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.
