Outsourced Chief Investment Officer (OCIO)

Outsourced Chief Investment Officer (OCIO)

Our 30+ years of experience as a fiduciary and a risk management leader make us well-positioned to manage the total investment and governance needs of OCIO clients.
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Investors are increasingly uncertain about how to meet their objectives given a more complex and lower return market environment. The need for help creating tailored portfolios based on their unique goals and constraints has never been greater.

BlackRock’s OCIO team aligns the firm’s extensive investment expertise, robust research platform, and advanced technology and analytics in support of a single goal: helping clients achieve their investment objectives.

Q: What is OCIO?  

OCIO stands for Outsourced Chief Investment Officer. It’s exactly as the name implies – where an asset owner decides to “outsource” the investment management decisions for their pool of assets to a third party. 

The third party is usually an investment firm. And the investment firm is willing to take on fiduciary responsibility and ownership of certain operational services from the asset owner.

Importantly, asset owners continue to retain full authority over their asset allocation policy, and risk and return objectives.

Q: How is OCIO different than a model that uses an Investment Consultant to help make investment decisions?

The primary benefit of partnering with an OCIO is timeliness. Most asset owners can’t make any investment decisions until they meet with their investment committees, trustees, and consultants.

These meetings usually only happen quarterly and reference stale data. Even when they are timely during certain market events, it can still take multiple meetings to finalize investment decisions. In the face of market volatility, many plans simply can’t afford to wait to get consensus before adjusting portfolios.

With OCIOs, the investment decisions are delegated to an investment firm, who monitors the portfolio daily, and has the authority to implement necessary adjustments in real-time. This can have a big impact.

For example, according to a recent BlackRock U.S. pension funding update, the average funded status of U.S. pension plans dropped -7.8% during the pandemic market sell-off in March of 2020. However, among BlackRock’s outsourced pension clients, funded status only declined -2.7% over the same period. This was largely a result to real-time decisions that BlackRock was able to implement in client portfolios.

 Q: A recent Cerulli Study showed that global OCIO assets under management had grown to $2.3 trillion by the end of 2019, which is up 19% from the previous year. What is driving this demand and why are more institutional clients gravitating towards these solutions?

Historically, most of the growth in OCIO has come from smaller asset owners – primarily institutions with less than $100m in assets. That makes sense given those entities often don’t have the resources to hire staff or invest in the technology required to run modern investment programs. We are now seeing larger asset owners trending towards OCIO. 

Specifically, we are seeing more RFPs and searches from asset owners, like pensions and healthcare systems, ranging in size from $5 to 10bn, and even more.

In fact, at BlackRock, we’ve recently been awarded two mega pension pools north of $30bn in assets each. These plans were seeking an end-to-end strategic OCIO provider.

We think this trend is driven by a few reasons:

Returns – asset owners are fatigued with poor historical investment performance

Governance – asset owners want better and real-time portfolio governance

Talent – it’s been difficult for larger asset owners to retain investment staff among talent wars

Technology – the spend to maintain investment programs continues to rise into the millions of dollars

Lastly – overall Cost of running the plan. Typically, in an OCIO construct, there can be the opportunity to bring down the overall expenses in running the asset pool

In this increasingly complex investment market and regulatory environment, we only see the trend towards OCIO continuing for institutions.

What you should know about OCIO

Jason Fisher, Managing Director and Head of U.S. Middle Market Pensions provides an overview of OCIO and how the solution differs from the model of using a Consultant to help make decisions. 

Why BlackRock for OCIO?

BlackRock has been entrusted with more than USD$251 billion in OCIO mandates globally, and we have a 154-person team dedicated to serving clients with a whole-portfolio approach that prioritizes your objectives.1

BlackRock can help meet your needs for outcome-oriented solutions, and OCIO sits at the heart of what we look to deliver to our clients: market insight, differentiated investment performance, robust risk management and superior client service.

Whole portfolio approach
Whole portfolio approach
We seek to understand and solve for clients’ needs in the context of the whole portfolio.
Broad opportunity set
Broad opportunity set
We design resilient solutions that draw upon our full toolkit of investment capabilities across index, factor and alpha-seeking strategies.
Robust risk management
Robust risk management
We employ our industry-leading Aladdin® technology to analyze risk factors and provide transparency into your portfolio.
End-to-end partnership
End-to-end partnership
We serve as an extension of your staff to ensure a seamless partnership from onboarding to implementation.

Q: What characteristics make the best OCIO providers?

We believe there are four key things that differentiate the best OCIO providers:

Specialization: We believe having dedicated Client CIOs who specialize within – rather than across asset owner channels – is critical to delivering differentiated investment outcomes. It allows the OCIO manager to deeply understand industry trends specific to each asset owner segment. This improves the client experience because often the dedicated Client CIO is providing wholistic services tailored to the client channel beyond just the investment portfolio.

For example, our pension client CIOs spends 100% of their time on pensions and a core part of their service to clients is to interact with the plan actuary when helping clients set funding policies. These decisions have direct implications for the type of investment program that is appropriate to reach funded ratio goals.

Technology: Having integrated technology and infrastructure to facilitate the investment and portfolio risk management process is a critical attribute of OCIO providers.

OCIOs with multiple systems and data sources for different phases in their investment process may introduce unnecessary operational risk to clients.

BlackRock, for example, invests over $250m annually in our portfolio management technology called Aladdin. Every phase of our investment process occurs in this single system, minimizing operational risk and costs to the client.

Market Presence: We believe an OCIO’s success is also dependent on the provider’s position in the market. There are two components to this:

First, is having robust capabilities and experience across every asset class including alternatives. Scale can enable some managers to leverage a breadth of specialties and competencies across asset classes. 

The second is trading and implementation resources; including the ability to deeply understand liquidity conditions, trading costs and the risks of trading across all markets.

Cost Effectiveness: When institutional clients partner with an OCIO, they benefit from the economy of scale and the breadth of resources that larger asset manager can access. By being part of a larger asset pool, plans benefit from cost savings and do not have to negotiate fees with smaller asset amounts.

Asset managers with larger pools of assets can drive greater efficiencies in trading, portfolio management and operational support. This can create advantages for executing trades at lower costs and for better managing risk conditions for clients’ portfolios.

Not to mention clients are able to offset the growing costs of retaining talent and maintaining technology when they choose to outsource most of their investment decisions. In turn, clients can redirect those cost savings to invest in their own business operations and core offerings.

At BlackRock, our OCIO platform is built around these differentiators. Our clients can rely heavily on us as specialized investment and operational partners. They can also depend on BlackRock for their asset pool in areas such as transition management, portfolio servicing and performance reporting to name a few.

What to look for in an OCIO provider

Jason Fisher, Managing Director and Head of U.S. Middle Market Pensions provides insight on four key things that differentiate the best OCIO providers.

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OCIO teams

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Corporate and public pensions

BlackRock’s pensions OCIO team is committed to helping your pension fund with governance and investment processes that are highly efficient and easy to understand. We draw on our expertise in liability-aware investing to construct custom portfolios designed to help clients improve and preserve their funded status levels, and we take a hands-on approach to monitoring and managing the whole portfolio. Our global scale and centralized technology platform allow us to offer risk-aware, cost-effective solutions.

Calvin Yu: For the first time since 2007, the average corporate defined benefit pension plan is estimated to be over 95% funded. But, there's a lot of dispersion across companies, and how the pension impacts the corporate enterprise may influence the risk tolerance.

For example, am I taking the right risk? How does my plan impact my net income and free cash flows? Are my peers managing their plans differently?

To address these questions, I'll share 3 key insights from a recent client engagement, which potentially helped the client better preserve funded status and position for the future.

Hi and welcome back to another Quick Insights.

I'm Calvin Yu, head of the Client Insight Unit at BlackRock, and we help deliver portfolio insights to investors. In this series, we talk about common investment challenges and highlight ideas to help achieve the desired outcomes.

We released a corporate pension peer study, and a lot of clients have leveraged this to analyze their pension as well as their peers, and studied the implications on the broader enterprise.

The purpose of this study though is not trying to say who’s winning or losing, because markets give and take all the time. How many CIOs and CFOs find this helpful is by studying the strategic choices of others. This brings another perspective, and many have even used these findings in their Board discussions.

So what factors can affect a pension?

Well that brings me to the first insight, which is Evaluating the Enterprise.

We analyzed the funded status and plan materiality of the client as well as their industry peers. We’ll refer to this client as Company X.

While better funded plans may de-risk to preserve funded status, how material the liability is relative to the market cap could impact the capacity to take risk.

From an income statement perspective, the plan’s strategy could impact pension expense, which could drive sensitivities relating to net income.  

And from a cash flow perspective, the plan deficit may have different impacts on cash flows from operations.

So how can a plan efficiently earn returns needed to meet its objectives?

Well that brings me to the second insight, which is Honing in on the Hurdle.

We analyzed the hurdle rate of return required to meet end state objectives, and break down the components coming from interest cost, service cost, and so forth.

In Company X’s case, they need a 7.2% return to reach the end state.

We do the same calculation for the peers, and as we look at the portfolios, you can see various factors affect plans differently.

For example, Company X is just over 70% funded, so they focus on growth assets, particularly in Alternatives and Other asset classes. This drives higher risks and returns, where their reported Expected Return exceeds the hurdle rate of return.

Meanwhile, if we look across the peers, Peer I also maintains a large allocation to Alternatives and Other asset classes. But they structured the portfolio so their Expected Return is more in line with the hurdle rate.

As a result, even though Company X has a high expected return per unit of risk from a standalone basis, when you incorporate the liabilities and look at expected returns per unit of surplus risk, Peer I looks more efficient.

So how could that impact the funded status over time?

Well that brings me to the third insight, which is Narrowing the Cones.

We analyzed the historical funded status journey, and outlined the potential future paths.

While Company X is expected to be fully funded over time, the question is how can we narrow the cone of outcomes, so we can efficiently target growth, without taking a lot of surplus risk, which in draw down scenarios, may require significant contributions.

From this study, we partnered closely with the client to analyze different parts of their portfolio, such as exploring capital efficiency, evolving LDI beyond long corporate, and aligning growth to reduce surplus risk. This helped the client build an efficient portfolio that was more in line with their objectives.

So if you want to learn more about analyzing the positioning of your plan, please reach out to your BlackRock relationship manager.

Thanks for watching and I'll see you with the next Insight.

Corporate pensions peer study highlights

In this video, Calvin Yu, head of BlackRock's Client Insight Unit, highlights quick insights from the 2021 corporate pensions peer risk study, which explored the sectors that may have higher funding ratios.

Endowments and foundations

BlackRock’s endowments and foundations OCIO team manages bespoke investment solutions targeted at the specific desired outcomes of our clients. We leverage the breadth of our investment platform across index, factor, and alpha-seeking strategies to deliver unique insights into our portfolios. Our proprietary technology platform underpins our investment process, providing transparency into the true drivers of risk and return and the toolkit to build a custom solution.

Family offices

BlackRock’s family office team brings the breadth and depth of the world’s largest investment manager to family offices of all sizes. We sit at the heart of BlackRock and leverage the firm’s extensive investment and technology capabilities to help family offices grow and preserve their wealth. We believe a successful investment program requires a whole portfolio perspective anchored in each client’s needs and goals, and we work collaboratively to develop investment solutions.

Healthcare

BlackRock’s healthcare OCIO team delivers customized whole portfolio investment solutions that are designed to meet the specific goals of each of our clients. We work with healthcare providers across asset pools, including operating, pension, foundation and insurance portfolios. Leveraging the breadth of our investment platform (across index and active, public and private markets) and our proprietary technology, we design and manage portfolios in the context of a healthcare provider’s enterprise risk and return objectives.

Gabriella Barschdorff
Co-Head of Americas Pensions group within Multi-Asset Strategies & Solutions (MASS)
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Martin Jaugietis
Co-Head of Americas Pensions group within Multi-Asset Strategies & Solutions (MASS)
Read biography
Ned Rosenman
Head of OCIO for Endowments and Foundations, Healthcare, and Family Offices
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Edward Ng, CFA
Chief Investment Officer, Endowments and Foundations
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Anne Marie Schultz
Head of U.S. and Canada Healthcare Business
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Olaolu Aganga
Senior Client CIO for Endowments, Foundations and Healthcare
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Ned Rosenman
Head of OCIO for Endowments and Foundations, Healthcare, and Family Offices
Read biography
Alan McKenzie
Chief Investment Officer for Family Offices
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