Investors who rely on outsourced chief investment officers want more exposure to private markets — but identifying the best OCIO provider to carry out this desire may not be an easy task, according to research and consulting firm Cerulli Associates.
Clients of OCIO firms are increasingly seeking private equity and other “illiquid” investment alternatives for their portfolios, believing these bets will help provide a “better risk-adjusted return,” Cerulli said in a research report Thursday. Yet finding the OCIO firms with the strongest track records can be frustrating due to the opacity surrounding performance in the $1.9 trillion U.S. industry.
Cerulli found that foundations and endowments are most likely to use a consultant to help screen OCIO firms, followed by corporate pension plans and family offices. Providers of OCIO services may have discretion over an investor’s entire portfolio, including the selection and replacement of asset managers.
With no standardized way of judging the performance of OCIO firms, half of the consultants surveyed by Cerulli said they will typically evaluate the track records of asset classes. The consultants keep an average 46 firms on their search list — less than half of the total 96 active U.S. OCIO providers at the end of 2018 — and then narrow it based on their clients’ needs, according to the report.
“The most significant challenge that search consultants face when working with providers is inadequate communication” surrounding investment performance, Cerulli said in the report. “Tracking OCIO provider performance is not as clear cut as it is in traditional consulting and it can be incredibly difficult to monitor.”
Consultants may get a sense of OCIO providers’ performance by reviewing benchmarks, portfolio construction, and returns from their similar or oldest clients. They’ll often depend on the deep due diligence they’ve been able to conduct as result of their relationships with OCIO providers.
While performance of the OCIO industry is “opaque,” Cerulli found consultants view GIPS, or global investment performance standards, as “nice to have” but not “completely necessary.”
Cerulli said the “benefit of GIPS-compliant reporting is its acceptance as an industry-wide performance reporting standard for search consultants and clients to more accurately compare providers.” Still, only 38 percent of search consultants view GIPS as “moderately important” when evaluating performance.
As the OCIO industry matures, the assets under management remain dispersed among smaller funds even as the average client size grows, according to the report. Fifty-one percent of OCIO clients have less than $100 million in assets, compared to 14 percent with more than $1 billion.
“Large, multi-billion-dollar clients are more likely to outsource a sleeve of their portfolio, particularly alternative asset classes, than to fully outsource their total portfolio,” Cerulli said in the report.