Institutions aren’t firing their outsourced chief investment officers (OCIOs) because they’re dissatisfied with performance.
Instead, the top motivation for switching from one OCIO to another is communication — or lack thereof — according to industry consultants.
The biggest culprits? OCIOs that mislead clients about investment strategy or underdeliver in communication frequency, according to Jim Scheinberg, founder of North Pier Search Consulting, which advises institutions through the OCIO hiring process.
“What we’ve heard more than anecdotally is that the consultant may talk a lot about topics and themes, but then doesn’t do any implementation,” Scheinberg said in an interview Tuesday. “They don’t follow through with actionable policy changes.”
A remedy for that, according to Margaret Chen, global head of endowments and foundations at Cambridge Associates, is being candid with clients.
“I always tell people to be direct,” said Margaret Chen, global head of endowments and foundations at Cambridge Associates, a major OCIO and consulting firm. “There should be no surprises in terms of interactions with clients.” To achieve that, she stressed clear delineations of roles and responsibilities, which should be established early on. “That is so under-appreciated by many,” Chen said. “That is important for effective governance.”
Scheinberg’s colleague, North Pier senior consultant Gregory Metzger, said that when OCIOs don’t communicate with an institution’s committee frequently enough, they often run into trouble.
Part of the problem, according to Jim Dunn of OCIO Verger Capital, is that some providers take on too many mandates. Institutions that previously handled investing internally would have been able to get answers to questions immediately. But when they outsource to certain firms, clients may have to deal with compliance before getting questions answered, or struggle to get the CIO on the phone at all, Dunn said.
“I think the OCIO firms that are doing well are capping the amount of clients they have,” Dunn told Institutional Investor by phone Tuesday. “They close. They keep their clients to a small number.”
The sweet spot for OCIOs is managing between $6 billion and $8 billion, or 25 to 30 clients at maximum, in Dunn’s view.
According to Metzger, problems also arise when a client’s committee doesn’t have an understanding of what their provider is up to. “When they hire an OCIO, they’re looking for someone who can be assertive with the committee and make sure that the committee fulfills its duty,” Metzger said. “A lot of it comes down to communication.”
[II Deep Dive: The OCIO Industry Is the ‘Wild West.’ Here’s How to Tame It.]
Investment returns have less of an impact on the decision to switch OCIOs than one might expect, according to Dunn.
“Candidly, returns are too low,” Dunn said. “Endowments are spending 5 percent [per year] and the average return this past year was less than that. Clients are asking what else is out there.” But at least for now, few are doing more than asking.
“When you dig more deeply, there’s not a lot of dispersion between the good and bad firms,” he said, adding that this is where access, service, communication become deciding factors.