evaluating ocio providers - oacubo · 25/04/2019 · cornerstone cambridge blackrock atlanta...

Evaluating OCIO Providers

April 25, 2019

With Senior Consultant, Frank Szymanek

1

Discussion Agenda

▪ Needs and Benefits of Evaluating an OCIO

▪ Current State of OCIO Delivery

▪ Performing Effective Due Diligence

2

Needs and Benefits of Evaluating an OCIO

3

Background of the OCIO Marketplace

▪ Outsourced Chief Investment Officer (OCIO) = investment advisory services for foundations / endowments (and other asset pools)

▪ OCIO now accounts for almost $2 trillion of discretionary assets under management

▪ Explosive demand has led to significant growth in new entrants offering their services; today, over 100 firms claim to offer OCIO capabilities

▪ Firms differentiate on asset management expertise, performance, risk management, technology, administrative services and pricing

▪ Need for more disciplined process for evaluating hiring / retaining of an OCIO provider is escalated

4

Representative OCIO Providers

BoutiquesTraditional

Consulting FirmsAsset Managers

Banks/Wealth

Management

Cornerstone Cambridge BlackrockAtlanta Consulting

Group

Hirtle Callaghan DeMarche Commonfund Goldman Sachs

Global Endowment

ManagementEllwood Fidelity J.P. Morgan

Perella / AgilityFund Evaluation

GroupRussell

Morgan Stanley -

Graystone

Strategic Investment

GroupMercer SEI Northern Trust

TIAA NEPC Vanguard PNC

5

Understanding Your Foundation / Endowment Oversight Needs

▪ Growth of OCIO services is often fueled by:

▫ lack of internal resources▫ need for stronger fiduciary oversight▫ better risk management▫ Increase return potential▫ cost savings

⁃ How do these apply to you?

▪ Are your investment program’s and institutional goals aligned (e.g. spending target, risk tolerance)? When did you last review?

▪ Are you making use of expanding administrative services available – gift stock processing, endowment accounting, charitable gift admin services, and education and donor support?

▪ Effective stewardship of donor bequests, especially coordinated with capital campaign, growth potential

6

Benefits of an OCIO Search / Review

▪ If outsourcing for the first time:

➢ Establish expertise and specialization in dedicated OCIO

➢ Frees-up internal resources

➢ Greater fiduciary oversight and risk management

➢ Obtain comprehensive services and competitive fees

▪ Reviewing an existing OCIO:

➢ Re-evaluate investment program’s alignment with goals of institution

➢ Ensure services provided are best-of-class in industry

➢ Compare / reduce fees relative to competitors

▪ Institutional quality oversight growth potential

7

Benefits of a Consultant Leading an OCIO Search

▪ Political issues, e.g. board / donor interests, often lead to

selection /retention of a provider without thorough due

diligence

▪ Oversight led by overworked internal resources, or finance

committee / board with other priorities

▪ Use of an experienced, independent consultant for search

provides:

▫ objectivity

▫ extensive familiarity with marketplace

▫ peer benchmarking

▫ comprehensive scope of analysis

▫ better decision making

8

Case Study #1 – Private Higher Education Client

• Single oversight structure

• External expertise

• Better stewardship of endowment

• Internal oversight of portion; person retiring

• Broker oversight of portion; not sure of history

• No coordination of two

Governance

Before

• Single, integrated oversight structure

• External OCIO expertise

• Better stewardship of endowment -> growth

• Hire consultant to lead search


• Student group oversight of portion; integration?

• Donors’ brokers’ oversight of portions; history?

• No coordination of separate program sleeves

Goal

Case Study # 2 – Private Higher Education Client

Goal

• More formal due diligence & oversight

• Assess expected returns & risk management on

spending policy

• Benchmarking of services & fees

• Better stewardship of endowment -> growth

• Hire consultant to lead review

• Longstanding provider; performance & service

issues

• Questions on alignment of provider’s approach

with institution’s goals

• Complexity of manager oversight

• Belief fees too high

Governance

Before

9

Current State of OCIO Delivery

10

Differing Styles and Approaches

Alternatives Research

Active/ Passive

StructureFocus

▪ Alternatives generally make up 10-40% of

portfolios not following Endowment / Yale

Model

▪ Use and structure of alternatives for return

enhancement and / or risk management needs

to be understood and evaluated

▪ Access to top tier and capacity constrained

managers is essential

▪ Firms rely on their size, reputation and a deep

research staff to identify alternative managers,

negotiate access and fees

11


▪ Expanding use of indexing to control costs and

manage risks

▪ The majority of providers favor active where

managers can exploit inefficiencies and will use

passive in efficient market spaces

▪ Providers increasingly favor concentrated

managers with high tracking error who they

believe can outperform the index

▪ Environmental, social and governance (ESG)

solutions are growing in use to meet objectives

of organization


Active/ Passive

StructureFocus

12


▪ Different investment models include commingled

funds to a fully customized solution, predominantly

manager-of-managers, with limited use of

proprietary management

▪ Investment pool structures include:

▫ Single manager funds

▫ Fund-of-funds (mutual v. common v. LPs)

▫ Separate accounts for larger pools

▫ Private / direct ownership for larger pools

▪ Commingled funds create complexity for oversight

and potential fee overlaps

▪ Back-office custodial support is imperative for

separate accounts and private structures


Active/ Passive

StructureFocus

13


▪ OCIO providers range from boutique firms, traditional consulting firms, asset managers, banks and wealth managers offering a varying array of services

▪ OCIO provider’s approach needs to fit the culture of the institution they are serving and understanding their organizational mission objectives

▪ Service model varies from a team approach to a dedicated CIO, and may include consultants / advisors who perform OCIO co-incidentally to other services

▪ Foundation / endowment focused firms look beyond the investment program itself to incorporate endowment specific traits, such as:

▫ evaluating spending policy and liquidity requirements

▫ endowment accounting

▫ charitable gift administration

▫ donor support and education


Active/ Passive

StructureFocus

14









Before

• Update investment policy statement

• Comprehensive investment line-up review

• Assess use of indexing, alternatives & ESG

• Full transparency of fees

• Alignment of return / risk goals with tolerances &

spending policy

• Non-integrated investment management &

potential overlapping exposures

• Older investment policy statement & no

monitoring of implementation

• No alignment of investment program’s goals with

institutional goals

Goal

Investment Review

Goal

• Review & simplify investment structure

• More use of passive vehicles & thoughtful approach

to alternatives

• Full transparency of fees

• Alignment of return / risk goals with tolerances &

spending policy

• Emphasis on active management & alternatives

• Uncertain benefit of Illiquid assets

• Risk management concerns

• Belief fees too high

Before

Investment Review

15

Performing Effective Due Diligence

16

Evaluation Process

Step 1: Determine your objectives, preferences and

needs – arguably most important step

Step 3: Create and send customized RFP (60-80

questions) to short list

Step 4: Summarize RFP responses

Step 5: Finalist presentations (up to 3 firms)

Step 6: Negotiations, reference checks and

review contracts

Step 7: Final selection & implementation

Step 2: Screen consultant’s database and

create appropriate short list (5-7 firms)

17

Assessing Your Needs

Preferences & Board / Management Input▪ Confirm objectives &

scoring criteria

▪ Identify decision makers

▪ Determination of desired board / mgmt. involvement

▪ Identification of political considerations

▪ Granting discretionary authority to OCIO

▪ Include incumbent OCIO

Evaluate Current Structure▪ Investment Policy

Statement

▪ Spending Policy

▪ Utilization of passive versus active management

▪ Alpha generation areas

▪ Unacceptable risk elements

▪ Fees

▪ Governance oversight & process

▪ Services

Key Attributes Matching

▪ Strengths, expertise of firm

▪ Depth of teams

⁃Asset mgmt. / research

▪ Investment approach

▪ Service model & reporting

▪ Administrative services

▪ Fees (performance based)

18

Areas of Inquiry in Search

▪ Firm Profile – Number and type of OCIO clients, assets under management, strength of team, account size and fee minimums

▪ Investment Philosophy – Use of different asset classes, indexing, alternatives, ESG, funds, separate accounts, proprietary options

▪ Portfolio Construction – Asset allocation process, research management, liquidity, frequency of rebalancing, stress testing

▪ Governance – Decision making, adherence to Investment Policy Statement, risk management process

▪ Servicing – Frequency of meetings, strength of reporting (internal and governmental), custodian, gift stocks, administrative support

▪ Transition – Process, timing, handling of legacy assets

▪ Fees – Inclusive of all service providers, overlap, indirect compensation, guarantees, performance based

19

Sample Project Timeline

Q1 Q2 Q3 Q4

Goal Setting / Planning / Screening

RFP Submission / Completion

RFP Analysis / Finalist Meetings

Negotiation / References / Contract

Develop IPS / Asset Allocation

Transition / Management

20

Evaluation Process – Short Form

Step 1: Determine your objectives, preferences and needs

Step 2: Screen consultant’s database and

create appropriate short list for RFI (3-5 firms)

Step 5: Finalist presentations (1-2 firms)

Step 6: Negotiations, reference checks and review

contracts

Step 7: Final selection & implementation

Step 3: Create and send customized RFI (20-30

institution specific questions) to short list

Step 4: Summarize RFI responses

21









Process• Hire one provider for endowment & another for

long-term reserves given different objectives

• Update investment policy statement

• Comprehensive investment line-up revamp

• Reduction & full transparency of all fees

• Assess investment expectations’ impact on spending

policy

• Complete goals & objectives questionnaire

• Internal education on process & intended

outcome

• Full RFP with 8 firms

• 3 firms + 1 existing manager for finalist meetings

Result

Search

Result

• Hire new provider

• Refresh investment policy statement

• Re-tool investment structure - more use of passive &

thoughtful approach to alternatives

• Reduction & full transparency of all fees

• Assess investment expectations’ impact on spending

policy

• Complete goals & objectives questionnaire

• Internal education on process & intended

outcome

• Full RFP with 5 firms

• 3 firms including incumbent provider for finalist

meetings

Process

Review

22

Frank Szymanek

223 W. Jackson Blvd., Suite 800

Chicago, IL 60606

www.planpilot.com

(312) 973-4911

Thank you.Points to Remember

▪ Greater fiduciary governance

▪ Alignment of investment program with

institutional goals

▪ Better risk / return expectations

▪ Lower costs

▪ Streamlined decision-making

▪ Better stewardship & growth potential

http://www.planpilot.com/

evaluating ocio providers - oacubo · 25/04/2019 · cornerstone cambridge blackrock atlanta...

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