From market volatility to an increasingly complex regulatory environment, the challenges confronting institutional investors continue to grow. It comes as no surprise that many pension plans, endowments, foundations, hospitals and other institutional investors are searching for better ways to achieve their investment objectives while controlling risk and managing costs.

A growing number of institutional asset owners are discovering the benefits of outsourcing all or some of their investment management functions.

Outsourced investment solutions, a flexible alternative to in-house asset management and traditional consultant models, can provide an effective way for institutions to enhance their investment capabilities and gain much-needed fiduciary support.

Institutional Asset Owners Face a Challenging Environment

The capital markets landscape is undergoing profound changes, and staggering demands are being placed on today's institutional asset owners and investment committees. Among the most significant challenges and obstacles are:

  • Continuously evolving investment markets
  • Growing scope and scale of risk management oversight needs
  • Limited time and budget resources
  • Proliferation of complex investment strategies that expand research requirements
  • The need for timely, responsive implementation of strategic investment decisions
  • Increasingly complicated regulations

It is no wonder that “fiduciary fatigue” has set in as investment committees and in-house asset management professionals cope with the challenges of today’s investment environment.

For many institutional investors, the timing could not be better to consider outsourcing their investment functions.

Outsourced Investing — A Flexible Solution for Institutional Investors

Outsourced investing is about outsourcing responsibility for the day-to-day management of the investment program. Specifically, it involves shifting discretionary investment responsibility for some or all investment functions from the asset owner to an investment advisor. Often called OCIO (outsourced chief investment officer), outsourced investing has been used by institutional investors for decades.

OCIO solutions provide institutional asset owners with flexibility and a wide range of options for outsourcing investment authority. The scope of outsourcing can vary significantly depending on the needs of the asset owner. To illustrate this, the specific functions outsourced to the investment advisor can vary: The asset owner may outsource virtually all investment functions or choose among certain responsibilities to be outsourced.

OCIO solutions provide institutional asset owners with flexibility and a wide range of options for outsourcing investment authority. The scope of outsourcing can vary significantly depending on the needs of the asset owner.

Institutions may choose to outsource full responsibility for asset allocation and manager selection to an OCIO or they may retain approval authority. Of course, even if all investment functions are fully outsourced, the asset owner continues to have fiduciary responsibility for the selection and monitoring of the OCIO and overall authority over the investment program. Outsourcing of a portfolio or function to a qualified OCIO provider can help the asset owner demonstrate a prudent investment process, which can help to satisfy the fiduciary obligation of the board, trustees, investment committee or other responsible parties for the assets.

OCIO Solutions Range of Options

  Type Description*
High Full
  • Most of the portfolio's investment functions are outsourced.
  • OCIO makes investment decisions within established IPS, e.g., manager selection, asset allocation, monitoring and asset/liability management.
Scope of Outsourcing Hybrid
  • Institutional asset owner maintains certain higher-level functions, which may include asset/liability management, asset allocation, and IPS construction and maintenance, for example.
  • OCIO is responsible for implementation and decisions on manager selection and tactical allocations.
Low Limited
  • Outsourced investments are limited to specific strategies.

*Descriptions are for illustrative purposes;
OCIO models are flexible and may be constructed in many forms.

Outsourced Investments Versus Traditional Consultants

While traditional consulting services encompass similar functions as outsourced investing, there are significant differences between the two. In the traditional consultant model, the asset owner contracts with a consultant to provide services such as advising on the investment policy statement (IPS), consulting on asset allocation, recommending investment managers and monitoring performance. Under this model, the asset owner, in-house staff or investment committee make the final decisions after the consultant provides information and makes recommendations.

Today’s institutional asset owners are choosing to outsource all or parts of their investment functions. The OCIO model provides investors with a compelling combination of specialized investment experience, cost effectiveness, nimble decision-making and the ability to take advantage of more sophisticated strategies — all while providing fiduciary relief.

Traditional Consulting and Outsourced Investment Models — Examples (Chart 1)

View accessible version of chart 1

Advantages of OCIO Solutions

OCIO solutions offer institutional asset owners a number of potential advantages.

1. Improved risk management and fiduciary oversight. Seasoned OCIO providers have developed sophisticated tools to help manage portfolio risk and effectively deploy the client’s risk budget. In addition, outsourced investment firms have established due diligence and monitoring systems to evaluate third-party managers and — if needed — remove and replace managers more efficiently. OCIO solutions also provide institutional asset owners with a wide range of options for outsourcing discretionary investment authority, providing institutions with the ability to shift some of their fiduciary responsibilities.

2. Better allocation of resources. OCIO solutions enable institutional investors to allocate their resources optimally. Since an OCIO is responsible for decision-making within the scope of the outsourced investment functions, the institutional asset owner can focus on the investment policy and on overseeing overall performance, setting objectives and other key business priorities. As a result, investors can avoid allocating limited resources to functions that may be more effectively performed by outsourced investment providers.

3. Agile decision-making. Since the outsourced investment model outsources authority for designated functions, the OCIO provider can make more timely decisions in response to changing conditions. The traditional consulting approach often involves providing information and recommendations to in-house staff or the investment committee, who are then responsible for making the final decisions.

This process takes time, possibly causing the institutional asset owner to miss market opportunities.

Outsourced investment providers, on the other hand, are able to make more timely decisions and move more quickly on implementation. Importantly, this enhanced agility that the OCIO model offers can help significantly reduce the costs associated with missed opportunities.

4. Opportunity for cost savings. Because of scale efficiencies, outsourcing can provide investors with cost savings in implementing portfolio strategies. With responsibility for the assets of hundreds or thousands of investors, an OCIO firm enables a single asset owner to gain access to managers and strategies that it otherwise might not be able to use because of account minimums. The benefit of overseeing significant investor assets also enables the OCIO firm to negotiate better terms with specialist managers as well as affording the ability to achieve less expensive trade executions because of larger transaction sizes.

5. More sophisticated investment strategies. A challenging investment environment may cause institutional investors to explore increasingly sophisticated investment strategies. Evaluating the risk–return implications of these options can push staff and investment committees beyond the limits of their experience. An OCIO provider can provide the experience required to implement multifaceted solutions to help enhance the potential of the asset owner’s portfolio.

6. Enhanced reporting. Today’s complicated investment climate demands sophisticated communications and reporting. To be effective, information should be distilled and presented in a way that is responsive to institutional asset owners’ needs and customized to address the unique priorities of each. OCIO firms are able to combine a wide range of investment strategies into a comprehensive, concise reporting format and deliver meaningful, understandable insights. OCIO reporting also benefits institutional investors by freeing up internal resources that would be devoted to routine report preparation.

Implementing an OCIO Solution

Once an institutional investor decides that an outsourcing approach is appropriate for its portfolio, the next step is to define the framework that will be used to select and monitor an OCIO provider. While the specifics will vary depending on each institution’s needs, the following considerations are important elements in the initial stages of an OCIO relationship:

  • Establish criteria for selecting an OCIO provider and compose due-diligence questions
  • Establish the level of outsourcing of functions being outsourced and the desired fiduciary accountability for each — essentially deciding the extent of outsourced solution being sought (full or hybrid approach)
  • Define accountability for all investment functions, including those that are retained by the asset owner
  • Work with the selected OCIO provider to document a new IPS that captures new guidelines and responsibilities, portfolio parameters, and other key areas of governance

Ready to Help

For more information, contact Chris McGoldrick, CFA, FSA, Managing Director – OCIO Solutions, at You can also visit to learn more.


Traditional Consulting and Outsourced Investment Models — Examples (view image of chart 1)

Fiduciary Responsibility/Function Traditional Consulting Hybrid (Implemented Consulting) Full Discretionary Management
Governance Client decision Client decision Client decision
IPS Construction & Maintenance Client decision Client decision Client decision
Asset/Liability Management & Review Client decision Client decision Outsourced decision
Asset Allocation Client decision Client decision Outsourced decision
Investment Structure Client decision Outsourced decision Outsourced decision
Manager Selection, Monitoring & Oversight Client decision Outsourced decision Outsourced decision
Implementation Client decision Outsourced decision Outsourced decision

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