Unlike the earlier years of outsourced chief investment officer (OCIO) adoption, the clients now expected to adopt at the fastest rates are endowments, foundations, and health and hospital systems. Growth in OCIO is expected to remain higher than institutional asset growth, largely as a result of the increased interest and adoption from these three client groups, according to the latest Cerulli Edge—U.S. Institutional Edition, 3Q 2023 Issue.

According to Cerulli, OCIO assets grew to $2.4 trillion by the end of 2021 and are expected to grow to more than $3.0 trillion by the end of 2026, an overall growth rate of 5.6%, driven by both new adoption and expected capital markets movements.

While many asset owners currently do not use an OCIO, use is expected to increase considerably over the next two years, with many opportunities for future adoption over the long term. According to Cerulli, 14% of asset owners say over the next 24 months they are likely to start using an OCIO for the first time. An additional 11% expect to expand their overall use of OCIO (either from a partial portfolio mandate to a full portfolio mandate or to fully cede final portfolio investment decisions to the OCIO provider).

Access to a range of asset classes that are not traditionally managed in-house—particularly for nonprofits—is driving interest in the OCIO business model. “Nonprofits are especially interested in investing in a variety of asset classes, including alternatives and private asset classes that require minimum investment levels, not to mention access to high-quality managers and opportunities, that often are out of reach,” says Laura Levesque, director. “OCIOs can gain access to these opportunities through economies of scale and commingled vehicles, another reason nonprofits are moving to the model,” she adds.

Asset owners and prospects are most likely to ask OCIO providers for information about and guidance with asset allocation (77%), investment holdings (69%), capital markets expectations (68%), and risk analysis (67%). With market changes over the last three years, both prospective and current OCIO clients are putting an increased emphasis on the risk management capabilities of their OCIO providers. Recent market volatility has, in some cases, uncovered areas of unintended risk for many asset owners—they are looking at it not only from the perspective of portfolio investment risks, but also from the operational and spending policy risks to which they are exposed.

“OCIO providers must ensure they are appropriately focusing marketing and communications efforts on the topics that are most top-of-mind for both clients and prospects,” says Levesque. “Today, there is far more focus on investment capabilities, particularly around alternatives and private investments, as well as risk management. These areas are likely to remain priorities, and marketing and communications should be directed there,” she concludes.