4400 registered foals, and only 16 or 18 of them make it to the Derby ― John Sosby, Claiborne Farm

What a year.  For the twelve months ending December 31st, 2023, total outsourced AUM managed by the one-hundred-two firms in our latest OCIO Directory reached a record $4.1 trillion dollars thanks to $686 billion in new business, a whopping twenty percent increase.

This chart shows which OCIOs gained the most AUM for the year. We grouped the firms by size, numbers per group, and growth in dollars and percentage.

Winner takes all

Here’s what caught our attention.  Less than a quarter of the firms on our list manage most of the money, about $3.4tn, while the other seventy-nine outsourcers divvied up the remaining $681bn.  The twelve largest OCIOs alone control over $2.6tn or sixty-four percent of the outsourced total.

As for new business in 2023? Almost three-quarters of last year’s gain accrued to these twelve largest providers, thirteen percent went to the next eleven, and those dogged seventy-nine fought for the remaining twelve percent, roughly $83bn.

The Twelve
$420,000,000,000 – Mercer
$329,400,000,000 – Goldman Sachs
$319,000,000,000 – BlackRock
$243,200,000,000 – Russell
$193,500,000,000 – SEIC
$182,100,000,000 – MS Graystone
$169,800,000,000 – CAPTRUST
$164,200,000,000 – J.P. Morgan
$163,000,000,000 – WTW
$157,000,000,000 – State Street
$155,000,000,000 – AON
$121,000,000,000 – Wilshire

As in past years, the largest source of new OCIO mandates in dollar terms came from corporate pensions.

For most OCIOs, however, the corporate defined-benefit world is a land apart and out of reach, actuarial, regulated, and liability driven, with big-ticket AUM on offer.  According to the latest Milliman corporate pension report, the top 100 US DB plans held about $1.32 trillion in assets in 2023.

By the way, only four of these plans outsourced their DB obligations during the year, so there are still a few mandates to be had.

Many firms, many flavors

Each OCIO has its own culture, investment style, and biases.  Some firms focus on indexing and liquid markets, others on alternatives, still others on ESG.  Some customize portfolios, others don’t.

But biases affect risk, allocations, and outcomes.  Alternatives including venture capital and private equity have outperformed in the past and may do so again.

A 2022 University of Chicago paper concludes that “Venture capital performance remains remarkably persistent across funds raised by the same general partner.  In contrast, buyout funds’ performance persistence becomes noticeably weaker over time.”

However, there’s a trade-off in liquidity and transparency.  If it’s liquidity you want, check the fine print for lockups, redemptions, gates, and fees.

“The top LBO funds invest money quickly, but the liquidation of portfolio companies is a long process, requiring more than 12 years from the vintage year,” according to Jeffrey Hooke, senior lecturer, Johns Hopkins University.

Before choosing an OCIO, know which way they lean.

Failure to communicate

Here’s one last point to keep in mind. 

Our spring 2024 OCIO Directory

(download OCIO Directory as PDF)

The outlook wasn’t brilliant for the Mudville nine that day: The score stood four to two, with but one inning more to play … Casey at the Bat, Ernest Lawrence Thayer

Hope springs eternal in the OCIO space. Each year confident investment officers and ardent marketeers announce their brand-new best-in-class discretionary outsourced solution. But for most of these eager rookies, few customers will come or care.

Looking back over the last four decades, the best time to pitch an outsourced chief investment officer (OCIO) proposition was probably about thirty years ago when prospects were plentiful, competitors few, and margins were healthy.

In today’s hyper-competitive wealth management arena, fielding a full-service institutional grade asset management team is expensive and costs are soaring for compensation, cyber-security, audits, and compliance, to say nothing of rampant regulatory hurdles and those nasty unknown unknowns.

(See our charts below for detailed office cost breakdowns.)

We recently completed an OCIO search and selection engagement for a sizable east coast nonprofit and found all the responding providers to be consummate professionals and serious competitors.

Firms such as Hirtle Callaghan, Blackrock, J.P. Morgan, and Brown Brothers Harriman, among the stalwarts in our directory, have had years to hone their systems, service, succession, and investment capabilities. But it’s never easy.

In an interview with Jon Hirtle for our 2020 OCIO review he reminisced on the firm’s early efforts to win clients.

Debby [Jon’s wife] and I often talk about the financial low point when our checking account had dropped to $17. What kept us going was that everyone loved the OCIO concept. The idea of powerful, informed, energetic advocacy without the conflicts of interest that define the traditional investment industry.

This Cold Cruel World

It’s tough for newbies and niche players to keep up with the veterans. This year kicked off with Edgehill calling it quits, Agility selling to Cerity Partners, and Vanguard’s OCIO team decamping en masse for Mercer.

They’re in good company. The past few years have seen a steady stream of outsourcing hopefuls merge with better-resourced patrons including Truvvo, Ellwood Associates, New Providence, CornerStone, PFM, and Permit Capital. There will certainly be more.

Boston Consulting Group, in their Global Asset Management 2023 review, estimates that – due to rising costs – the industry’s compound annual growth rate in profits “will be approximately half the average of recent years (5% versus 10%).”

Most nonprofits and family offices, basically anyone under $500 million in investable assets, don’t have the time or resources to build competitive and secure internal investment capabilities. 

Investment Office Costs: you pay to play

Strategic Investment Group published an investment office cost study recently, Building Blocks and Costs of an Internal Investment Office, that’s worth a read.