5th Apr 2023, By Andrew Slater
I first came across the concept of an outsourced chief investment officer (OCIO) in the early 2000s. I was working in asset management with a client base of Dutch pension schemes. The hot topic at that time was new Dutch legislation called FTK, which can be thought of as a trimmed-down version of the Solvency 2 insurance regulatory regime, which was then in development.
But, I have jumped in at the middle of the story. Turn the clock back further, and there was a time when institutional investment was straightforward. The institution performed the investment function either in-house or outsourced to a local asset manager via a balanced mandate. This was because the investments were typically just local cash, fixed income and equity. There was little, if any, connect between the asset and liability sides of the balance sheet.
As time ticked on, the investment world became broader. Institutions set strategic asset allocations for global diversification, which was implemented with specialist rather than balanced mandates. This was absolutely the right investment approach, but only the very largest institutional investors had the capability to perform it all in-house. This gave rise to an investment consulting industry to assist in determining strategic asset allocation and asset manager due diligence. Such consultants were able to develop sophisticated investment models and deep databases about asset managers on all asset classes and geographies. The outsourcing of the investment function had begun.
Running parallel with these developments was a change of benchmark the institutions used to measure themselves. In the days of balanced mandates, it was peer comparison. But this led to herding behaviour which catalysed the change to specialist mandates and benchmarks of market indices (which are universal for all investors) aligned with the specific strategic asset allocation of the institutional investor.
In the Netherlands, what the FTK legislation represented was a codified linking of the asset and liability sides of the pension scheme balance sheet. It forced another change of benchmark for the assets, this time from market indices to the liabilities specific to the institutional investor. For the first time, those managing the assets day to day had to be cognisant of not just the asset side but also the liability side of the institutional balance sheet. Pension scheme trustees starting started asking their asset managers: Can they do it? The asset managers responded by creating the capability and understanding that had previously lived with the consultants.
This represented a dismantling of the silos of expertise that had built up. This dismantling went the other way, too, as the asset managers extended from asset to liability capability, the consultants expanded from liability to asset capability. These similar offerings have become labelled as OCIO, or sometimes, and often in pensions, fiduciary management. Whatever the label, the service offers a team that cuts across the silos and can advise and implement on all stages of the investment process, including:
OCIO represents today’s evolution of best practice in investment for institutional investors. In some ways, things have come full circle. OCIO provides a complete, not piecemeal, investment function, just as the in-house teams of yesteryear. Of course, what has changed since yesteryear and now, is the complexity of the investment landscape. The in-house solution is no longer commercially viable except for the very largest institutional investors, which is why outsourced solutions like OCIO have become mainstream.
Lux offers investment consulting services to help organizations manage their assets and meet long-term obligations. Our Outsourced Chief Investment Officer (OCIO) services provide expert advice and guidance on investment strategies and products, help implement and monitor investment policies, report investment performance, and manage risk. We also offer Asset Management Consulting services to optimize asset performance, develop and implement management strategies, provide advice on asset acquisition, disposal, and financing, and help organizations comply with regulations and standards. Contact us to learn more about our OCIO services and how they can benefit your organization.
Phone+971 4 876 8530
Kenya and East Africajoseph.firstname.lastname@example.org
Subscribe to our newsletter
To receive your quarterly updates.
By completing this form you are opting into emails from Lux Actuaries. You can unsubscribe at any time.
© 2023 All rights reserved.