Endowments Looking At Outsourced Chief Investment Officers

Search consultants saw a slight year-over-year increase in activity in 2020, according to the inaugural OCIO Search Consultant Survey from SEI, provider of asset management, investment processing, and investment operation solutions. Across 2020 searches, 59% were reported to be for discretionary providers, while 22% were for nondiscretionary providers.

After a disruptive year, many institutional investors have started to make changes in their organizations, resulting in high search volumes for consultants, according to the SEI survey. Ten consultants polled in April have conducted more than 210 searches on behalf of institutional investors over the past two years. On average, each of the firms conducted at least 10 searches during the past two years, with 20 searches at the end of that range. In 2020, they ranged from five to 20, with an average of 11, compared with 2019, when there was an average of 10.5, ranging from six to 20.

With corporate headquarters in Oaks, Pa., and offices worldwide, SEI manages or administers some $1.3 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including almost $400 billion in assets under management and $880 billion in client assets under administration. SEI trades on the NASDAQ exchange under the symbol, SEIC.

The discretionary approach, also known as the outsourced chief investment officer (OCIO) model, provides the outsourced partner with broader oversight of a firm’s investment strategy and day-to-day investment and fiduciary decision-making, while shifting the investment committee’s role to focus more on investment policy-setting and asset allocation strategy. The nonprofit sector was the most likely to be looking for discretionary models while the vast majority of search consultant requests (87%) came from university or college endowments. 

“The most common challenge for institutional investors and search consultants is facilitating dialogue between the institutional investor and the OCIO candidates,” Michael Cagnina, managing director of SEI’s Institutional Group in North America, said via a statement announcing the survey results. “We’re finding the searches that provide the OCIO candidates with direct access to the institutional investors, especially their investment board, committee, or staff, result in impactful conversations and allow for more informed decisions. As search consultants play a significant role in more and more searches, transparency and direct access will continue to be crucial for driving effective decision making,” he said.

Of the consultants interviewed, 60% said college or university endowment clients are more likely to bring their own lists of OCIOs to include in requests for proposals (RFP) rather than rely on their own expertise. Forty percent said community foundations were the next most likely to do so.

Search consultants are not being used in a large capacity in defined contribution. Less than a third (30%) have conducted searches for defined contribution over the past two years, and half doubt that they’ll participate in any OCIO searches over the next three years.

Some 70% of those interviewed expected nonprofits, including healthcare, to be the top segment driving growth, followed by corporate-defined benefit plan sponsors at 50%. Within the nonprofit sector, search consultants believe college and university endowments and private foundations will be the segments expected to conduct the most searches.

Search consultants cited proposed recommendations and observations around components such as Investment Policy Statements (IPS) or portfolio allocations, as a critical factor when evaluating providers, with consultants unanimously considering it a top-three priority. Seventy percent of respondents ranked “type of provider (such as large OCIO or boutique firm)” as the least important factor.