As outsourced chief investment officer (OCIO) providers seek new client mandates, the majority say the endowment (91%) and foundation (91%) channels are the most critical for growing their firm’s assets under management (AUM), according to the latest Cerulli Edge—The Americas Asset and Wealth Management Edition.

During the past two years, 80% of OCIO search consultants saw an increase in searches from endowments and foundations. In particular, endowments and foundations with between $100 million and $250 million in total assets are largely responsible for this growth in the OCIO industry.

“A key factor driving endowments and foundations to the OCIO model is the complexity involved in managing their portfolios,” says Chris Swansey, associate director. “Many say this complexity requires an enhanced level of expertise, and reviewing managers at quarterly investment committee meetings with the aid of an advisory-only investment consultant does not meet their preferred level of oversight,” he adds.

However, OCIO adoption is particularly low among endowments and foundations with greater than $1 billion in assets—just 15% of endowments with more than $1 billion in AUM use an OCIO, as do only 20% of foundations with more than $500 million in AUM.

“A substantial opportunity exists for OCIO providers to gain scale from larger institutions,” says Swansey. “While larger institutions often maintain internal investment offices, they have begun to consider that outsourcing could deliver a better outcome for their portfolios. These institutions have been prompted to outsource by concerns over internal investment team turnover, limited access to strong alternative managers, and a desire to improve performance,” he adds.

According to Cerulli’s survey of asset owners that have more than $100 million, 40% of institutions that use an OCIO provider previously managed their portfolio through an internal investment office. “Significant possibility remains for those OCIO providers taking a measured approach to growth, especially among larger endowments and foundations, an important yet untapped client segment,” he concludes.