In his recent Special Report on CIO Outsourcing for Pensions & Investments, writer Palash Ghosh outlines why the demand for Outsourced Chief Investment Officers (OCIOs) is accelerating, and will only continue to grow as increasingly volatile markets create uncertainty in some, erode confidence for others, and prompt reviews of the status quo for most.
North Pier Search Consulting’s Managing Partner Jim Scheinberg spoke with Ghosh for the report, citing an increase in discretionary mandates as well as the size of the mandates as reasons for the growth, with a wide variety of asset owners adopting the change. “We have seen a large increase in OCIO searches from most types of asset owners. Foundations, both public as well as those of private families, continue to move in that direction. Most searches we conduct in that space are from $100 million to $1 billion, though lately we are seeing more requests as small as $25 million,” Scheinberg told Ghosh.
As for who else is running OCIO searches, the North Pier team has seen an upsurge in public funds and Taft-Harley pension plans showing interest in RFP projects or program evaluations and related fiduciary education over the past year or so. “I suspect we will see that area start moving more and more to delegated mandates in the coming years, especially with the recent market volatility,” Scheinberg said in the interview.
The earliest adopters of OCIO services, corporate pension funds, and defined contribution plans continue to migrate from traditional consulting to OCIO arrangements. These retirement plans add ERISA liability protection to the list of OCIO benefits. Moving to discretionary advisors isn’t just for small to mid-sized plans anymore. Scheinberg added that, “We are working on one project right now well in excess of $10 billion, and we [were] just requested to bid on another for a plan three times that size.”
“Looking at (asset owners’) cost structures and resources, it just makes more sense for them to outsource their investment management,” Michael Cagnina, Vice President and Managing Director of North American Sales at SEI Investments Co, said in the article. “Plus, the market has more esoteric asset classes like private equity, cryptocurrency, infrastructure, real estate, etc., that OCIOs are more likely to have expertise in and familiarity with.”
Asset owners interviewed for the article include Lawrence Bernert, board chairman of the Norfolk Employees’ Retirement System, who recently completed an OCIO search. “The retirement plan had been investing in a balanced model index portfolio, both stocks and bonds,” Mr. Bernert said. “But we recently decided to take the OCIO route to manage our assets and retained a [search] consultant to help us.”
Similarly, Michael Hradec, VP, Deputy Director of Business Services at Savannah River Nuclear Solutions, stated that they recently transitioned to OCIO after completing a search for their $4.1 Billion pension plan. “One of the major reasons we decided to hire an OCIO was because our committee would meet quarterly and our process would not allow tactical changes with agility,” said Mr. Hradec. “That led us to miss out on opportunities with shifts in the markets and the overall economy.”
Hradec also noted that during the COVID-19 pandemic, “When the market adjusted — we could not move quickly enough in our fixed-income portfolio to take advantage of the gaps in Treasury yields and credit spreads and missed out on this opportunity for additional returns and reduced interest rate hedge,” he said. “We expect to capture those opportunities with OCIO.”