The OCIO Dilemma: If You Can’t Build It; Buy, Sell, or Merge

05 / 21 / 2020
by Charles Skorina | Comments are closed

Active management is feeling more love these days.  With the surge in institutions looking for investment help, there is new-found affection for the experience, judgement, and human touch provided by outsourced CIO firms.

But with opportunity pounding on the door, why do so few OCIOs hunger for growth?  Where's that entrepreneurial drive, that vision, passion, and focus on becoming the biggest and the best?

We have been tracking the industry for over a decade and have yet to see a single independent OCIO provider break through the one-hundred billion AUM level.  Not one.  Most will never reach twenty billion.

The OCIO business, as defined by Commonfund is...the practice of delegating a significant portion of the investment office function to a third-party provider, typically an investment management or consulting firm.

The industry, with $2.38 trillion in assets as of our latest report, is bifurcated, highly diverse, intensely competitive, and the largest six providers on our annual OCIO list - Aon, Blackrock, Goldman Sachs, Mercer, Russell and Willis Towers Watson - with their size and resources dominate the largest segment, corporate pensions.

In this segment, reality bites.  There are only about three-hundred remaining internally managed corporate pensions over a billion AUM and those that outsource will chose one of the big six mentioned above or a major insurance company.  Boutique OCIOs have no chance for the business.

Most new prospects dwell in the sub-$1 billion realm - endowments, foundations, health systems, charities, and associations - and smaller sub-$200 million customers including ultra-high-net-worth families and nonprofits.

The good news is that there are about fifteen hundred colleges and universities in the US (about one-hundred-fifty endowments over $1 billion and another one-hundred-fifty in the $500 million to $1 billion bracket) and several thousand foundations, health systems, charities, and associations.

The bad news is that most of the eighty-three firms on our list compete in this space along-side RIAs, brokers, and advisors.  Literally hundreds of rivals.

Most of these competitors would be much better off buying, selling, or merging with other providers instead of grinding away with little gain.

Here's why.



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A Dazzling Decade with Trouble Ahead

12 / 12 / 2019
by Charles Skorina | Comments are closed

It's hard to make predictions - especially about the future.

Robert Storm Petersen, Danish cartoonist, writer, humorist

London calling

Reporter Chris Flood at the Financial Times ran an article a few weeks ago that parsed our latest endowment performance report and pounced on the fact that that none of the sixty funds we featured performed as well  as Vanguard's VFIAX, a large-cap U.S. equity fund, over the last 10 years.

Our newsletter gave an early peek at endowment investment performance for fiscal 2019, including a ranking by 10-year returns.

The VFIAX returned 14.7 percent net of fees for the decade while the top 10-year endowment investor on our list was Paula Volent at Bowdoin College, who racked up an excellent 12.0 percent.

Mr. Flood's observation makes a good story-hook but, comparing diversified endowment or foundation portfolios to the VFIAX - or to any similar pure-play equity index makes little sense in the real world.

Retrospectively (looking backwards from 2019), placing all your chips on a cheap equity-only index fund looks like genius, but prospectively (forwards from 2009) it would have been insane for any prudent institutional investor.

Endowments and foundations are long-term global investors with horizons extending out fifty, a hundred years and more, and the trustees and CIOs build portfolios to last for generations.

The job of CIO at an endowment or any financial institution is not to beat the VFIAX, but to meet the objectives set by the board who view capital preservation and steady cash flows as paramount.

The sages speak: Omaha vs. New Haven

In our letter we quoted an anonymous board member who was ready to throw up his hands and index his institution’s endowment, thereby avoiding a lot of fees.

We know this board chair and he’s an able and experienced financial exec. 

But some bigger and more eminent investors have also taken positions both for and against a passive strategy.



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Performance & Persistence: 1-10 year Endowment Returns

11 / 26 / 2019
by Charles Skorina | Comments are closed

Our FY2019 institutional investment update presents the latest one and ten-year returns for sixty endowments.

We consider ten-year returns to be a rigorous and revealing measure of the strength of an institution’s oversight and investment abilities.

Despite rumblings to the contrary, our latest research shows that many nonprofit chief investment officers – and their boards – deliver meaningful value to their institutions.

The road to riches

Most high-performance investment offices on our list have stable boards and long serving CIOs.

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? – can sap performance for a decade.

We recruit these executives for a living and avidly follow all institutional investment heads managing assets over $1 billion (and many with less), tracking their performance and scrutinizing their abilities. 

They may have a down year or two but, as we spotlighted in an earlier report, top chief investment officers stay on top.

And now, on to the table for our fresh-from-the-oven, pre-Thanksgiving performance chart!



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OCIO Growth in 2019: The Party’s Over

10 / 29 / 2019
by Charles Skorina | Comments are closed

No one knows exactly when the Southern Cottontail Rabbit diverged from its other 19 (or so) North American Cottontail cousins, becoming its own distinct species of bunny.

In evolution these things just happen.

Similarly, among financial institutions, modern banks seem to have evolved from traditional moneylenders somewhere in northern Italy in the late 14th century.  But that fateful development could only be recognized in retrospect.

Our friend John Hirtle, of Hirtle, Callaghan & Co, claims that he (with fellow Goldman Sachs vet Donald Callaghan) birthed the OCIO species in 1988.  He's a very nice (and imposing) man, so we take him at his word.

In any case, there were soon several smallish firms pursuing the OCIO business model in the early 1990s.

The core idea was to offer a diversified and full-discretion money management function to family offices and others who could no longer effectively or affordably do the job in-house (even with the help of traditional trust banking services).

The job was becoming too sophisticated and complex, both conceptually and operationally.

Observing their success, a number of larger firms joined the scrum in the OCIO space and, in a couple of decades we had the OCIO landscape of today, managing not just billions, but trillions of dollars.  And reaping proportionate fees therefrom.

We've been charting the growth of the OCIO industry for the past decade in our annual OCIO report and the heirs of Hirtle, big and small, seem (mostly) to have flourished.

In our shiny new 2019 report we observe that total OCIO assets grew from $1.98 Trillion to $2.38 Trillion. That's a year-over-year growth rate of 19 percent.

That's pretty impressive! But, the AUM increase is not as vigorous as the annual growth over the previous four years (2014 through 2018).  And some of the increase represents a "reclassification of assets" at two OCIO providers.

So, three decades into the OCIO era, we're minded to ask whether the OCIO growth rate may be slowing, maybe even plateauing.  Are the OCIO rabbits multiplying faster than the green, green grass of customer money they live on?

Let's consider the evidence, both statistical and anecdotal.

The hard numbers



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From Russia, with math! Anastasia Titarchuk takes over New York State’s CRF fund

09 / 17 / 2019
by Charles Skorina | Comments are closed

Anastasia Titarchuk just moved up to permanent chief investment officer and deputy comptroller of New York State’s $216 billion CRF fund after three years as Deputy CIO and a year as Interim CIO.

NYSCRF is the county’s third-biggest public pension fund after CalPERS and CalSTRS in California.

We have a revealing Q&A with her just below; but first here’s some context about CRF, which doesn’t usually get as much ink as the big West Coast funds.

Investment Performance

Here are the latest multiyear returns for these three mega-pensions and CRF hold its own very well on a comparative basis. (CRF has a non-standard fiscal year, but we have helpfully stated all figures as of June 30, 2019.)

For 2019, CRF tops both the Californians with 7.1 net return.

Over 10 years the New Yorkers were a close second to CalSTRS, with 9.8 percent vs. Chris Ailman’s 10.1 percent.

Investment Performance NYCRF, CalSTRS, CalPERS

[Click "read more" below for charts and complete report]

Only Mr. Ailman at CalSTRS was CIO for a whole decade (now approaching two decades!).  Ms. Titarchuk was interim CIO for all of 2019.  And, of course, Mr. Meng at CalPERS is the newbie, in office for only the last six months of the 2019 fiscal year.

Funded Status

A very big deal for public pensions is an actuarial number called funded status, which other institutional investors don’t have to think about.  The calculation depends on some tricky estimates, and opinions differ about what’s a healthy number.  But higher is always better.

A recent Milliman Study of 100 major U.S. pensions found that only 11 have a funded status over 90 percent, and NYSCRF is one of them, with an enviable 94 percent as of 2018.

Good investment performance can help improve this number, but it’s only one factor.  Still, a low funded ratio tends to attract attention in a not-good way and can cast a pall over the whole system.



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