The outsourced chief investment officer industry has exploded in size in recent years. No longer the domain of corporate pension funds looking to offload assets, institutional investors from endowments to public pension funds are now using OCIOs, a trend that continues to gain traction. While OCIO firms have taken on ever-larger mandates, however, they haven’t yet caught up to their institutional peers in one major way: industry benchmarking and standardization.
Jim Scheinberg, founder of OCIO consulting firm North Pier Consulting, compares the fast-growing industry to “the Wild West,” saying that industry standards haven't kept up with the growth.
“The industry has zero standards,” Scheinberg said by phone. “There is no oversight at all.”
OCIO firms say it is hard to measure their performance and outcomes against some sort of benchmark, because their clients have different risk profiles and investment goals from one another. But their potential clients — large institutions and asset management firms — want to be able to compare performance, and they aren't accepting that answer anymore.
Two groups are now working to change this. One made up of the largest providers in the industry. The other is the CFA Institute, which aims to set standards for the investment management industry.
Regardless of which set of guidelines end up being adopted by OCIOs, it’s clear that their clients are eager for standardization.
“Our clients are really pushing us to provide more transparency,” said Mitchell Johnson, chief technology officer at asset management data provider eVestment. He noted that eVestment’s clients are looking for the same transparency in the OCIO industry that eVestment offers surrounding asset managers and institutions.
This includes details on underlying managers and asset classes in the OCIO’s portfolio and what the firm’s performance is like in relation to its own previous performance, as well as that of its peers, he said.
Scheinberg said North Pier collects monthly and quarterly data from the OCIOs it works with so that it can test firms on liquidity and returns, among other measures. According to Scheinberg, it’s a labor-intensive process. Instead, he said he'd be interested in offloading that process to an outside group.
According to Johnson, the perceived challenge of reporting performance in the OCIO space — that there are no standard client mandates — is also true of other asset classes. This ultimately means that there is a way to benchmark the industry, he said. But experts acknowledge this won't be easy.
“We need a common playing field, but it is complicated,” said Scheinberg. “No two institutional asset owners are alike.”
But, he noted, there are more similarities between OCIOs than the industry gives itself credit for. “We see enough anecdotal data that it’s no longer anecdotal,” he said.
One way that OCIO firms are attempting to solve the problem is by adopting the CFA Institute’s Global Investment Performance Standards (GIPS Standards). One such firm is Angeles Investment Advisors, which oversees $9.2 billion in OCIO relationships, according to its website.
Michael Rosen, chief investment officer at Angeles, said he’s surprised that other OCIO firms are not using GIPS Standards to measure their performance.
“It’s the right thing to do,” he said by phone Tuesday. “I can’t imagine why you wouldn’t do it.”
He added that it hasn’t been difficult for his firm to implement the measurements.
“The standard argument you often hear is that every client is different, so you can’t have a composite and you can’t pick and choose which clients you show, so you can’t show anything,” Rosen said. But, he added, GIPS Standards provide for those differences by allowing asset managers to group clients into different buckets.
The CFA Institute is working on a variation of its Global Investment Performance Standards for OCIO firms in the United Kingdom by the year’s end, because the U.K.’s Competition & Markets Authority has required that fiduciary managers in the country come up with a set of standards by then, according to Karyn Vincent, head of Global Industry Standards at the institute.
“While these standards are only for U.K. managers, we’re looking at creating standards that would apply to OCIOs outside of the country,” Vincent said by phone.
According to Vincent, the U.K. guidance will “standardize the performance and risk information” about the assets OCIOs manage according to specific mandates. The goal, she said, is to give people looking to hire OCIOs the means to compare them.
But not everybody thinks these standards are the best solution.
“GIPS Standards can be helpful, but on their own fall short on some important considerations that are specific to the OCIO space,” said Tim Yates, president of Commonfund Asset Management and head of the firm’s OCIO business, via email. “The key challenge is not defining a calculation methodology.”
According to Yates, the major challenge is in agreeing on the appropriate measures and definitions of composite groupings to account for the different types of clients OCIOs serve.
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While the CFA Institute is working on adapting GIPS Standards to fit the OCIO industry, a group of industry players has taken it upon itself to figure out an appropriate benchmarking system.
North Pier gathered several of the top OCIO firms by market share, along with representatives from the legal industry, the American Retirement Association, and the ERISA Industry Committee for a meeting at UCLA last December.
“We decided to kind of give away the secret sauce of what it was that we did and put it up for peer review,” Scheinberg said.
The group, according to Scheinberg, is called The Discretionary Investment Management Industry Working Group on Data Standards, and it will meet again this winter – likely in January or February – to discuss the creation of industry standards.
In the meantime, Rosen said he hopes that more firms at least start using the GIPS Standards. He compared the eventual adoption of standards to an anecdote about lawyers.
“The one lawyer in town is going broke until the second lawyer moves in — they can now sue each other and get some business,” Rosen said. “Once you have more than a couple of firms providing a track record, I think the pressure will build on everyone else to get in line to do the same.”