BY JAMES PERRY & MARK WEIR, Maples Group
A challenging investment environment over the last two decades has forced institutional investors to embrace a wide range of alternative investment strategies to achieve their performance objectives. At the same time, this has also dramatically increased the complexity of managing an institutional investor’s portfolio. These dynamics have led a growing number of institutions to consider outsourced chief investment officer, or OCIO, platforms as an alternative to establishing and maintaining the in-house investment expertise and operational infrastructure necessary to run a successful investment program in today’s market environment.
While the OCIO market has rapidly expanded in recent years, demands from these larger investment programs regarding transparency, a growing client base and increasing competition from new entrants has pushed leading OCIOs to find innovative ways to better serve their clients, differentiate themselves from competitors, and effectively scale their businesses. Solutions in the key areas of structuring, operations and technology that enable OCIOs to monitor, allocate and report on a broad range of asset classes, strategies and structures have arguably become the cornerstones of their success.
Pillar 1: StructuringOCIOs are increasingly seeking optimal investment structures to facilitate portfolio rebalancing, maximise alignment of interest with underlying investment managers, and improve transparency, liquidity and control. Bespoke solutions such as fund of ones or managed accounts can assist OCIOs in differentiating themselves from their peers who may only invest through commingled funds. OCIOs are also recognising the benefits of managed custody accounts which introduce an innovative way of redefining the traditional relationship between asset allocators and managers and can play a significant role in enabling outperformance.
As OCIOs direct more of their alternative investments into customised vehicles and realise the benefits of structures such as MCAs, they must ensure that they have the robust technological infrastructure and expert support needed to maximise "structural alpha."
Pillar 2: OperationsSimilar to optimising investment structures, establishing effective operations has become more and more difficult for OCIOs. With investment programs, client requirements and reporting needs becoming ever more demanding, OCIOs must ensure they have the resources, expertise and infrastructure necessary to deliver. Key areas of focus include data management, portfolio accounting and portfolio reporting and analytics.
Outsourcing these functions can improve operational efficiency and allows OCIOs to focus on engaging with their underlying clients and asset managers to drive performance and build better portfolios. In addition, this serves as a valuable way of introducing an added layer of independence that can supplement governance practices and enhance stakeholder reporting.
Pillar 3: TechnologySuperior information delivery systems and the ability to make data useful is a necessity in today’s environment. For OCIOs in particular, the reporting and level of oversight that underlying clients demand is typically quite complex and fulfilling operational requirements demands the optimisation of existing processes through a single robust yet scalable technology platform. Conversely, sub-optimal technology solutions create myriad challenges for OCIOs.
Given increased complexity and competition across the industry, OCIOs are unquestionably under more pressure than ever before. The capabilities of an OCIO are determined by their ability to provide services tailored to the individual needs of a wide range of clients. This is something that can only be accomplished by a significant investment in resources and systems. With this in mind, many OCIOs find it useful to outsource specific processes and engage third party experts who provide proven operational and technological solutions.
Note: Visit the Maples Group’s website for more information on the pillars of success for OCIOs and the resources and support available to this rapidly expanding market.
The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of Maples Group nor TEXPERS, and are subject to revision over time.
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