Outsourced Chief Investment Officer: The Key to Navigating Volatility

Outsourced Chief Investment Officer: The Key to Navigating Volatility
September 5, 2023 16 mins

Outsourced Chief Investment Officer: The Key to Navigating Volatility

Outsourced Chief Investment Officer: The Key to Navigating Volatility

In a volatile climate, institutional investors are turning to outsourced chief investment officers to conquer administrative, regulatory and market challenges.

Key Takeaways
  1. An OCIO is a customizable solution that allows organizations to outsource as much or as little as they need.
  2. By taking on administrative and regulatory tasks, an OCIO allows organizations to focus on long-term strategy.
  3. Potential cost savings and access to more sophisticated investments are some of the key benefits associated with OCIOs.

It’s no secret that institutional investors face a range of current challenges, from inflation and rising interest rates to bank crises and international conflict. Add in regulatory changes in many jurisdictions, and the road ahead seems quite uncertain for organizations managing investment portfolios. In addition, some lack the institutional capacity to execute strategy in a timely enough manner to take advantage of fast-changing conditions.

Along with macro trends, investors face more mundane everyday challenges. Administrative duties pile up, pulling focus away from strategic thinking. Short-term concerns take precedence over long-term planning. Implementation complexities, like choosing managers, can create barriers.

As these trends continue and volatility persists, the benefits of an outsourced chief investment officer (OCIO) become clear. Institutional investors who want to maximize investment opportunities while minimizing risk or gain the support needed to reach their strategic endgame objectives have the potential to do so without facing investment implementation and administrative demands. And the more time to focus on strategic objectives, the more potential benefits companies will receive.

The Role of an OCIO

OCIO is an umbrella term for a service that can be tailored to the circumstances of a client’s needs. An OCIO can be a manager who implements the strategy of an institutional investor, including handling administrative duties and sharing the fiduciary responsibility. It can also be a role more akin to an operational manager. While initially developed for larger organizations, even small and midsize entities can find OCIOs beneficial, as they allow time to refocus on core priorities.

The flexibility and customization of an OCIO provide the opportunity to support various aspects of an organization’s portfolio, whether that’s compliance with ESG regulations in Europe, a multinational company fulfilling a specific mandate around alternative investments, or a U.S. organization looking to maximize investment opportunity.

For multinational organizations in particular, an OCIO approach can deliver the benefits of consistent views, efficient implementation, consolidated reporting and strategic analysis across multiple plans and countries.

An OCIO’s Responsibilities Could Include:
  • Advising on the establishment of the investment strategy to achieve investor objectives
  • Assuming discretion for strategy implementation
  • Portfolio rebalancing and cash flow management
  • Manager selection and review

An important part of the OCIO experience is the ability to tailor the solution to an organization’s needs, providing a bespoke solution that can take on as much — or as little — of the investment and administrative and operational responsibilities as the organization needs.

For example, a private foundation board may want to focus on its oversight duties and governance strategy, leaving day-to-day operations control and specific investment decisions to an OCIO. By focusing on the parts of the job that are most important to them, the board can thereby better serve the organization.

Governance issues are at the forefront for investment managers. This is especially true in Europe and the UK, where investment managers faced a crisis over UK bond prices, forcing organizations to quickly rebalance their portfolios.

The Benefits of an OCIO

Investing continues to become more complex, with emerging regulations and technology advancing at a pace that may leave some behind. While this complexity isn’t new, it has accelerated to a point where even experienced institutional investors may need to enlist help.

Using an OCIO is more than just a convenience — it’s a tailored solution that can help improve governance, manage complexity and save costs. Potential benefits include:

  • Improved governance: Improved governance is at the core of an OCIO solution. Organizations that find themselves understaffed or busy with administrative tasks can offload some of these responsibilities to an OCIO and instead turn their focus to strategic thinking. Additionally, an OCIO can be more efficient at replacing underperforming managers, which may prevent losses.
  • Cost savings: Cost savings can come from an OCIO’s ability to aggregate assets and negotiate better management fees.
  • Market execution: Many organizations may not have the capabilities or expertise to execute in some markets. Working with an experienced OCIO provides the opportunity to access more sophisticated and complex investment options, potentially driving improved outcomes and expanded portfolios.
  • Time efficiency: The ability to make decisions with greater speed is another benefit of an OCIO. Some institutional investors don’t have the bandwidth to take advantage of changing market conditions. For example, an investment committee might only meet once per quarter, resulting in an extremely slow decision making process, especially in volatile conditions. An OCIO can reduce this timeframe drastically.
  • Long-term planning: Dealing with the short-term consequences of market volatility makes it challenging for asset owners to focus on strategic planning that is vital to the long-term success of an investment program. An OCIO can help manage short-term volatility, freeing up time and resources for future planning.
  • Portfolio resilience: By providing roadmaps for navigating volatility and uncertainty, OCIOs are positioned to build resilience into portfolios.

Pave Your Own Way — Customizable Approaches to an OCIO

Organizations looking to use an OCIO should first evaluate their needs and structure their model accordingly. The OCIO relationship is fully customizable — from portfolio strategy implementation and portions of the portfolio, to simply managing the “back office” functions of rebalancing, cash flow management and policy compliance. Ensure the following before partnering with an OCIO:

  • Capabilities and infrastructure: An OCIO should have demonstrated capabilities in portfolio management and operations, as well as the technological infrastructure to support the management and monitoring of complex portfolios and strategies.
  • Expertise: Knowledge across all asset classes and strategies, including the ability to allocate them across risk profiles, is critical.
  • Transparency: The OCIO should be transparent, both in pricing their services and their ability to negotiate favorable terms with investment managers on behalf of clients.

Making Better Decisions Faster

Volatility and uncertainty in markets mean that organizations can’t afford to be complacent. The ability to rebalance assets, ensure necessary liquidity and execute quickly under policy to capture opportunities in a timely manner is crucial. Organizations with defined benefit plans and interest rate-sensitive portfolios can benefit from the uncertainty around central banks’ interest rate hikes by actively managing the portfolio’s exposure to interest rate risk. However, most organizations do not have the internal bandwidth to cope with such volatility and react at speed.

Volatility is likely here to stay. The years ahead will bring new complexities, and with them, new opportunities. Institutional investors who effectively manage this uncertainty by enlisting the help of OCIOs can be well-positioned to focus on the long term and achieve better outcomes.

Aon's Thought Leaders

Bryan Ward
Senior Partner, Wealth Solutions, NA

Maria Johannessen
Head of UK Investments, Wealth Solutions, UK

William Parry
Associate Partner, Retirement and Investment, UK

Erwan Pirou
Canada Chief Investment Officer, Investment, NA

Colin Haines
Chief Commercial Officer, Wealth, EMEA

Opinion Disclosure:

Investment advice and consulting services provided by Aon Investments USA Inc (“Aon Investments”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on Aon Investments’ understanding of current laws and interpretation. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Investments’ preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Investments disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Investments reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Aon Investments. Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aon Investments USA Inc. is also registered with the Commodity Futures Trading Commission as a commodity pool operator and a commodity trading advisor and is a member of the National Futures Association. The Aon Investments USA Inc. ADV Form Part 2A disclosure statement is available upon written request to: Aon Investments USA Inc. 200 E. Randolph Street Suite 700 Chicago, IL 60601 ATTN: Aon Investments Compliance Officer © Aon plc 2023. All rights reserved.

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86%

Assets under full or partial delegation to an OCIO are up 86 percent since 2017, reaching more than $2.66 trillion.

Source: Pensions & Investments, data as of March 31, 2022

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