard for businesses to thrive. Now asset management giant BlackRock is ramping up its expansion into the business, further increasing the competition and threatening to shrink margins.

This month Bloomberg reported that Arizona State University has hired BlackRock as an OCIO to invest its $600 million endowment. The university had been using Agility, the OCIO arm of New York-based investment firm Perella Weinberg Partners, which it hired in 2013. But in December, Agility decided not to renew its contract with Arizona State, according to a source familiar with the conversation. The foundation’s investment committee has said that in addition to using BlackRock, it wants to make more investment decisions itself.

To some the news of Arizona State’s decision to shift its mandate to a less traditional OCIO is a symptom of an industry under the gun. The proliferation of OCIO firms, pressure on fees, lack of performance by hedge funds and other alternative investments, and move toward indexing all have hurt the OCIO business model, even though it continues to appeal to many.

“Conceptually an OCIO makes a lot of sense,” says Michael Falk, a partner with the investment management advisory firm Focus Consulting Group. “Educated investment professionals taking on the fiduciary responsibilities to manage on behalf of someone else” is, on paper, a good idea, Falk says. But, he warns, “in theory there is no difference between theory and practice, but in practice there is.” Although OCIOs grew in popularity for more than a decade, lately investors are starting to evaluate what they get out of the OCIO relationship.

Perella Weinberg Partners’ OCIO unit, Agility, owes its success, and its team, to the tendency of foundations and endowments to want to outsource the fiduciary responsibility for managing their assets to a professional asset management firm. In 2008, Agility, which had been founded more than a year previously, won the mandate to manage $825 million of assets from the $874 million University of Colorado Foundation. Colorado’s CIO, Chris Bittman, moved over to Agility to run the OCIO business, taking his team with him. Today Agility has $8.4 billion in assets under management. The firm made the decision late last year not to rebid for the Arizona State contract. Arizona State did not respond to a request for comment by the time of publication.

OCIO managers themselves agree that the market has become competitive, and it is hard for any but the most successful — a group that includes Agility — to thrive. “I’ve had a lot of resumes hit my desk,” says the head of one OCIO firm. “People are starting to wash out.”

Others argue there is plenty of work for those who establish a strong reputation. “If you perform, you do a good job, and you take care of your clients, you are going to have no problem growing,” says the CIO of one OCIO firm. “If you are good, the market finds you.”

One criticism of OCIO businesses, however, is that determining what constitutes doing a good job can be subjective because these firms lack transparent track records. While money managers have clear records they can show to prospective clients — and many institutions will not invest with a manager that has a track record of less than three years unless they are taking a chance on a startup — the performance of an OCIO business can vary depending on the individual client, and managers are often unwilling to share this information with other clients or prospects. The result is a marketplace where performance is opaque, making hiring decisions difficult.

“The odd thing about OCIOs is they get hired, and it has nothing to do with style, and it has nothing to do with performance, because they don’t show performance,” says Falk. “They say, ‘We’re smart; hire us.’ When you ask them about performance, at least in our experience, they say, ‘We do things differently for every one of our clients.’ ‘How do I know you’re good?’ They say, ‘You should look at our credentials.’ But just because you are smart doesn’t mean you’re good at managing money.”

Not everyone is falling out of love with the OCIO concept, however. Boston-based investment consulting and investment management firm Cambridge Associates earlier this year laid off close to 50 employees and is evolving from advisory services to more of an OCIO model. Some pension plans, such as the $15.4 billion Illinois State Board of Investments, have also started to embrace the OCIO model for some or all of their actively managed assets.