The outsourced chief investment officer business continues to thrive, with a quarter of allocators expected to hire an OCIO or expand their services in the next two years.
According to a report by Cerulli Associates released Tuesday, the OCIO market remains robust, with significant opportunities for providers to win mandates or additional services from existing clients.
About 14 percent of asset owners are expected to begin leveraging an OCIO relationship while 11 percent are expected to widen their services — either through a complete portfolio mandate or by adding more assets that are currently being managed internally. Institutions may also move toward a model in which discretion is fully ceded to an OCIO.
Only 6 percent of investors are expected to reduce or cease their OCIO services.
Highlighting the macro environment, Cerulli expects investors to leverage OCIO providers to further diversify their portfolios with increased allocations to emerging markets debt, private debt, infrastructure, and various real estate investments.
“Amidst inflation, interest rate hikes, market volatility, and the changing implications of geopolitical conditions, asset owners are increasingly drawn to the OCIO model for the management of sleeves for alternatives and private asset classes for which they do not think they have the appropriate level of expertise,” Laura Levesque, an associate director at Cerulli, said in the press release.
For faster access to performance and transparency, allocators will also seek out OCIO providers with services such as risk analytics, bundled plan administration, and online portal access. Other sought-out services include accounting support, thought leadership, education, and customized reporting, Cerulli noted.
In August, Cerulli found that endowments and foundations were increasingly adopting the OCIO model due to the barriers that smaller asset owners face when pursuing private market investments. For nonprofits, the rise of environmental, social, and governance strategies was also a contributing factor for the OCIO adoption.
“An OCIO provider’s ability to retain client assets will increasingly depend on the firm’s conviction in sticking to its original mandate,” Cerulli said in the latest release. “In fact, deviating from the original mandate is by far most likely to contribute to a client’s decision to terminate a relationship.”
Underperformance was, of course, another major reason for firing OCIOs, albeit at a much lower rate. According to Cerulli, 78 percent of surveyed asset owners said deviation from the mandate would make termination very likely, versus 35 percent who said the same for underperformance.
“The upcoming wave of clients will want to make certain that they understand the manner in which the OCIO operates and its investment philosophy,” Levesque said in the release. “Therefore, a firm’s ability to convey these attributes to asset owners cannot be understated. OCIOs that are able to uphold investment conviction and report accordingly could have the upper hand when it comes to acquiring new assets.”