Endowment and foundation (E&F) asset owners have unique investment management challenges, including:
- A broader set of stakeholders (board, investment committee, donors and benefactors, CFO, staff, students, etc.)
- A larger use of more complex investments such as private markets, hedge funds, and tactical/opportunistic investing (due to the perpetual nature and total return focus)
- A need to balance spending needs with risk tolerance
With the recent pandemic combined with the ongoing increase in market volatility, these challenges are becoming a catalyst for E&F asset owners to evaluate their operating model, including whether hiring an Outsourced Chief Investment Officer (“OCIO”) makes sense.
Here are five key questions an E&F asset owner should think about when determining whether to hire an OCIO.
1. What outcomes or key capabilities are you looking for and can these be best achieved via an OCIO?
Committees need to clearly articulate the outcomes they expect to achieve, which could include some or all of the following:
- Target return
- Risk management
- Administrative and back-office support
- Sustainability / ESG / DEI
2. Is the investment committee comfortable delegating investment and/or administrative responsibilities?
If an investment committee retains an OCIO, investment and related administrative decisions will be delegated. Since there is no standard OCIO operating model, the type and timing of decisions to delegate can be customized by the committee to meet their needs and operating culture. For example, the committee may delegate manager selection and termination, with veto power in the first year and full delegation in subsequent years. Other areas of delegation may include:
- Where and how much passive management should be utilized
- Which and at what weight sub asset class allocations should be employed
- Managing administrative aspects of legacy private investments
- The approach to rebalancing the portfolio
3. If the investment committee is comfortable delegating responsibilities to the OCIO, do they understand the responsibilities they need to retain?
The ultimate responsibility for achieving the objectives remains with the committee, even if an OCIO is retained. As a result, the committee needs to stay focused on:
- Setting objectives
- Managing the overall investment strategy and policies
- Providing oversight of third-parties such as the OCIO, trustee, etc.
4. Can the E&F asset owner’s mission be achieved by an OICO?
Can the OCIO not only understand the mission, but also embrace it and can demonstrate they can execute on those values?
Values could be:
- Environmental
- Community-based
- Faith-based
5. Is there a cost benefit to engaging with an OCIO?
Understanding that OCIO fees are higher than traditional consulting fees, what additional value can we expect?
- Augmenting internal resources
- Improving risk and/or returns
- More timely decision
- Access to private markets
- Tactical/opportunistic investing
- Lowering investment management fees
As an asset owner, you want to ensure you have funds available to support activities for years to come. Curcio Webb regularly works with endowments and foundations to take a deeper dive into the questions posed here. Our consultants provide non-biased guidance and are happy to help you weigh your options. Please contact Sue Anderson at 609-737-4106 or at sanderson@curciowebb.com to learn more.