OCIO growth from adoption continues to be an important aspect of institutional asset management and will likely continue in the long termA new report from Cerulli Associates explores the evolving outsourced chief investment officer (OCIO) market, including market sizing, demand and anticipated growth across client segments, types of outsourcing arrangements, functions outsourced, obstacles to uniformity across providers (i.e., performance track record and fees), and reasons why institutions are outsourcing. Access the report here.
January 24, 2023, BOSTON—The outsourced chief investment officer (OCIO) market is strong, with significant new opportunities for mandate wins and expansion in services from new or existing clients. About one out of four asset owners polled by Cerulli expect to use an OCIO in some capacity over the next 24 months, according to Cerulli’s new research, U.S. Outsourced Chief Investment Officer Function 2022: Industry Efforts for Standardization Kick Into High Gear.
The research finds a significant runway for growth in the OCIO service model. Approximately 14% of asset owners expect to begin using an OCIO relationship and 11% expect to expand the use of OCIO, moving from a partial portfolio (sleeve) to a total portfolio mandate or the addition of other asset pools that are currently managed in-house. Many institutions could also move from partial discretion to a model in which discretion is fully ceded to the OCIO provider. Only 6% expect to reduce or stop using OCIO services.
In the next 24 months, asset owners expect to increase allocations to emerging markets debt, private debt, infrastructure, and various real estate investments—a key driver for OCIO adoption. “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,” remarks Laura Levesque, associate director. “Given market conditions, these asset allocation trends are in line with what Cerulli would expect—all four asset classes provide some level of diversification from other public market investments,” she adds.
Providing Transparency & Retaining Client Assets
In addition to experience managing alternative asset classes, key services that asset owners will seek from OCIO providers include risk analytics, bundled plan administration, and online portal access. “Asset owners want access to how their investments are performing at their fingertips. OCIO providers that can offer granular transparency with anytime, anywhere access to investment performance will be well positioned to win mandates,” says Levesque. Accounting support, thought leadership, education, and customized reporting are among other important services, the research notes.
An OCIO provider’s ability to retain client assets will increasingly depend on the firm’s conviction in sticking to its original mandate. In fact, deviating from the original mandate is by far most likely to contribute to a client’s decision to terminate a relationship. Underperformance is also considered a major factor, but at a much lower level (78% vs. 35%), according to the research. “The upcoming wave of clients will want to make certain that they understand the manner in which the OCIO operates and its investment philosophy. Therefore, a firm’s ability to convey these attributes to asset owners cannot be understated,” states Levesque. “OCIOs that are able to uphold investment conviction and report accordingly could have the upper hand when it comes to acquiring new assets,” she concludes.
About Cerulli Associates
For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.
Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.