05/18/2024

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

Our spring 2024 Outsourced Chief Investment Officer (OCIO) update features one-hundred-two service providers with pertinent particulars on each.  We include names, numbers, emails, titles, and at least one client service professional ready to take your call.  What could be easier?

Our goal is to help families and institutions locate, review, and connect with full-service discretionary outsource investment managers.  These firms care deeply about their customers.  Our directory makes it easy for prospective clients to reach them.

What a year

For the year ending December 31st, 2023, total OCIO AUM hit a record $4.1 trillion dollars on $686 billion in new business, a whopping twenty percent gain.

In Derby lingo, a few entrants dropped off the board and others jockeyed for position, but the favorites finished in the money, and the payouts were impressive.

Our latest OCIO directory hosts a crowded field so we assembled this chart to provide some context, grouping the firms by size, number, and a few growth-per-group statistics. *

Winner takes all

Here’s what caught our attention. Twenty-three firms on our list manage most of the money, about eighty-four percent – the twelve largest control sixty-four percent – while the remaining seventy-nine providers divvied up the rest, approximately $681bn.

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

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 – about $1.32 trillion among the top 100 US plans in 2023, according to the latest Milliman corporate pension report.

Many firms, many flavors

Each firm 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.  However, there’s a trade-off in liquidity and transparency.  Before choosing an OCIO, know which way they lean.

According to a 2022 University of Chicago paper, “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.”

If it’s liquidity you want, check the fine print for lockups, redemptions, gates, and fees.

Failure to communicate

Here’s one last point to keep in mind.  “Lack of adequate communication – particularly regarding performance – is the single biggest challenge and the most common source of dissatisfaction within OCIO relationships.”  FundFire.

When we speak with family heads and board members who are considering a change in OCIO providers they usually cite poor performance.  But when we dig deeper, we find it’s rarely about returns, but about a change in their client service representative and frustration with the current dialogue.

Relationships are ruptured.  Communication goes awry.  Clients are unhappy.  Good news and bad, the messenger conveys the message.  Whether the goal is client retention or a new business win, it usually comes down to delivery.

Final thoughts

We’ve said it before and we’ll say it again. The asset management business is hyper-competitive, hard to differentiate, and expensive to scale. We have yet to see an independent Outsourced Chief Investment Officer firm reach $100 Billion AUM through organic growth. Most of those on our list will never reach $20 Billion.

With the amount of talent and resources available on Wall Street, the chances of building top-ranked, enduring investment teams capable of vaulting over the competition are slim to none without superior technology, blockbuster products, or a relentless M&A machine.

If the goal is to deliver exceptional performance, service and solutions and be there for the client twenty years from now, there’s no need to reinvent the wheel. Talk to your competitors. Some might make fine partners.

Our latest OCIO Company Directory

(download OCIO Directory as PDF)

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05/03/2024

The outlook wasn’t brilliant for the Mudville nine that day: The score stood four to two, with but one inning more to playCasey 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. 

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