A lot of success in life and business comes from knowing what you want to avoid ―Charlie Munger

Our fall 2024 Outsourced Chief Investment Officer (OCIO) update features one-hundred-four service providers with pertinent particulars on each.  We include names, numbers, emails, and titles of business executives at each firm ready to take your call.

Our goal is to help families and institutions locate, review, and connect with full-service discretionary outsource investment managers.  Our directory makes it easy for prospective clients to reach them.  No ads, no paywall, no charge.

A solid six months

For the six months ending June 30th, 2024, total OCIO AUM hit a record $4.456 trillion dollars on about $432 billion in new business, an impressive 10.73 percent gain.  But it’s not quite what it seems.

(OCIOs by group and AUM +/-)

OCIOs and the multiverse

The OCIO business operates in two distinct realms, the mega-buck land of corporate pensions and a parallel universe of nonprofit institutions and family wealth. Pension plans focus on funding levels, risk mitigation, and cost reduction, while nonprofit entities and ultra-high-net-worth families attend to wealth stewardship, lifestyle preferences, and mission-based endeavors.

Well over half the OCIO money in our directory (probably closer to two-thirds) is pension money. This defined-benefit world is actuarial and liability driven, and heavily regulated. The largest firms with their size, resources, and appetites aggressively compete for pension money and dominate the segment, managing sixty-eight percent of our OCIO pie, about $3.046 trillion, up from sixty-four percent six months ago.

The largest firms have expertise across the board, of course, and manage substantial family and nonprofits assets, but corporate pensions are so large they skew the data.

These are big-ticket items. Recent corporate OCIO mandates include the $43.4bn UPS plan awarded to Goldman Sachs, Shell’s $30bn defined benefit pension headed to Blackrock, and Nokia’s $13.9bn plan  transfer to Mercer.

(Thirteen largest OCIOs by AUM)

How we report

We do not separately list pension versus nonprofit and family wealth assets for two reasons.  First, the industry has no standard reporting template for OCIO assets.  Pensions & Investments does their best to break out the categories, but companies can report what they want the way they want as long as regulatory requirements are met.

And second, our executive recruiting and OCIO search and selection business focuses on nonprofits, family offices, and middle-market asset managers, so we leave the mighty pension world to others.

Consolidation

This year has been a busy time for M&A.  The eighty-two firms under fifty billion on our list manage about $754bn among them, mostly nonprofit and family money.  However, many of the founders and original partners are aging out and because most firms are privately owned, converting equity to cash is a challenge.

But one man’s problem is another’s opportunity. Private equity firms and RIA aggregators are well aware of the challenges OCIOs face and delighted to step in with liquidity, in exchange for ownership.

Last month, RIA aggregator Hightower and wealth manager Pathstone announced OCIO acquisitions, Hightower procuring a majority interest in NEPC and Pathstone buying Hall Capital Partners.

Earlier in the year Edgehill called it quits, Agility sold to Cerity Partners, and Vanguard’s OCIO team moved en masse to Mercer. And in recent years Truvvo, Ellwood Associates, New Providence, CornerStone, PFM, and Permit Capital all decamped for better-resourced patrons. There will certainly be more.

Final thoughts

OCIO providers offer the proven performance of in-house investment staffs at a reasonable price.  And they can replicate the entire investment office with the process and structure to cope with the complexity of modern portfolios and mounting operational and regulatory burden.

But fielding a full-service institutional grade practice is expensive and costs are soaring for compensation, cyber-security, audits, and compliance, to say nothing of rampant regulatory hurdles.

It takes years to fully hone systems, service, succession, and investment capabilities. Hirtle Callaghan and Blackrock opened for business in 1988, McMorgan & Company set up shop in 1969, and Brown Brothers Harriman and JPMorgan Chase  hung their shingles over two hundred years ago.

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, the OCIO option is an effective and time-tested alternative.

―Charles Skorina

(download OCIO Directory as PDF)

Leadership is the capacity to translate vision into reality —Warren Bennis

Chief investment officers are C-suite executives. They manage a business that generates revenue and supports an enterprise. Be it OCIO, endowment, or family office, investment leadership matters.

We recruit these executives and facilitate OCIO selections so we pay attention to who they are, what they do, and how well they do it. Here are a few observations.

Larry Fink, CEO of BlackRock, describes leadership as “a consistent voice, a clear purpose, a coherent strategy, and a long-term view.” McKinsey defines leadership as “enabling others to accomplish something they couldn’t do on their own.” Jon Hirtle, executive chairman Hirtle Callaghan and former Marine Corps officer, considers leadership “the noble cause – serving the client.”

The authors of “What Makes a Great Leader,” list three qualities as key – architects, bridgers, and catalysts. “As architects, they build the culture and capabilities for co-creation. As bridgers, they curate and enable networks of talent inside and outside their organizations to co-create. And as catalysts, they lead beyond their organizational boundaries to energize and activate co-creation across entire ecosystems.”

Myra Drucker’s prolific CIO academy

Some years ago we spoke with Myra Drucker, the former chief investment officer of the Xerox corporate pension group, and wrote about her impressive internal CIO training program.

Notable alumni include Joseph Boateng, CIO of Casey Family Programs Foundation, MaDoe Htun, CIO of the William Penn Foundation, former endowment CIO’s Mary Cahill and Matthew Wright of Emory and Vanderbilt respectively (and founders of OCIO firms Acansas and Disciplina).

Mr. Boateng recalled that “Myra told all of us in the investment office that she would consider her job a success if she accomplished just two objectives: first, meet her performance targets for the pension fund; and second, develop all of us so well that each of us could go on to become a CIO. She is a role model I still look up to.”

When we asked Ms. Drucker for the secret to her CIO sauce, she answered this way: “First, obviously, you hire the best people you can find. Every hiring decision should be a big deal that gets your full attention.

“Then, push them. Make them stretch and take on new assignments. I rotated my people among asset classes. Nobody just sits at a fixed-income desk without ever having to deal with equities or alternatives. For every asset class and major initiative, I made sure there were two team-members assigned: a lead and a back-up.

“But it goes beyond just portfolio management. Everybody is exposed to the operational and administrative tasks. Everybody has to understand fund accounting.

“I know that some fund managers think they should be the sole interface with the board or trustees, and reserve that job to themselves. I think that’s a mistake. I made sure my people were in meetings with the board members and made presentations to them. “Managing” a board is a key, make-or-break skill for a fund manager, but if you’re not taught how to do it, how can you ever operate on that level?”

Time and money

“The true sign of intelligence is not knowledge, but imagination”

—Albert Einstein

You don’t have to reinvent the wheel to build a successful outsourced chief investment officer (OCIO) business, but it sure helps to connect the dots.

Despite countless paeans to AI these days, when it comes to OCIOs, there is very little new under the sun, and as most wide-eyed newcomers eventually come to admit, discretionary service providers are notoriously hard to scale. 

Jon Hirtle of Hirtle Callaghan launched the first conflict-free, independent investment office managing family and institutional money in 1988. Forty years later, the OCIO industry is bifurcated, highly diverse, and intensely competitive with hundreds of OCIOs, RIAs, banks, brokers, and asset managers competing for discretionary customers. It’s a jungle out there.

But with the formidable forty-year swell in private equity, venture capital, credit, and infrastructure investing, OCIOs are matching capabilities with clients in creative new ways.

Dean Keith Simonton, Professor Emeritus of Psychology at the University of California, Davis, posits that “genius hunts widely—almost blindly—for a solution to a problem, exploring dead ends and backtracking repeatedly before arriving at the ideal answer.”

Boutique providers – that’s pretty much everyone under about one-hundred billion in AUM – such as Hirtle Callaghan, Commonfund, Makena, and McMorgan & Company, have spent years polishing their services and honing their competitive advantage. As the market grew and providers proliferated, firms adapted, combining traditional prix fixe solutions with selective a la carte services.

According to Cerulli Associates, “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.”

It’s all about access

Access to the crème de la crème of alternative managers challenges most tax-exempt institutions and family offices, but OCIOs, with the diversified endowment model as their template, have spent years sourcing and cementing relationships with top private equity and venture capital professionals. Providers now offer a variety of alternative sleeves for those who prefer specialized participation.

A few prescient firms have gotten even more creative. McMorgan & Company, for example, has an infrastructure fund not common in boutique outsourcers.

A few years ago, the company established a relationship with OMERS Infrastructure, the infrastructure investment arm of OMERS, a large Canadian pension plan that has been investing directly in infrastructure since 1999.  This relationship has led McMorgan to create a fund which co-invests in certain deals alongside OMERS Infrastructure.

There’s nothing new about infrastructure funds, plenty of firms in the mix, but few boutiques take the time to build something special. The McMorgan Infrastructure Fund hews a path for prudent tax-exempt and family office investors.

Final thoughts

We’re in the executive search business, for those that haven’t already guessed, along with OCIO search and selection and the occasional consulting assignment, so job seekers send us resumes and call almost every day.

Most candidates hammer on about what they’ve got and what they want. Surprisingly few spend much time asking about what our clients want, the folks we care most about.

But now and then someone applies that “second level thinking” Howard Marks talks about. They surprise us by connecting the dots, by carefully researching a potential employer and asking, what does this company need and how can I give it to them, rather than ramble on about what they, the job seeker, wants.

Here’s an example, a story we heard some while back.

“The thing that never happens just happened again” – Viktor Chernomyrdin, former Prime Minister of Russia

Our latest Outsourced Chief Investment Officer spot-check notes a steady stream of RFPs, mostly under eighty million AUM, Obama Foundation excepted.

Some client institutions are looking to change providers, unhappy with recent returns. But if better performance is what they’re after, a word of caution: their current OCIO’s best years might be just beginning.

Even Berkshire Hathaway, with one of the best runs ever, “has had 10 negative return years, four years where it has fallen greater than -20% and six years where it underperformed the S&P500 by more than -20%.”

Apples and oranges

How should one compare OCIO returns? Commonfund considers comparisons “a complex apples-to-oranges exercise because there are so many variables to consider. Performance outcomes are as unique as the institutions themselves.”

We keep track of over one hundred OCIOs. Each has its own culture, client mix, investment style, and biases. Some firms focus on indexing and liquid markets, others on alternatives, still others on ESG. Some customize portfolios for clients, others don’t.

When we speak of past performance we are referring to history. But forecasting what’s to come is mostly an expression of hope. And hope is not a strategy, or reason to change providers.

According to Business Insider, “the S&P 500 average return over the past decade has come in at around 10.2%, just under the long-term historic average of 10.7%.”

Does this mean all OCIOs or clients should have indexed and gone home? Are they sure these public market returns are baked in for the next ten to twenty years? As Brad Conger at Hirtle Callaghan wrote a while back, “not even the most insightful among us can see around corners.”

“Historically, markets have posted strong long-term gains following declines,” but that’s over ten years and more. For most investors, or board members, patience is not their strong suit. Unfortunately, there’s usually a price to pay for impatience.

(see complete chart above)

People come first

We begin an OCIO search and selection assignment by looking at the talent. Who are they, what is the turnover, how long has the firm been in business, and what’s their plan for staying on top? Then investment philosophy, process, and incentives. Then performance.

In the end it’s the ability to adapt, revitalize, and deliver over time that’s key. Brown Brothers Harriman, Goldman Sachs, J.P. Morgan, and Morgan Stanley have been around for more than a century and they keep signing up clients.

But how about the eighty or so OCIO firms in our last directory under fifty billion AUM? Hirtle Callaghan, Commonfund, and a few others have engineered smooth successions. Yet most still have first-gen founders in place or soon to retire. What comes next?

There’s a related issue. What happens when outside money enters the picture? Will the passion and focus remain? Or will the firm lose the founder’s intensity and become one more commodity in a collection of disposables?

Final thoughts

As we’ve said many times before, given the talent and resources in this country, 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 over decades, forget about reinventing the wheel. Talk to your competitors. Some might make fine partners.

———————————————–

Time to update our OCIO directory

It’s time once again to update Skorina’s Outsourced Chief Investment Officer (OCIO) directory.  So please send us any changes in contact information (name, phone, email) and AUM as of June 30, 2024.

Prospective clients can’t reach you if they don’t know how to find you.

—Charles Skorina

skorina@charlesskorina.com

“There’s only one way to describe most investors: trend followers.” —Howard Marks

We recently sent out an email query asking asset managers and chief investment officers, “anything new under the sun,” and received some serious replies.  One thoughtful, highly respected, mega-fund chief investment officer wrote:

“There are quite a few interesting trends: AI, energy transition, innovations in healthcare are a few positive ones. Commercial RE, small cap, China and Emerging Markets are a few negative ones.

“The slow pace of private capital coming back to investors is another important trend that everyone is contemplating.  Everyone is hoping that lower interest rates will restart more M&A and IPO activity.

“However, personally I think the bigger trend is how investors are thinking about asset allocation.  I remember the strong emphasis across the industry on diversification.  If you could find uncorrelated return streams, the trend was to add them almost blindly.  Diversification and low vol was the main point.

“Today (and for some time), diversification has not been your friend.  The future is moving to disruption, and you need companies and funds that have size, data, the ability to invest in AI, and cheap financing.  

“Disruption is so large in the U.S. that we may not need geographic diversification like we used to.”

Another CIO replied:

“I find the dominance of U.S. public equities, and a teeny-weeny handful of them at that, to be quite troubling.

“One of our IC members is pushing us to divest of non-U.S. equities and it’s difficult to find any recent data to argue against that, yet the idea of having 40% of our endowment in a stock portfolio that’s really just five giant tech stocks is scary to me.

“We’ve reduced our hedge fund exposure, our real asset portfolio was always pretty small, and those big tech companies are amazing economic engines, so I am not sure I would say we are in a bubble.

“But some of the most successful endowments have one-sixth, one-fifth, or even one-quarter of their portfolios with a single VC firm.  Maybe we should be worried.”

Pay and Chief Investment Officers

Speaking of chief investment officers, in case you missed it, here are a few highlights from an interesting paper on chief investment officer compensation by Matteo Binfarè, University of Missouri and Robert S. Harris, University of Virginia:

“Endowments pay CIOs more, rely more on bonuses, attract more experienced professionals, and have lower turnover than pensions.

“On average, endowment CIOs earn a whopping $800,000 in total annual compensation, three times more than their peers at pension funds. Incentive compensation makes up a significant portion of their pay, with more than 40% being tied to incentives — almost four times more than pension plan CIOs.

“Endowments that pay their CIOs top quartile compensation significantly outperform endowments with bottom quartile compensation by almost 100 basis points annually.”

All great stuff, but this begs the question, what are chief investment officers actually getting paid for?  Size, complexity, performance?

The compensation conundrum

According to Business Insider, “the S&P 500 average return over the past decade has come in at around 10.2%, just under the long-term historic average of 10.7% since the benchmark index was introduced 65 years ago.”