For the outsourced chief investment officer industry, crisis is bringing opportunity, new data shows.
“OCIO’s growth is accelerating post-crisis,” according to a new report expected to be published this week from Chestnut Advisory Group, a business advisor to asset managers.
But these opportunities have placed a renewed focus on the industry’s transparency and standardization problems, which one working group is trying to remedy.
Chestnut expects consultant and OCIO turnover to increase. According to the research, 53 percent of investors expect to review their consultant and OCIO relationships over the next two years. Chestnut surveyed consultants and OCIOs with $18.3 trillion in assets under administration.
“Despite widespread projections that OCIO’s blistering growth over the last decade would slow, fully half of our respondents now forecast higher business growth than they did pre-pandemic,” according to the report.
In an interview with Institutional Investor, Amanda Tepper, Chestnut’s founder and CEO, said that the OCIO industry experienced similar growth after the global financial crisis.
“This crisis makes the case for OCIO,” said Tepper in the interview. Tepper said one-half of Vanguard’s OCIO pipeline is replacement searches.
“Crises cause many institutional investors to realize that they are not comfortable or properly structured to effectively navigate a volatile, complex, fast-moving capital markets environment under the traditional consulting relationship, much less fully independently,” according to the report.
Tepper calls what is happening now OCIO 2.0. “What’s really different with OCIO 2.0 is the education and communication needs of clients,” she said. “Now, it’s important to make sure that allocators understand the details, such as how long it will take to be fully invested in private equity. Ten years ago, there were a lot fewer providers. You just said I want to outsource, and the board would say who do you know?”
In 2.0 there’s a developed system in place that will soon become entrenched, including the use of search consultants, said Tepper.
North Pier Search Consulting founder and chief investment officer Jim Scheinberg agreed.
“A lot of money stampeded into the OCIO space and a lot of it was unassisted, direct searches,” Scheinberg said by phone. “Some of the searches that were run by a third party were not aided by meaningful quantitative data in the first place.”
Scheinberg has set up a working group with some OCIO providers, search consultants, and members of the legal community to start addressing the transparency issue in the industry. Scheinberg said the working group is trying to make data on the OCIO market transparent, open-source, and available en masse.
“If you’re talking about OCIO data, and eventually composites that would be formed from that data, things like who gets included into what bucket are crucial,” Scheinberg said. These things include asset allocation, risk budgets, and liquidity, among other factors, he said.
Then, there’s the issue of legacy assets. When an OCIO client switches to another provider, they may have illiquid investments that they will continue to hold. While this presents problems as is — the former OCIO may still charge fees on the investment, for instance — Scheinberg said that figuring this into the data is complicated.
“Does the new OCIO have responsibility on day one?” he said. “Do they carve those assets out?”
The group met in May and has since split into committees to delve deeper into the issue, he said, adding that the majority of participants believe that they would be able to accomplish the first set of standards within one to two years.