Evaluat aluating ing OC OCIO IO Pr Providers viders With - PowerPoint PPT Presentation

Evaluat aluating ing OC OCIO IO Pr Providers viders With Senior Consultant, Frank Szymanek April 25, 2019

Discussion Agenda ▪ Needs and Benefits of Evaluating an OCIO ▪ Current State of OCIO Delivery ▪ Performing Effective Due Diligence 1

Ne Needs s and d Benefit efits s of Evaluating aluating an an OC OCIO 2

Background of the OCIO Marketplace ▪ Outsourced Chief Investment Officer (OCIO) = investment advisory services for foundations / endowments (and other asset pools) ▪ OCIO now accounts for almost $2 trillion of discretionary assets under management ▪ Explosive demand has led to significant growth in new entrants offering their services; today, over 100 firms claim to offer OCIO capabilities ▪ Firms differentiate on asset management expertise, performance, risk management, technology, administrative services and pricing ▪ Need for more disciplined process for evaluating hiring / retaining of an OCIO provider is escalated 3

Representative OCIO Providers Banks/ Traditional Boutiques Asset Managers Wealth Consulting Firms Management Atlanta Consulting Cornerstone Cambridge Blackrock Group Hirtle Callaghan DeMarche Commonfund Goldman Sachs Global Endowment Ellwood Fidelity J.P . Morgan Management Fund Evaluation Morgan Stanley - Perella / Agility Russell Group Graystone Strategic Investment Mercer SEI Northern Trust Group TIAA NEPC Vanguard PNC 4

Understanding Your Foundation / Endowment Oversight Needs ▪ Growth of OCIO services is often fueled by: ▫ lack of internal resources ▫ need for stronger fiduciary oversight ▫ better risk management ▫ Increase return potential ▫ cost savings ฀ How do these apply to you? ▪ Are your investment program’s and institutional goals aligned (e.g. spending target, risk tolerance)? When did you last review? ▪ Are you making use of expanding administrative services available – gift stock processing, endowment accounting, charitable gift admin services, and education and donor support? ▪ Effective stewardship of donor bequests, especially coordinated with capital campaign, growth potential 5

Benefits of an OCIO Search / Review ▪ If outsourcing for the first time: ➢ Establish expertise and specialization in dedicated OCIO ➢ Frees-up internal resources ➢ Greater fiduciary oversight and risk management ➢ Obtain comprehensive services and competitive fees ▪ Reviewing an existing OCIO: ➢ Re- evaluate investment program’s alignment with goals of institution ➢ Ensure services provided are best-of-class in industry ➢ Compare / reduce fees relative to competitors ▪ Institutional quality oversight growth potential 6

Benefits of a Consultant Leading an OCIO Search ▪ Political issues, e.g. board / donor interests, often lead to selection /retention of a provider without thorough due diligence ▪ Oversight led by overworked internal resources, or finance committee / board with other priorities ▪ Use of an experienced, independent consultant for search provides: ▫ objectivity ▫ extensive familiarity with marketplace ▫ peer benchmarking ▫ comprehensive scope of analysis ▫ better decision making 7

Case Study #1 – Private Higher Education Client Governance Goal Before • • Internal oversight of portion; person retiring Single oversight structure • • Internal oversight of portion; person retiring • Broker oversight of portion; not sure of history External expertise • Single, integrated oversight structure • Better stewardship of endowment • No coordination of two • Student group oversight of portion; integration? • External OCIO expertise • Better stewardship of endowment -> growth • Donors’ brokers’ oversight of portions; history? • Hire consultant to lead search • No coordination of separate program sleeves Case Study # 2 – Private Higher Education Client Governance Goal Before • Longstanding provider; performance & service • More formal due diligence & oversight • Assess expected returns & risk management on issues • Questions on alignment of provider’s approach spending policy • Benchmarking of services & fees with institution’s goals • Better stewardship of endowment -> growth • Complexity of manager oversight • Hire consultant to lead review • Belief fees too high 8

Current ent St State te of OC OCIO O De Deliver ery 9

Differing Styles and Approaches ▪ Alternatives generally make up 10-40% of portfolios not following Endowment / Yale Model Active/ Alternatives ▪ Use and structure of alternatives for return Passive Research enhancement and / or risk management needs to be understood and evaluated ▪ Access to top tier and capacity constrained Structure Focus managers is essential ▪ Firms rely on their size, reputation and a deep research staff to identify alternative managers, negotiate access and fees 10

Differing Styles and Approaches ▪ Expanding use of indexing to control costs and manage risks ▪ The majority of providers favor active where Active/ Alternatives managers can exploit inefficiencies and will use Passive Research passive in efficient market spaces ▪ Providers increasingly favor concentrated managers with high tracking error who they Structure Focus believe can outperform the index ▪ Environmental, social and governance (ESG) solutions are growing in use to meet objectives of organization 11

Differing Styles and Approaches ▪ Different investment models include commingled funds to a fully customized solution, predominantly manager-of-managers, with limited use of proprietary management Active/ Alternatives ▪ Investment pool structures include: Passive Research ▫ Single manager funds ▫ Fund-of-funds (mutual v. common v. LPs) ▫ Separate accounts for larger pools Structure Focus ▫ Private / direct ownership for larger pools ▪ Commingled funds create complexity for oversight and potential fee overlaps ▪ Back-office custodial support is imperative for separate accounts and private structures 12

Differing Styles and Approaches OCIO providers range from boutique firms, traditional ▪ consulting firms, asset managers, banks and wealth managers offering a varying array of services OCIO provider’s approach needs to fit the culture of the ▪ institution they are serving and understanding their Active/ Alternatives organizational mission objectives Passive Research Service model varies from a team approach to a ▪ dedicated CIO, and may include consultants / advisors who perform OCIO co-incidentally to other services Structure ▪ Foundation / endowment focused firms look beyond the Focus investment program itself to incorporate endowment specific traits, such as: ▫ evaluating spending policy and liquidity requirements ▫ endowment accounting ▫ charitable gift administration ▫ donor support and education 13

Case Study #1 – Private Higher Education Client Investment Review Goal Before • Update investment policy statement • Internal oversight of portion; person retiring • • Non-integrated investment management & Single oversight structure • Comprehensive investment line-up review • • External expertise Broker oversight of portion; not sure of history potential overlapping exposures • • Assess use of indexing, alternatives & ESG Better stewardship of endowment • • Older investment policy statement & no No coordination of two • Full transparency of fees monitoring of implementation • Alignment of return / risk goals with tolerances & • No alignment of investment program’s goals with spending policy institutional goals Case Study # 2 – Private Higher Education Client Investment Review Before Goal • Review & simplify investment structure • Emphasis on active management & alternatives • More use of passive vehicles & thoughtful approach • Uncertain benefit of Illiquid assets to alternatives • Full transparency of fees • Risk management concerns • Alignment of return / risk goals with tolerances & • Belief fees too high spending policy 14

Per Perfor formi ming ng Effec ectiv tive e Du Due Di Diligen igence 15

Evaluation Process Step 1: Determine your objectives, preferences and needs – arguably most important step Step 2: Screen consultant’s database and create appropriate short list (5-7 firms) Step 3: Create and send customized RFP (60-80 questions) to short list Step 4: Summarize RFP responses Step 5: Finalist presentations (up to 3 firms) Step 6: Negotiations, reference checks and review contracts Step 7: Final selection & implementation 16

Assessing Your Needs Preferences & Board / Evaluate Current Key Attributes Matching Management Input Structure ▪ Strengths, expertise of firm ▪ Confirm objectives & ▪ Investment Policy scoring criteria Statement ▪ Depth of teams ▪ Identify decision makers ▪ Spending Policy ฀ Asset mgmt. / research ▪ Determination of desired ▪ Utilization of passive versus ▪ Investment approach board / mgmt. involvement active management ▪ Service model & reporting ▪ Identification of political ▪ Alpha generation areas ▪ Administrative services considerations ▪ Unacceptable risk elements ▪ Fees (performance based) ▪ Granting discretionary ▪ Fees authority to OCIO ▪ Governance oversight & ▪ Include incumbent OCIO process ▪ Services 17