Calls for Transparency in the U.S. OCIO Market Grow as AUM Reaches New High
November 24, 2020 — Boston
Market volatility drives asset owners to seek OCIO services; delivering enhanced performance reporting will be a selling point for providers
Adoption of outsourced chief investment officer (OCIO) services is on the rise as more asset owners seek enhanced portfolio governance at a time of increased market volatility. At the same time, search consultants and asset owners are demanding greater transparency, according to The Cerulli Report—U.S. Outsourced Chief Investment Officer Function 2020: A Growing Demand for Industry Standards.
Assets under management (AUM) growth in the OCIO industry remains strong and steady. U.S. OCIO assets totaled $1.9 trillion as of year-end 2019, growing 16.5% annually since 2015. Both new adoption of the OCIO model by asset owners and overall capital market appreciation have had a positive effect on OCIO asset growth figures.
As it nears $2 trillion in U.S. assets, the OCIO industry is getting more attention. Pressure for performance standards continues to grow from asset owners, search consultants, and OCIO providers as concerns over transparency into underlying investments, fees, and the comparability of performance track records remain a top challenge. “Greater consistency and transparency when evaluating investment track records will help investors select the best OCIO to meet their particular needs,” remarks Laura Levesque, associate director.
Global Investment Performance Standards (GIPS) reports continue to be a top focus for developing industry standards; however, the expense of adopting standards is a significant barrier, especially for smaller OCIO providers in the U.S. market. Additionally, search consultants do not view GIPS as critical to evaluating investment performance. According to the report, 45% of consultants indicate that GIPS are slightly important. Meanwhile, 73% tell Cerulli the most common type of track record they encounter is a representative account of similar clients, regardless of whether they have adopted GIPS.
Numerous efforts are underway to increase industry standards and transparency. The Alpha NASDAQ OCIO indices went live in 2020 and many OCIO providers are already self-reporting performance to be included in these indices, with more expected to report in coming quarters. North Pier Search Consulting founded the Discretionary Investment Management Working Group on Data Standards (DIMWG), a group of OCIO providers and other industry leaders, to help better classify the OCIO space and determine standards for reporting. “Ultimately, firms that are able to adopt any developing industry standards by these groups should have an advantage in attracting potential clients,” says Levesque. “It may also help avoid future performance surprises and assist in building lengthier client relationships, a top goal for both OCIO providers and asset owners,” she concludes.