OCIO can mean different things to different clients. Framed simply, OCIO is all about taking over key investment and fiduciary responsibilities previously undertaken by an asset owner. This allows clients to focus on the objective or mission for the asset pool. For defined benefit (DB) plans, this typically means driving funded status while managing volatility; for defined contribution (DC) plans, this entails achieving better participant outcomes while managing overall fiduciary risks. Other asset owners strive to align their investment strategy with spending policies or overall return needs. To align investment programs with objectives, an asset owner has seven key decision areas to consider:
- Objective setting and alignment with corporate strategy and governance
- Risk budgeting, a true understanding of liabilities and their interaction with the assets
- Ongoing monitoring and risk management, including an understanding of long-term systemic risks
- Strategic asset allocation, both top-down or bottom-up objective-based investing or total portfolio approach and — for DC — appropriate line-up and target-date fund structure
- Manager selection
- Dynamic asset allocation across asset classes
- Security/asset selection within asset classes
Of these, asset consultants have typically helped clients manage numbers one to six, while asset managers have historically owned number seven (and for multi-asset mandates, perhaps contributed to number six as well). As asset consultants have grown, their OCIO and fund-of-fund solutions, oversight and responsibility of number six has expanded as well.
The interplay of OCIOs, asset owners and asset managers
OCIO trends: Why do asset owners outsource?
Asset owners may choose to outsource investment responsibilities for several reasons, depending on their specific circumstances. Key drivers in recent years have included:
Whether it is helping clients better handle growing market complexity, providing retirement plan (DB and DC) expertise, adhering to regulations or managing fiduciary risks, clients have turned to OCIOs to provide the implementation experience, manager selection and program monitoring.
With this backdrop, it's no surprise that OCIO growth has exploded, growing from $90 billion in 2007 to an estimated $2.7 trillion in 2022, a compound annual growth rate of 25% [1].
Of the top five OCIO providers, 60% of assets are managed by asset consultants (WTW, Mercer, Aon) while 40% are managed by asset managers (BlackRock, GSAM), newer entrants to the space.
Key drivers of OCIO
Key drivers of OCIO
OCIO by the numbers
Explore more considerations for OCIOs here.
Footnotes
- WTW Global client figures as of 31 December 2022 Return to article
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