Maintaining A Long-Term OCIO Relationship


It’s all about communication.    

Lack of adequate communication particularly regarding performance – is the single biggest challenge and the most common source of dissatisfaction within OCIO relationships.* The solution is to maintain open channels of communication to address questions when they arise, and to establish a clear framework for effective, periodic reviews. The best reviews are those that cover the “three Rs”: regular, reciprocal, and realistic.  

*As reported by FundFire (Dec. 9, 2020).  

Schedule Regular Reviews 

Ad hoc and free-form communications are appropriate for addressing ongoing operational questions and concerns, but regular, scheduled reviews are critical to an effective long-term OCIO relationship. The investment committee and OCIO should meet on a formal basis at least annually to assess the long-term performance of the portfolio and review the organization’s investment objective and policy benchmark/strategic asset allocation. It’s also important to make time on the meeting agenda for an honest discussion of the quality and overall experience of the OCIO relationship.    

The investment committee should be straightforward with the OCIO if it feels that there are aspects of the relationship that aren’t working. In this regard, it’s best to focus on specific, actionable times. Conversely, the investment committee should be open to constructive suggestions from the OCIO. In addition to self-examination, effective committees proactively seek out advice – especially from those who regularly interact with the committee members. OCIOs are in the special position of interacting with numerous other investment committees. In the process, OCIOs can gain valuable insight into which features and practices of investment committees are productive and which are problematic. Don’t be afraid to ask whether the OCIO can suggest ways for the investment committee to improve its internal functions as well as the OCIO relationship. A good OCIO will see this as an opportunity to contribute more – not as an invitation to complain or shift responsibilities properly in its court back to the investment committee.   

We also recommend deeper, “milestone” reviews of the OCIO relationship every three years. For these reviews, the investment committee should go back to the notes and records from the OCIO search process. What was the search committee looking for in an OCIO (i.e., the "must-haves" identified by the committee prior to/during the OCIO search)? How has the OCIO performed with respect to the features and services for which it was hired? If the organization’s objectives/priorities have evolved, have the changes been communicated to the OCIO? If so, how has the OCIO responded? If not, the milestone review is a good forum to discuss issues “fundamental” to the organization and the OCIO relationship.  

Establish a Realistic Definition of “Success”

Success in the context of an organization’s investment portfolio typically is measured by two factors: (1) the extent to which the portfolio has generated returns in excess of the policy benchmark identified in the organization’s IPS; and (2) the achievement of absolute returns relative to the organization’s objectives (e.g., meeting funding obligations, or generating adequate operating revenue), measured over 5+ year intervals. While it is clearly key that an OCIO deliver alpha, an investment committee that expects repeated outperformance over short market cycles is not being realistic and also may be overlooking other ways in which an OCIO relationship can add meaningful value to the organization.  

Also important to consider is: 

  • Whether the investment policy benchmark has experienced greater volatility than the organization’s investment portfolio.  
  • How the organization has performed relative to peers – keeping in mind that other organizations have unique objectives and circumstances – over three-, five-, seven- and 10-year periods. (A one-year peer comparison is not meaningful, particularly during a period of significant performance dispersion between the best and worst-performing asset classes.)
  • Performance over longer market cycles (e.g., three to five years).  
  • How well the OCIO has managed fees compared to industry standards. Investment committees often overlook the extent to which high fees – particularly for strategies that do not have a high potential to add value to the portfolio – can eat into “net” returns.