Organisational Design

More investors mull outsourcing CIO

Last year, America Red Cross shut its investment office and handed over the keys of its $3 billion investment portfolio to Cambridge Associates. More pensions and endowments will do the same, argues new research from Cerulli Associates.


Cerulli Associates, on behalf of BlackRock, has conducted in-depth qualitative interviews with senior executives, finance and investment staff professionals, and investment committee and board members at 45 US institutions across client segments, primarily non-profit institutions and corporate defined benefit plans, to learn about their experiences working with an outsourced chief investment officer (OCIO) provider.

This is Cerulli’s first dedicated research initiative covering asset owners using the support of an OCIO provider. The study is also an outgrowth of, and complement to, our annual survey of OCIO providers and decade-long syndicated research on the OCIO industry.

Worldwide OCIO assets have climbed sharply from less than $100 billion in 2007 to more than $2 trillion as of 2018, with a spike in demand following the 2008/2009 financial crisis. We estimate that US assets under management are $1.1 trillion as of year-end 2018 and forecast continued strong industry growth, with US AUM expected to reach nearly $1.7 trillion by 2023, an annualised growth rate of more than 8 per cent.

Defined benefit plans currently make up the largest portion of OCIO AUM, representing 55 per cent of US industry assets, followed by non-profits, which represent 25 per cent of AUM. Going forward, we expect foundations and endowments to experience significantly stronger growth (annualised growth of 10.7 per cent) as these institutions increasingly adopt the OCIO model.

While we expect corporate DB plans to continue to adopt the OCIO model, asset growth will be slower than that of the overall OCIO market at an annualised growth rate of 5.2 per cent. This slower projected growth has several causes, including the fact that participants will draw benefits, DB plans will undergo pension risk transfers, and plans have large allocations to fixed income, which we forecast will generate lower returns than many other asset classes.

The drivers pushing these investors towards this model include a lack of internal resources (82 per cent), and the need to improve a governance process (53 per cent) Cerulli’s existing OCIO research shows that growth of OCIO assets has primarily been driven by institutional investors’ needs for timelier decision making, deeper manager due diligence, and greater oversight of portfolio risks, and we expect that these same forces will continue to help drive growth in the OCIO industry.

Role of consultants

We found that fiduciaries and boards focus on key areas when deciding to outsource their CIO. Typically, research findings are supplemented by qualitative interviews with search consultants that help institutions evaluate and select an OCIO provider. When institutions are in the search phase, consultants highlight several areas to help asset owners find a suitable OCIO, including service models, the investment philosophy of the provider, investment expertise, client experience, cost, and a given provider’s expertise supporting similar client types.

One key consideration is alignment of investment philosophy regarding active and index strategies, as well as the role of alternatives in the portfolio. For institutions that rely heavily on alternatives, manager access is paramount.

Consultants also advise asset owners to look for OCIOs with expertise in helping to achieve their specific long-term objectives. For pensions, this may involve choosing an OCIO with a track record in portfolio de-risking, liability-driven investing, or risk transfer advice. For foundations and endowments, an OCIO’s experience with managing complex portfolios of legacy alternative assets can be an important differentiator. For some smaller organisations with less complex portfolios, fees may be the most important factor. Consultants also cite the importance of deep resources, open architecture, avoiding key-person risk, and performance track record.

We asked participants whether they feel like they’re getting appropriate value for money given the all-in fee paid to their OCIO provider for investment management. Overall, 84 per cent of participants state that they are getting appropriate value given the fees they pay. When taking total costs into account, several respondents say that moving to an OCIO model has improved their fee structure, with some citing the additional portfolio expertise and administrative support received. Our research did not include a cost analysis of in-house management versus outsourcing.

Our research did not explore the risks of outsourcing directly. However, asset owners do have certain considerations about risks. These include:

  • The decision to hire an OCIO is not always unanimous and institutions can face reluctance from some decision-makers following the move to OCIO.A common misconception is that board engagement decreases when institutions move to an OCIO relationship. However, more than half (56 per cent) of institutions tell us that board engagement has not changed since hiring an OCIO, and an additional 27 per cent say that board engagement has improved.
  • Growth of the OCIO industry has occurred in an extended bull market and clients remain cautious of the next down market. Around one-sixth (16 per cent) are unsure whether their OCIO will meet their performance goals in a down market. We believe a market downturn will present new challenges for providers, many of which have seen business growth during the extended bull market. When markets inevitably enter a more difficult phase, it will become increasingly important for OCIOs to deliver best-of-breed risk management capabilities and to demonstrate their ability to respond tactically to changing market conditions.

We did not collect data on investment performance results. However, most institutions polled are satisfied, or very satisfied with OCIO’s investment capabilities. Optimism remains high, as most organizations believe that their OCIO is well positioned, or very well positioned to meet their performance goals and objectives over the next three to five years.

Key findings

Investors are broadly satisfied with the OCIO model. Investor satisfaction levels are high across all aspects of their OCIO relationships.

Boards remain engaged after ceding investment responsibilities.

Investment committees and boards are comfortable with shared responsibility and remain engaged. The decision to outsource allows boards and committees to focus on priorities that are core to the organization.

As the OCIO market evolves, investors are seeking expanded services and conducting replacement searches.

The OCIO market is at an inflection point and investors want more from their OCIO. More than half of survey participants have initiated a replacement search since hiring their OCIO, as organisations seek greater flexibility, stronger investment capabilities, proactive client service, and better fit with their OCIO.

Alternatives and environmental, social, and governance (ESG) expertise are key for endowments and foundations, while pensions are focused on risk management and preparing for the end-game.

Investment performance remains a top priority, with preferences for specialty capabilities varying by client type. Nonprofits seek access to top alternatives managers and are increasingly looking for help with ESG. Corporate defined benefit (DB) plans most value pension risk management and help preparing for the end-game.

Operational and administrative capabilities are strong, but institutions want improved technology.

While virtually all (96 per cent) organisations are satisfied with their OCIO provider’s operational and administrative capabilities, many are looking for improved technology. Nearly half (42 per cent) of institutions say they will need additional technology services in the future.

Board and stakeholder education are key.

Across all client types, institutions highly value OCIOs sharing their intellectual capital to educate stakeholders and decision-makers.

We expect strong growth in OCIO but shifting financial markets present challenges.

Institutions are highly likely to recommend the OCIO model, but growth has occurred in an extended bull market. As markets move into a more challenging stage, institutions are increasingly likely to seek OCIO services, providers will face a new series of tests, and existing OCIO clients will continue to conduct replacement searches.

Above all, the sentiment that emerges from our research is one of strong satisfaction with the OCIO service arrangement.

Nearly all, 98 per cent, of the institutional investors we surveyed are satisfied with the OCIO model and their governance structure.

Additionally, investor satisfaction levels are high across all aspects of their OCIO relationship, including OCIO providers’ investment capabilities and operational support.


Michele Giuditta is director of Boston-based research firm Cerulli Associates’ institutional practice. Prior to joining Cerulli, Michele worked at Cambridge Associates as an associate director in the client relationship management group.

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