Enhancing results amid complexity

The investment landscape has become increasingly complex. The decade leading up to the pandemic was marked by low interest rates and low inflation, but today’s economic reality is much different. The Federal Reserve has been slow to lower interest rates while inflation has remained above its target. This introduces new challenges for institutions in achieving return targets and keeping up with rising expenses resulting from higher inflation.

In our view, the new economic regime includes greater dispersion and lower than expected investment returns. Heightened uncertainty requires closer oversight of portfolios, even for institutions with longer time horizons which can be demanding on investment committees.

In an increasingly complex environment, institutional investors, including foundations, family offices and endowments, may need help achieving the results they need. These institutions are governed by investment policy statements that detail how they may invest, how much liquidity they are required to maintain, and how they should monitor performance, among other issues. Institutions looking to achieve desired results—such as excess returns in current economic conditions—may feel their hands are tied as they struggle to stay within governance guidelines with the resources they have.

Adding in-house management is not always possible

For institutions looking to increase their investment capabilities, adding in-house expertise is not always in the cards—nor is it always the most effective solution. It can be time consuming and costly to hire managers focused on complex asset classes, such as alternatives, and to keep up with the rigorous reporting requirements these assets often trigger.

What’s more, increasing in-house responsibilities can mean less time for institutional staff to focus on core competencies and strategic priorities. Introducing additional complex asset classes to manage, staff may struggle to complete necessary existing responsibilities such as fiduciary oversight of the investment portfolio and employee management.

Tapping additional resources through outsourcing

For a more efficient way to increase investment capabilities, many institutions have turned to an outsourced chief investment officer (OCIO), a third party engaged to manage a range of investment activities. In fact, since 2016, global OCIO assets have increased from nearly $1.6 trillion to about $3.3 trillion and are expected to grow to $4.2 trillion by 2028.¹

OCIOs offer a variety of benefits. They are able to act quickly to target alpha, making investment decisions in real time as market conditions change. This constant monitoring and oversight frees up time for investment staff to focus on longer-term strategic priorities.

At the same time, an OCIO can provide look-through reporting and ongoing monitoring to keep investors informed and in control of their portfolio and its performance. An OCIO should feel like a true extension of staff, reinforcing the in-house investment team.

As the OCIO market grows, relationships are evolving and taking a range of shapes. Some institutions look to fully off-load investment responsibilities while others maintain meaningful involvement seeking a hybrid structure. Finally, some institutions outsource a sleeve of the portfolio allowing the in-house investment team to focus on an area of expertise or core competency. OCIOs can offer a spectrum of collaborative structures to meet the unique needs of each institution and complement the existing investment team.

Lastly, OCIOs help manage costs, promoting efficient management of investor fee budgets. For example, an OCIO may leverage its global platform to gain access to exclusive products and negotiate fees to allow institutions access to optimal investment strategies at better rates. As the OCIO takes on challenging governance functions, institutions save time and resources while staff can focus on key strategic decisions and actions.

Contact our team today to learn how a fiduciary like BlackRock can help you pursue your goals.