An OCIO Can Be the Investment Answer in Volatile Times
October 19, 2022
For many organizations, the volatility of the COVID-19 pandemic highlighted how quickly key decisions — including what to do with an organization’s investment portfolios — could be delayed or disrupted. The value of engaging an outsourced chief investment officer (OCIO) rapidly became apparent.
Now, a fresh set of circumstances is underscoring the importance of an OCIO.
While the onset of the pandemic showed how an OCIO could help manage market volatility, Bryan Ward, senior partner and head of solutions and sales at Aon Investments USA Inc., says an OCIO continues to be valuable. “Now we’re moving out of a pandemic-stressed, volatile environment into an inflation-induced, stressed, volatile environment. So, we’re still seeing some of those same reasons drive increased interest in OCIO,” Ward says.
At the end of September, the UK pensions industry faced a crisis as crashing UK bond prices forced plans to scramble for liquidity to settle margin calls. The Bank of England eventually had to step in to offer to buy up bonds to restore stability. This action gave the plans time to reassess their holdings. But the crisis moved the issue of pension plan stability firmly into the boardroom.
In such stressful investment times, organizations face a need to rebalance portfolios, but might lack the resources to effectively do so on their own. At the same time, there can be opportunities in volatile markets that many investors are inadequately positioned to address. An OCIO can help investors deal more effectively with both and increase chances for successful investment outcomes.
An OCIO can provide investors with a variety of important qualities including speed, a diverse range of individual experience to guide investment activities and exposure to a variety of market conditions and events over decades of investing.
“In a consultative model, investment committees might only meet once a quarter and can’t execute rapidly,” says Heather Myers, partner and non-profit practice leader at Aon. “An OCIO is actively managing the investments and can pivot quickly as markets evolve or change.” This speed of execution can be particularly valuable in rebalancing investors’ portfolio during periods of market volatility.
From a Niche Market to Broad Use
OCIOs manage investments for a variety of asset owners, including pension and defined contribution retirement plans, university and healthcare organization endowments, sovereign wealth funds and other institutional investors.
Over the past 10 years, the focus of the OCIO has moved from de-risking frozen pension funds to all manner of benefit plans in the corporate space, as well as endowments and foundations, operating portfolios and public sector retirement and benefit plans. Some asset owners have taken a hybrid approach, outsourcing specific investment activities such as interest rate hedging portfolios for qualified pensions.
Nonprofit organizations are also among the entities benefitting from the increased flexibility of the OCIO model. “From a public sector and union perspective, I think it would surprise most people to learn that these entities have been using OCIO for nearly two decades,” says Ed Bardowski, partner and public markets solution leader at Aon. Bardowski adds that while several U.S. states and other public entities have used OCIOs for years, many other entities are only beginning to explore the approach.
The Importance of Governance
Good governance is critical to the success of an OCIO, who can help an organization execute its policies.
“At the highest level, when a committee or a board adopts the strategy and puts it into a policy statement, they need to have the internal governance capabilities to properly execute on it,” says Ward. “If you adopt a strategy that you cannot properly govern, you need to outsource some or all of it. You have to make sure that when you say you’re going to do something, you’re able to do it. And if you can’t, find a partner that can.”
Transparency is an important element of governance, and it is essential for an OCIO to understand not only the investments of the client business but also its operations. With transparency in governance, an OCIO can help organizations with high priority environmental, social and governance (ESG) investing.
Though Bardowski notes that limited resources may make ESG investing challenging for smaller OCIOs, it will nonetheless be important for these offices to develop skills in this area. “I think it’s critical for OCIOs to hire in two key spaces within the next six to 12 months,” Bardowski says. “One of those is the governance area, but also on the responsible investing side for clients seeking that capability.”
Meeting Varied Client Needs
As organizations increasingly embrace the OCIO approach to their investments, more is being expected of the outsourced partners. Beyond setting up portfolios, asset allocation and hiring investment managers, investors are expecting OCIOs to provide back-office services and operations, take a key role in governance and help with enterprise risk management including such areas as cyber security and fiduciary liability.
“As an OCIO, you’re an extension of the staff,” says Bardowski. “With everything that’s happening with technology and with turnover in the C-suite and with staff, we’re only going to see more of that.”
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