I never wanted this for you. We just ran out of time, Vito Corleone ― The Godfather

Our spring 2025 Outsourced Chief Investment Officer (OCIO) directory update features one-hundred-seven 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.

Time and Money

Time is a beguiling thing. “The relative progression of existence” posited Einstein. “Mostly a human affair” adds theoretical physicist John Kitching. But for the rest of us, aging is more akin to Hemingway’s famous line, “How did you go bankrupt? Two ways. Gradually, then suddenly.”

Succession, like the passage of time, is something most families and institutions are aware of, but surprisingly few do much about it.

To be fair, sometimes age and events disrupt the best laid plans. A few weeks ago, I met with a notable, highly successful founder and entrepreneur who wished to discuss recruiting a new family office head. Due to this individual’s distinctive longevity, past occupants in the position are no longer with us.

This patriarch is still sharp as a tack and busy juggling ideas and opportunities, but time is short, there’s much to do, and the odds of replacing a time-tested veteran with a like-minded newbie and bringing this fresh hire up to speed in months, not years, are growing longer by the day.

Planning ahead

In the OCIO business it takes years to establish a presence, polish services, and build a solid investment record. Few firms manage the task. Even fewer adapt, revitalize, and deliver across generations.

Recent years have seen a steady stream of outsourcing hopefuls merge with better-resourced patrons as founders age out and cash in. Recent capitulants include Hall Capital, NEPC, Agility, Truvvo, Ellwood Associates, New Providence, CornerStone, PFM, and Permit Capital.

But now and then a firm manages the transition. Hirtle Callaghan, a pioneering OCIO serving philanthropic families and mission-driven nonprofits, opened for business thirty-seven years ago and recently finished fine-tuning their plans for the next fifty years.

Jon Hirtle remains Executive Chairman and works full-time, but the firm has transitioned to a distributed leadership structure with firm-wide support to provide stability and continuity. A three-member management committee now leads the firm, buttressed by ten managing directors and thirty directors.

While controlling interest remains within the Hirtle family – two generations of family members currently in leadership positions – the firm continues to parse out equity and mentor next-gen talent.

There were a few twists and turns along the way, but clients are pleased and the future looks bright.

The sunny side

It turns out, when time flies by, we’re usually having fun. That’s according to a University of Nevada, Las Vegas report.

“We tell time in our own experience by things we do, things that happen to us,” said James Hyman, a UNLV associate professor of psychology and the study’s senior author. “When we’re still and we’re bored, time goes very slowly because we’re not doing anything or nothing is happening.

On the contrary, when a lot of events happen, each one of those activities is advancing our brains forward. And if this is how our brains objectively tell time, then the more that we do and the more that happens to us, the faster time goes.”

In other words, we can choose between a seemingly short but fruitful life, or one long boring slog. Me, I think I’ll fruitfully keep on recruiting.

― Charles Skorina

(download OCIO Directory only as PDF)

Let me tell you about the very rich. They are different from you and me. ― F. Scott Fitzgerald, The Great Gatsby

Suppose the Princeton or Yale endowment investment staff wanted to go all-in on a single stock? Forget diversification and the free lunches, just one shoot-the-moon can’t lose security. Think their trustees would go for it? Can elephants fly? Of course not.

And yet, this is the case for some of the biggest winners in the foundation world, funds like the Jen-Hsun & Lori Huang Foundation and the Lilly Endowment.

So, here’s a question. Does foundation management mirror the personalities and proclivities of their anomalous founders? And, if so, how have these various styles affected investment performance over the last five years?

For example, a preference for public markets versus alternatives, concentration versus diversification, or sports teams and crypto.

Awash in liquidity

Thanks to several extraordinary decades of wealth creation, (present speed bumps aside) private foundations and their ultra-high-net-worth benefactors are flourishing.

Over the last thirty years the number of foundations has tripled from about 40,000 in 1995 with assets of $373.4 billion to nearly 120,000 holding $1.6 trillion today.

Given a record $19.4 trillion in liquid assets in checking and savings accounts and money market funds, an S&P annual return of 9.33% over the last thirty years, and unabated philanthropic zeal among the 225,000 U.S. ultra-wealthy mega-donors, private foundations – the Getty, Casey Family Programs, the Summer Science Program – continue to play a major role in American life.

Jon Hirtle, executive chairperson of OCIO provider Hirtle Callaghan puts it this way:

Foundations are responsible for a meaningful portion of society’s accumulated and monetized patrimony. That financial patrimony is used to enhance social services, the arts, scholarship, research…human progress, if you will.  So, better foundation investing means more human progress.  How about that for an inspiring mission?

Ornery, reclusive beasts

Too many people think investing is easy – Warren Buffett

Guest commentary: Jon Hirtle
Executive Chairman, Hirtle Callaghan

Most universities distribute about 4.5 to 5 percent of their endowment’s value each year to support school operations. The investment office therefore must earn a bare minimum 4.5 to 5 percent to maintain the nominal value of the endowment and its ability to support the university in perpetuity.

But what about purchasing power? Inflation whittles away at buying power or “real” value, so endowments add an inflation component to their earning targets. The average inflation rate since World War Two has been 3.65 percent, a cumulative price increase of 1,653.36%. So, 8 percent would seem to be the minimum return required.

But it’s not that simple. Schools have faced massive cost pressures for years. According to Mercer, “Over the past 40 years, the inflation rate in the US higher education space — as measured by the Commonfund Institute’s Higher Education Price IndexTM (HEPI) — has exceeded the headline inflation rate as measured by the Consumer Price Index (CPI) by almost 40% on a cumulative basis.”

Given this uncertainty, prudent endowment boards aim for returns that include some growth in the capital, at least another 1 percent a year on average to cover contingencies and development. All things considered – operating expenses, financial aid, growth, and the unexpected (Covid cost schools billions) – we think a 9 percent hurdle rate is a more realistic goal.

What to do?

Capital market theory assumes that “the greater the risk that an investment may lose money, the greater its potential for providing a substantial return. Setting aside the historically strong stock market returns over the last decade (and two bear markets in 2020 and 2022) , “since 1950, public stocks have, on average, produced about 6 percent over inflation with one major caveat, there’s lots of price volatility along the way. (Chart: S&P Historic Performance.)

Over that same time horizon, investment grade bonds have on average produced a scant 2 percent over inflation, albeit with far less volatility.

So why not hold 100 percent stock portfolios? The problem is the above-mentioned volatility. The stock market experiences dramatic price drops from time to time, destabilizing budgets and generally scaring the hell out of trustees.

How about adding bonds to dampen drawdowns? Not so fast. Investment grade bonds are indeed far less volatile, but with real returns of only 2 percent, not close to what institutions need.

The Capable, Independent Investment Office

Welcome to my world. How can we capture real endowment returns that exceed what is required while actively managing downside risk? Here’s how we look at it:

We source and select a myriad of compelling investments that complement each other by rising and falling in price at different times, then assemble them in a way that captures stock-market-like returns with something like bond market volatility.

This is no small task. It requires a team of experienced professionals collaborating closely and, ideally, working inside an independent investment office with substantial power.

Only the largest universities have the resources to support such an office. Most endowments and foundations do not. David Swensen described the choice as between “those that are set up to make high-quality active management decisions and those that aren’t.”

Governance Alpha

There is yet another challenge. When endowments fail to achieve their required return over time, the investment staff or the Investment Committee or both are accountable. “Alpha” is investment jargon for value added or subtracted by active investment decisions.

Governance Alpha is a term that we coined years ago to differentiate the impact of committee or CIO decisions from those made by underlying specialist money managers. Just like Manager Alpha, Governance Alpha can be either positive or negative.

When an endowment fails to earn its required return, it is most often the result of Governance Alpha, well-documented behavioral tendencies, present in all humans, which challenge retail investors and endowment committees alike.

For example, “Recency Bias” encourages committees to chase recent returns. Without a seasoned and savvy CIO with the power to check those tendencies, Governance Alpha often turns negative. That’s why a professional and independent investment operation is so important.

The OCIO solution

OCIO firms offer the proven performance of the best large institutional and family investment offices. And they have the resources, talent, structure, and process to deliver those required returns and cope with operational and regulatory burdens and the complexity of modern portfolios.

—Jon Hirtle

Being too far ahead of your time is indistinguishable from being wrong — Howard Marks

Our latest fiscal year-end 2024 endowment performance report features ten-year and one-year returns, and AUM for one-hundred-forty-four US and eight Canadian institutions, the latest available.

In our line of work, acquiring talent and capabilities for institutional and family office clients, we like hard data on the individuals who drive the investment decisions.  Returns may be historical, but they are useful clues to an investor’s – and board’s – views, process, and discipline.

We consider a ten-year span to be a rigorous and revealing measure of the strength of an institution’s long-term investment abilities, but we remind our readers that there’s much more to the story.

Board members and administrators set the parameters for investment execution, and they are the ones to judge whether their goals are met.  Every school has its own endowment payout rate and tolerance for risk and that’s what CIOs aim for.  Some schools rely heavily on income, others place more weight on growing the principal.

A tale of two markets

For those institutions holding substantial U.S. public equity stakes life is sweet.  As Chris Markoch at MarketBeat writes, the S&P was up twenty-three percent in 2024, “driven by earnings growth and sector leaders in AI, biopharma, and blue-chip companies.”

Sometimes it’s best to run with the herd, to paraphrase our Mr. Marks.  But for endowments with heavy exposure to alts, particularly private equity, there were challenges.

PE has performed well for forty years.  But there are periods when the economy tanks, deals stagnate, and returns to investors slow to a trickle.

Here’s Peter Lynch’s droll take on fickle Mr. Market, and a few partisan comments on PE from Alisa Amarosa Wood and Chris Harrington, partners at KKR, and Ludovic Phalippou, professor of Financial Economics at Saïd Business School, University of Oxford.

Opposing pundits aside, we take comfort in the chart below, a cheerful visual we ran in September’s newsletter from MFS investment Management depicting the S&P’s bumps and grinds.

S&P 500 Index cumulative returns for 1-, 5-, and 10-year periods following end of bear market

Tenure and Turnover

What a difference a decade makes.  Only about a third of the CIOs in our FY2024 endowment investment report logged ten years or more tenure, and those are mostly the ones on top.

Mr. Philip Zecher, CIO at Michigan State University, and our featured guest below, will soon pass the ten year mark and the endowment’s splendid performance reflects his time and attention.

Chief investment officers new to the position, Ms. Geeta Kapadia at Fordham for example, barely have time to roll up their sleeves and grab a pitchfork.  It takes five years at least to clear, plough, and seed an endowment, and five more to fully bear fruit.

College endowments consist of thousands of gifts with strings and legally binding contracts attached.  To repeat a well-worn trope, it takes years to fully implement a multi-asset, multi-generational investment strategy and altering course mid-stream – a new investment chair, a change in CIOs, court battles – can sap performance for a decade.

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Phil Zecher, chief investment officer

Michigan State University

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)