While the rapid growth of OCIO has made it attractive for many new resource-strapped institutional entrants, many allocators are still not ready to give up control of their portfolios. But outsourcing does not have to be all or nothing.

Amid the growing trend towards outsourcing, there is a new subtrend that industry insiders are observing where allocators offer only partial discretion. In fact, some trustees see partial OCIO allocations as a strategic learning tool.

Paul O’Brien, trustee and investment committee member at the $12 billion Wyoming Retirement System, argues that by outsourcing between 10 and 20 percent of the portfolio, boards and CIOs can observe a different investment process without committing the entire portfolio.

“Allocating part of a fund’s assets to an OCIO can give boards and CIOs a window into another investment process and help them experience the pros and cons of OCIOs,” O’Brien said, adding that the approach makes sense for even the largest institutions: “I believe that big enough funds, say $25 billion and up, should all be doing this.”

One large OCIO provider agreed that a partial allocation could provide institutions with insight into an OCIO’s process and help them evaluate outsourcing.

“Smaller clients, who may face challenges accessing separately managed accounts, have found commingled vehicles to be a practical solution,” said Chris Pariseault, Fidelity’s head of OCIO and institutional portfolio managers. “These vehicles allow for either full discretion or partial discretion through sleeve allocations.”

While all but one of its more than 160 OCIO clients are fully outsourced, Fidelity’s outsourcing business uses both approaches and has investment products and services that accommodate each. “We have partnered with larger clients in LDI for example, on sleeve or building block solutions,” Pariseault said. (Liability-driven investing aligns income-generating assets, usually bonds, with an organization’s future obligations to reduce interest rate and market risk and ensure payouts.)

The OCIO industry in the U.S. has more than tripled in less than a decade, climbing from just over $1 trillion in 2015 to $3.3 trillion by year-end 2024. That trajectory is expected to continue, with Cerulli Associates projecting assets to reach $5.6 trillion by 2029 — an average annual growth rate of 10.6 percent.

Cerulli attributes this growth to three main drivers: investment performance, contributions and distributions, and the strongest driver of growth, increased adoption.  Nearly $1.3 trillion is expected to flow into the OCIO industry over the next five years from institutions adopting the model for the first time or clients in sleeve portfolios expanding their relationships.

On a panel about nonprofits at the Investments & Wealth Institute Strategy Forum in New York this month, Cerulli’s associate director Chris Swansey told attendees that the biggest obstacle for institutions considering OCIO is that often one or more investment committee members are reluctant to relinquish control.

“The major hurdle there is giving up that discretion,” Swansey said.

To ease that transition, he explained that many endowments and foundations start with an “OCIO-lite” model, where the consultant makes manager selections, but the client retains final approval. “This is often a steppingstone to a full discretionary relationship where the members of the investment committee eventually become comfortable with handing over discretion,” Swansey added.