Outsourced Chief Investment Offices Gain Traction with Institutional Investors

MARCH 25, 2013

Outsourced Chief Investment Offices Gain Traction with Institutional Investors

Everyone from former endowment CIOs to asset managers is hanging out a shingle as an outsourced chief investment office. As endowments, pension funds and other institutions take advantage of OCIO services, this growing market will consolidate, experts say.
By Frances Denmark

This January, Matthew Wright joined a growing trend by walking out of his office at Vanderbilt University. He didn’t walk far. The former vice chancellor of investments founded Disciplina Group, an outsourced chief investment office, or OCIO, in Nashville.

Wright’s exit is part of a stream of high-profile talent from endowments that began in 2004, when former University of Virginia CIO Alice Handy founded Charlottesville, Virginia–based Investure. Mark Yusko left the University of North Carolina to launch Chapel Hill, North Carolina–­based Morgan Creek Capital Management, and Scott Wise departed Rice University to set up financial services firm TIAA-CREF’s Covariance Capital Management. When these people leave their posts, there’s no guarantee that they take their former institution with them.

As the OCIO business stakes out its turf, there seems to be an insatiable demand for veteran endowment investors to step in and manage endowment assets. But not everyone is convinced. “It’s an incredibly overcrowded space right now,” says Kevin Quirk, a founding partner of investment management consulting firm Casey, Quirk & Associates, in Darien, Connecticut.

Don’t tell that to Marvin Barth, who joined Houston-­based Covariance as portfolio strategist in 2011, when it launched with $1 billion in TIAA-CREF assets. For TIAA-CREF, a New York–based provider of retirement products for the educational market, one argument in favor of this new business is the strong chance that the next decade will yield flat or negative returns, Barth notes. “That’s going to be devastating to institutions that depend on regular payouts from their endowments,” he says.

Asset managers and investment consultants alike are rebranding as OCIOs, partly because their own business models aren’t working so well, Quirk contends. There are between 40 and 50 OCIO firms in the institutional space, while an additional 50 to 100 serve high-net-worth clients. The opportunities appear rich: Estimating the U.S. OCIO market at $250 billion as of the end of 2011, Casey Quirk predicts that it will double by 2016. But consolidation will leave just five to ten firms holding the bulk of assets, it warns.

Boston-based research firm Cerulli Associates defines OCIO duties as everything from discretionary consulting to control over an institution’s investment policy. “For OCIOs that are trying to build out specific institutional segments, star power matters more in the endowment space,” says Cerulli senior analyst John Hsu. Meanwhile, some asset managers are already deep into OCIO territory. “An OCIO’s office has multiple levers to pull on,” says Monica Issar, head of the endowments and foundations group at J.P. Morgan Asset Management in New York, citing portfolio analytics, asset allocation and risk management advice and tools. Issar’s group has 40 institutional clients and $7.3 billion in fully discretionary mandates; a further $28.8 billion comprises investment recommendations and approval of manager selection.

Pension funds are adopting the OCIO model. Alan Biller, a longtime consultant to union pension plans, recently became an OCIO without seeking the job. Shortly after launching Menlo Park, California–­based Alan Biller and Associates in 1982, he began advising the Western Conference of Teamsters Pension Trust. Lately, the plan’s 26 trustees have found it tough to direct investment decisions for their $32 billion portfolio. To cut delays between board meetings, they gave Biller discretion over $27 billion in assets. “This grants Alan additional flexibility and affords him extra authority,” says Michael Sander, the Seattle-based fund’s administrative manager.

Back in Nashville, Wright is developing a total-portfolio risk management platform to enhance his endowment OCIO services. “I had yet to find something that would provide risk management across the entire portfolio for all institutions,” says the Disciplina founder, who plans to do just that.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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