The outsourced chief investment officer industry will grow bigger as more asset owners — particularly endowments and foundations — seek its services.
Fourteen percent of asset owners plan to start using an OCIO for the first time over the next two years, according to the latest report from Cerulli. Eleven percent of asset owners expect to increase their use of OCIOs, which may involve transitioning from a partial to a complete portfolio mandate, or fully delegating final investment decisions to the OCIO. Twenty-one percent of asset owners said they plan to maintain their current use of OCIOs, while 48 percent of asset owners indicated that they don’t use an OCIO or don’t plan to use one in the near future, according to the survey.
“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,” the report said. OCIOs can help asset owners in a number of ways. More than three quarters of asset owners seek help primarily for asset allocation questions, followed by inquiries about their existing investment portfolios (69 percent), capital market expectations (68 percent), and risk analysis (67 percent).
Assets managed by OCIO providers reached $2.4 trillion by the end of 2021. According to Cerulli’s projection, they will grow at an annual rate of 5.6 percent and reach $3 trillion by the end of 2026.
Endowments and foundations are expected to play a key role in driving the growth of the OCIO industry. According to the Cerulli report, endowments make up 21 percent of the client base for OCIO providers, followed by foundations (19 percent) and family offices (14 percent).
“If you think about who has typically used the OCIO model for the last 15 years, it’s largely been dominated by corporate pensions [and] defined benefit plans,” Laura Levesque, director of Cerulli’s institutional division, told Institutional Investor. “But what we’ve noticed is that since 2020, there have been a number of factors that have [driven] more endowments and foundations to consider an OCIO for the first time.”
The pandemic, for example, has led to decreasing operational revenues for colleges and hospitals. As a result, endowments and foundations have been forced to reconsider their approach to risk management and to seek help from OCIO providers who have expertise in this area. In addition, rising inflation has made it harder for smaller asset owners to hit return targets, given their limited access to private asset classes.
“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,” Levesque said. “OCIOs can gain access to these opportunities through economies of scale and commingled vehicles, another reason nonprofits are moving to the model.”
