Once a niche subsector, the outsourced chief investment officer industry is now the fastest-growing segment in asset management, according to a Chestnut Advisory Group report released on Tuesday.
From 2016 to 2021, the total global OCIO industry grew from $1.29 trillion in assets under administration to $2.46 trillion. By 2026, Chestnut report authors Amanda Tepper, CEO, and Todd Glickson, senior advisor, expect the industry segment to reach a global total of $4.15 trillion in AUA.
The report also incorporated responses from over 450 investment professionals, including institutional investors, RIAs, asset managers, and investment consultants. When respondents were asked about their two-year growth expectations for the entire OCIO industry, 68 percent said they believe the industry will experience higher growth over the next two years.
In the report, Tepper and Glickson identify two key trends driving OCIO growth: increased investment complexity and the improved ease of OCIO hiring.
Chestnut asked institutional investor survey respondents to identify the most important factors driving OCIO hiring decisions. Seventy-five percent of respondents identified governance advisory and all-in fees as the key drivers of OCIO hires. Forty percent named investment performance track record, 33 percent said ESG advisory, and 25 percent said the depth of alternative asset class options.
“If you go back 20 years… the vehicles to build a portfolio were basically stocks and bonds. The big value-add was from manager selection and portfolio construction, but you had a limited number of things to choose from. And the traditional investment consultant approach worked,” Tepper told Institutional Investor.
Two decades ago, investment boards met around four times a year to review the managers in the portfolios, each of which usually contained around 20 managers. Today, however, there are many more asset classes — including private asset classes and digital assets — that can often be too esoteric for the members of an investment board. Add in market volatility, and the current average number of managers in an institutional portfolio has shot up to around 100 or 120, Tepper said.
“So four times a year is feeling increasingly inadequate,” she said. “If you’re on a board and you’re looking at potentially triggering some liquidity by rebalancing in a selloff, it’s hard not to be a deer in the headlights. If you’re the one approving that, you’re worried about career risk. But for OCIOs, it’s what they’ve been hired to do; they don’t worry about that.”
OCIO search consultants have improved the ease of OCIO hiring and brought transparency expectations to OCIO fees. As OCIO search consultants entered the market, they began to pressure OCIOs to unpack the fees they charged investors for their services. In institutional portfolios, fees cover a range of elements, including the actual advisor, the fees paid to each underlying manager, and the custody of the assets. Five years ago, many OCIOs bundled these costs into one fee. “If you were an institution, and you did a search for an OCIO and asked them what their fees were, it was all over the place — you couldn’t tell what it consisted of,” Tepper said.
Over the past few years, search providers have pressured OCIOs to “completely unbundle” their fees, and, as a result, the actual advisory fee has come down. Additionally, underlying managers are, in most cases, billed directly to the client today. “With the help of consultants, [institutions] are now able to compare apples, oranges, and pears,” Tepper said.
Amidst its unprecedented growth, the OCIO industry’s expansion poses challenges — and opportunities — for asset managers and consultants. For instance, as more asset managers develop an OCIO element to their business, industry competition for both managers and consultants will grow.
Additionally, Tepper said, OCIOs run by consulting firms will use a lot of their managers’ “capacity” — in other words, they’ll take a lot of their assets. OCIOs will also press managers for lower pricing. “Managers have to decide if they want to be with a given OCIO and give up a lot of capacity for a lower rate,” Tepper said. “Increasingly, people are turning down OCIO mandates.”
Another challenge for managers is the fact that, when they hire an OCIO, they become “disintermediated” from the client. In other words, they no longer deal with the client on a one-to-one basis. “As the manager, you never meet directly with the client, unless they call you in,” Tepper said. “You’re selling directly to the OCIO.”
