Outsourced CIO Says Big Growth Scope Remains; Stresses Importance Of Independence

Tom Burroughes Group Editor September 5, 2017

Outsourced CIO Says Big Growth Scope Remains; Stresses Importance Of Independence

The model of what is called the outsourced chief investment office has grown in recent years; a US practitioner says only a handful offer genuinely impartial, un-conflicted advice to clients.

A firm saying it is one of the trailblazers in the business model of the independent outsourced chief investment officer says it has big potential to grow in a scalable way, and is open to more hires after a recent high-profile appointment.

The role of outsourced chief investment officer has taken root at a time when some groups, such as single family offices and other wealth management entities, have struggled to justify the cost of running investments in-house. With an outsourced CIO, so the business case goes, there is the scale, analytical expertise and experience that a group of specialists provides.

Hirtle Callaghan, which is an OCIO business, recently reminded the market of this model of operating by announcing the hire of industry veteran Erica Evans to be head of client engagement, a newly-created role. At the start of this year, it set up an office in San Francisco.

Headquartered out of West Conshohocken, PA, Hirtle Callaghan’s business has responsibility for investing about $22 billion of assets, and its business is so scalable that such a figure could be far higher than that, Jon Hirtle, executive chairman, told this news service in a recent call. He said the firm is keeping an eye out for more talent.

“I’m confident we can manage $100 billion,” he told this news service.

The role of such bodies is only going to get greater, Hirtle said, because of greater regulatory and other cost burdens, high expectations of clients around quality of service, and the rising awareness of how such division of labor can prove beneficial to all sides.

“Asset allocation used to be so simple and it is massively more complex now. There is also a lot more noise around it all,” Hirtle said.

Also, the governance system in much of the family office and related wealth management sectors still has not really caught up with the need for more professionalism, accountability and a pushback against conflicts of interest, although that is changing, he said.

In some parts of the investment world, best practices including the creation of the position of “managing fiduciary” (seen in entities such as the endowment fund of Yale, or the Ontario Teachers fund, etc) arose, but this hasn’t yet fully set in among other parts of the investment world. “It is just a better way to run money,” he said.

The ascent of such businesses highlights how the family office space, for example, as well as the wider wealth management one, has felt the force of specialization and a division of labor along with other parts of the economy.

Cambridge Associates, the research and consulting firm, has said there are a range of reasons why the outsourced CIO model has gained ground: “Investment committees are facing more challenges than ever. Increased scrutiny of portfolio performance, growing concerns about reputational risk, and challenges of navigating changing regulations have led to `fiduciary fatigue’.” Another issue, CA said on its website, is that staff can be hard to attract and keep, making in-house CIO teams expensive to maintain.

The space has been busy, although as Hirtle’s comments suggest, there is a clear determination to stress difference between independent OCIOs, and those that are part of some other organisation. According to consultants Casey, Quirk & Associates, the OCIO space has been “crowded” in the past (source: Institutional Investor, March 2013).

There are other outsourced CIO firms out there, he acknowledged, such as Hall Capital Partners, with offices in New York and northern California. Another is Investure, said Hirtle.

Banks have not been slow to note the trend; UBS and Northern Trust, for example, have outsourced CIO offerings. JP Morgan Asset Management, to name another, has such a business line, as does SEI.

As far back as 2010, a survey by SEI found that almost half of executives and investment committee members overseeing US non-profit endowments would consider outsourcing the investment management function to a fiduciary management or outsourced CIO model.

Bigger clients
One trend is that larger and larger family offices are looking to farm out their CIO roles as cost and complexity burdens bite, Susan McEvoy, director and investment officer, told this news service in the same interview. “We are seeing larger single family offices looking to outsource. We have more resources – we have over 50 people in our strategy and research teams,” she said.

Hirtle is, perhaps understandably, biased in favor of the OCIO business model, but then he could argue that a career of almost 30 years in investment and financial services, and examples of how investors got into all kinds of problems prior to 2008, justify his call for outsourced professionalism if it is too expensive to do in-house.

As far as Hirtle Callaghan is concerned, the “sweet spot” for the kind of client he and colleagues looks for is a client with between $50 and $150 million of AuM, although it has the capacity to manage larger and smaller amounts than this sort of range.

Hirtle repeatedly makes the point that his firm does not sell products to clients, nor does it get involved in business outside a strictly demarcated investment terrain. “We don’t pay people’s bills or walk their dogs,” he said.

The business began by hunting down best-in-class active managers; it has broadened its reach to the alternatives investment space. “The scale of our opportunity set has multiplied,” Hirtle continued.

A number of banks have developed outsourced CIO operations, he said but they all have an issue in that these units are under pressure to deliver certain results for owners, he said. “This (outsourced CIO) is our only line of business and we don’t sell any products,” Hirtle said. “Nearly all the large [bank-owned] outsourced CIOs are conflicted,” he said. An example of the kind of problems that arise is, for example, if a client will be charged more when his/her outsourced CIO puts an allocation into a hedge fund.

“A pure-play CIO doesn’t have compensation affected by asset allocation,” he said. In his own firm’s case, it charges a percentage fee based on AuM, and the percentage will fall on larger AuM amounts.

Ultimately, the use of an outsourced CIO reflects how, for many wealthy business matriarchs or patriarchs, managing large blocks of money isn’t a hobby, but serious activity that needs to be done by professionals, Hirtle said

“In that sense, it is like healthcare,” he added.

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