Asset owners have stepped up their scrutiny of outsourced-chief investment officers, putting their own OCIO providers under the microscope to determine whether they should be replaced, according to Cerulli Associates.
Many investors have been working with the same OCIO provider for at least five years, prompting a rise in “market checks and replacement searches,” Cerulli found in a study released this week. Forty-two percent of their search activity in the past year has stemmed from market checks, the consulting and research firm’s survey shows.
In a nearly $2 trillion industry that still lacks a standardized way of comparing performance, asset owners such as pensions and foundations want to see how their OCIO providers stack up against the competition. A small but growing portion of investors are hiring consultants for help in discerning track records and the level of fees they should expect to pay, according to Cerulli.
They want to “make sure they are in the right relationship with an OCIO provider,” Laura Levesque, a Cerulli analyst, said Tuesday in a phone interview. “There is no industry standard right now.”
While the CFA Institute provides “a robust set of rules” around performance, many investors complain that composite-style performance metrics don’t work for an industry that tends to be highly customized, according to Levesque. For example, a $1 billion corporate defined benefit plan has a very different set of investment goals compared to a $500 million foundation, she said.
A “subset of OCIO providers” has adopted the Global Investment Performance Standards, or GIPS, for reporting performance, according to Levesque. “But there are a large number that do not” report returns that way, she said.
That’s why search consults are “playing a bigger hand” in evaluating OCIO providers, according to Levesque. She said consultants are asking OCIO firms to parse the performance track records they provide to ensure the firms are the right fit for asset owners.
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Meanwhile, there’s pressure to lower OCIO fees as the industry matures.
“Fees aren’t completely standardized at this point,” Levesque said. Still, the range of what OCIO providers charge is narrowing because the market is becoming more crowded, she said.
The maturing industry now manages almost $2 trillion of assets, according to Levesque, who said its growth rate has slowed to around 9 percent, from more than 20 percent a few years ago. The expansion has a led to a lot more scrutiny, with a particular light shining on investment consultants and asset managers that run OCIO businesses. Investors are worried about potential conflicts of interest.
“When you hire an OCIO provider, you’re turning over all of the investment buy and sell decisions to that provider,” she said. “That’s a big reason why there’s so much more scrutiny of the OCIO model.”