OCIO Model vs. Traditional Consulting Model

snowpeaschocolateManagement

Nov 18, 2013 (3 years and 6 months ago)

1,809 views



OCIO Model vs. Traditional Consulting
Model

Ronald L. Klotter, CFA

Principal and Director of Midwest Consulting


October 2013


Presenter Biography

2


Ronald
L. Klotter, CFA



Principal and Director
of Midwest
Consulting


Ron

is

a

Senior

Consultant

and

Director

of

Midwest

Consulting

operations

with

R
.
V
.

Kuhns

&

Associates,

Inc
.

and

is

located

in

our

Chicago

office
.


Prior

to

joining

RVK,

Ron

was

a

Principal

at

Hewitt

EnnisKnupp
.

Ron

also

has

held

senior

investment

management

positions

at

Wellington

Management

Company,

Brinson

Partners

and

INVESCO
.


In

addition

to

his

consulting

responsibilities,

Ron

has

responsibility

for

coordinating

and

overseeing

our

OCIO

search

activities
.


Ron

has

conducted

extensive

research

on

several

key

topics

in

the

investment

consulting

industry
.

Ron

is

a

frequent

speaker

at

major

industry

conferences
.



Ron

holds

a

B
.
S
.

(Honors)

degree

from

Miami

University

(Ohio)

and

an

MBA

degree

from

the

J
.

L
.

Kellogg

Graduate

School

of

Management

at

Northwestern

University

in

Evanston,

Illinois
.

Ron

holds

the

Chartered

Financial

Analyst

designation
.


He

is

a

member

of

the

CFA

Institute

and

a

member

of

the

Chicago

Society

of

Financial

Analysts
.



Our sole
business
is
evaluating, implementing and monitoring successful investment programs on behalf of our
institutional
clients.


RVK has no conflicts of interests and 100% of our revenue comes from cash payments from our clients. We accept no
commissions and sell no services to investment managers
.


RVK headquarters are in Portland, Oregon,
with
regional offices in Chicago and New York
.


RVK is independent and employee
-
owned and has 110 employee.


RVK has
adhered to
a strict code of ethics since its inception in 1985.



RVK Firm Overview

3

Independent

Ownership Structure


100% Employee

Owned


12 Employee

Principals


Five Member

Board of Directors

National Resources


Portland, OR


Chicago,

IL


New York, NY


Service Offices


Seattle,


Los Angeles, Dallas, Boise

Diverse Client Base


400

+ Client plans nationally


Various account sizes and client

types


Clients located in 28 states


Over $1 Trillion in assets under
advisement

4

Confluence of
Services and Service Providers

Consulting
Services

Investment
Consultants

Hedge Fund of
Funds

Investment
Managers

Investment

Management

Investment
Managers

Investment
Consultants

Commercial
Banks

Financial
Conglomerates

OCIO
Services

Dedicated OCIO
Providers

Investment
Consultants

Investment
Managers

Commercial
Banks

Actuaries

Financial
Conglomerates

Financial
Conglomerates

Continuum of Investment Structure
Options

5

6

Comparing and Contrasting the Consultant/Unbundled Model
with the OCIO Model

Traditional Consultant (TC)

Outsourced

CIO (OCIO)

Policy

Development

TC w
orks with the Investment Committee (IC) to
tailor a policy statement. The TC will draft a
Statement of Investment Policy, with final
wording approved by the IC.

OCIO will prepare policy statement, typically aligned
with OCIO processes and procedures.

IC may be able to
set asset allocation parameters, but normally not the
manager
-
specific criteria and guidelines.

Manager
Selection/Monitoring

TC will

recommend managers and allocations, but
does not have full discretion.
TC and Client may
jointly

visit and select managers

OCIO completes

manager visits and completes manager
selection on behalf of the client.

Opportunistic/Tactical

Investing

TC may recommend managers with opportunistic
or tactical strategies, but TC does not have
discretion to make tactical moves with assets
directly.

OCIO firm can move assets tactically within a full
discretion mandate.

Performance Monitoring

TC supplies

performance/risk reports

to client.

A
ssets are held at the custodian selected by IC.

OCIO provider supplies reports, sets the report
template, and likely selects the custodian.

Contractual

Agreement

Client has separate

contracts with the

TC and
investment manager(s).

Client has contract with OCIO provider; OCIO provider
has contract with investment manager(s).

Costs

TC charges annual retainer fee in the range of 4
-
10 basis points; manager and custodian fees are
charged and negotiated separately. Costs are
transparent.

OCIO typically

charges a fee as a percent of AUM that
ranges from 30
-
100 basis points; fee typically does not
include investment management. Costs are less
transparent and harder to evaluate. Total costs for
OCIO solution are typically higher.

Fiduciary Duty

Most large consultants accept fiduciary duty.

Expanded fiduciary duty as OCIO has discretion on
investments.

Client Liability

Liability shared across IC, consultant, managers,
and custodian.

IC does not relinquish liability. IC may accept additional
liability if the OCIO provider has issues and IC does not
have a proper monitoring process in place.

Different OCIO Models

Customized/
Decentralized

Building Block/
Hybrid

Pooled/
Centralized


Often
offered by
consulting firms
.



Clients have the
ability to customize
asset allocation and
underlying portfolio
structure.



A mix of separate
accounts and
manager of manager
funds are used.



Asset allocation is
tailored to clients’
specific needs
.



Manager selection is
set by OCIO provider
with
little
input from
client
.



Portfolios are
typically constructed
using manager of
manager funds.



Fund
structure is set
for one specific
client
type.



One
portfolio is
offered to all
clients.



Limited
ability
to
customize for client
preference or unique
circumstances.


7

The Multi
-
Dimensional Requirements of OCIO Searches

Investment
Manager
Evaluation
Considerations

Firm

Investment
Team

Fees

Performance

Risk/
Operations

Investmetn
Process

Outsourced CIO
Evaluation
Considerations

Organizational
Structure

Personnel

Investment/
Asset
Allocation
Process

Underlying
Manager
Evaluation

Operations
and
Reporting

Expenses

Total Fund
Performance

8

Selecting an OCIO Provider


Complex searches


a wide range of considerations.



Very difficult to execute without help, as there are very few standards of analysis in
existence at this time.



In effect, there is a structural disconnect


searches are looking for extremely stable
relationships with firms offering continuously effective performance over multiple asset
classes, in an unstable industry.



Questions that should be easy are very difficult to answer:


Who has the best returns?


Who has the lowest fees?




Observations

9

Who Has the Lowest Fees?

Expense Summary Example



Firm A

Firm B

Firm C

OCIO

Advisor Fee

0.30%

0.60%

0.20%

Incentive Fee

10% over 5.0%

--

10% on all assets

Minimum Annual Fee

$300,000

--

$400,000

Custody Fee

0.02%

0.03%

--

Average Traditional
Fee

0.60%

0.40%

0.50%

Average Alternative Fee

2.20%

1.80%

2.50%

Management Fee Using 60/40 Mix







Assume starting AUM of
$200
mm
and Total Return of
7.0%

Total Estimated Expenses

1.64%

1.49%

2.06%



Management Fee Using 80/20 Mix







Assume starting AUM of
$200
mm
and Total Return of
5.0%

Total Estimated Expenses

1.16%

1.22%

1.68%

10

Who Has the Best Returns?

Key Variables and Required Assumptions


Performance of
T
otal Portfolio


Performance of Traditional Asset Classes


Performance of Alternative Asset Classes


Asset Mix Assumptions


Anticipated Mix of Active and Passive Strategies


LDI Strategies (for defined benefit plans)


Performance analysis is more complex and less transparent than a prospect may
expect.












11

Identify
an OCIO provider with skills in each of the six key required skill
sets.

1.
They
have a deep and skilled back office/operational
team.

2.
They
have good investment products, or select good managers, in all asset
classes.

3.
Their
reporting capabilities and their reports meet your
needs.

4.
They
have talent in governance areas of importance to
you.

5.
They
add value net of expenses and the expenses are
reasonable.

6.
Your
IC and Board love your primary service
team.



And
philosophically the OCIO provider fits well with your
institution.



And
….they stay in the OCIO business forever and stay good at everything
forever.


In reality, it is unlikely that a single firm
will
meet all of your needs all of the time, but it
definitely is possible to find an institution that meets most of your needs.


12

Pearls: What Can Go
Right

Unfortunately, lots of things…


The OCIO provider can’t deliver everything they
promised.


The provider loses key
personnel.


The alpha is negative, and the skill sets are lacking, in one or more key asset
classes.


The provider makes a decision that the IC or Board does not feel is
appropriate.


The ownership changes of the firm you selected and it impacts their service level and/or
their commitment to the OCIO market and/or their business
plan.


The OCIO provider has a trading or accounting error and disputes their
liability.


Expenses go up and you have no control over
it.


The IC, Board or Staff has a conflict with one or more key team
members.


13

Perils: What Can Go Wrong?

Additional Factors to Consider


Hiring an OCIO provider does not relieve a Committee of their fiduciary duty.


Exiting an OCIO relationship is more difficult and more complex than with traditional
investment manager or consultant.


A
successful OCIO hiring decision requires establishing mutual acceptable benchmarks
and
an
ongoing monitoring process to measure progress towards established objectives
.


14