Delegating Investment Discretion
What is an Outsourced CIO?
Delegating investment discretion for all, or part, of a fund’s assets to a third party is often referred to as the Outsourced Chief Investment Officer model, or OCIO. By delegating investment discretion, a fund is able to leverage the resources and expertise of an investment firm in the most efficient way possible. Substantially or wholly-eliminating involvement in the investment selection, due diligence, approval, and implementation processes allows clients more time to focus on long-term strategic issues.
There are a number of different variations of the OCIO model. Clients should take the time to determine which approach best fits their needs. The model can vary by cost, customization, investment philosophy, resources, and transparency. Please see our white paper on “Best Practices for Selecting an OCIO” for guidance on how to navigate this complex decision.
Why Do Plans Delegate Investment Discretion?
From a client’s perspective, delegating investment discretion is about alleviating constraints and improving results. Many clients feel they cannot fulfill their fiduciary responsibilities due to time constraints, the complexity of modern investment portfolios, and the current market environment.
Many clients do not have sufficient resources to successfully navigate an increasingly complex and fast-moving market environment. Truly understanding the risks and rewards offered by today’s capital markets requires a team of experienced investors fully dedicated to this task.
Managing a complex institutional portfolio typically requires dedicated full time resources. Conflicting priorities and responsibilities prevent many clients from spending the necessary time to effectively manage their investments.
Many clients feel they cannot fulfill their duties due to the many constraints placed on them by their governance structure. In some cases, the slow-moving governance structure of a fund stands in stark contrast to fast-moving capital markets. The typical monthly or quarterly meeting schedule is not conducive to making opportunistic investment decisions.
The opportunity set for today’s investor is arguably as challenging as it has ever been. A simple mix of stocks and bonds will likely produce returns far below historical averages, and may result in many clients falling short of their return requirements.
The Benefits of Delegating Investment Discretion
While each client is unique, there are numerous ways in which a client may benefit from a delegated relationship if the right partner is identified.
Delegating all, or part, of the investment process to an outsourced provider can help ensure that clients and their staffs focus on their areas of expertise. Often, delegating the day-to-day implementation of an investment plan can free up time to focus on the primary mission and objectives of the plan.
In today’s environment of increased regulatory scrutiny, a discretionary partner occupying a position of trust and confidence can prove, for some clients, a more suitable option than a traditional non-discretionary consulting relationship.
Economies of Scale
Partnering with an established discretionary advisor can provide clients with opportunities that they might not otherwise be able to access. This is particularly true in the private markets space, where minimum commitment thresholds can be prohibitive for all but the largest investors. Furthermore, discretionary advisors are often able to leverage economies of scale to push down the cost of traditional investments below what a single client may be able to negotiate.
Delegating the day-to-day investment decision-making of a fund can result in faster implementation and lower opportunity costs. Rather than a meeting schedule dictating investment decision points, a discretionary advisor is able to actively direct client portfolios on a daily basis, thereby exploiting market opportunities and avoiding risks in real-time.
Does outsourcing/delegating mean that clients lose all control over investment decisions?
That depends on the provider. Meketa Fiduciary Management does not believe that outsourcing or delegating should be an “either/or” decision. Meketa Fiduciary Management works with each client to customize the governance structure that is right for them. For example, some of our clients choose to remain very involved in certain aspects of their fund (e.g., investment policy, strategic asset allocation) while delegating the rest, while others choose to delegate virtually everything.
Are there potential conflicts of interest with delegating investment discretion?
This also depends on the provider. Conflicts of interest may arise with firms who have the discretion to allocate client funds to their own investment products, or whose overall compensation varies according to how they invest the assets. At Meketa Fiduciary Management, we believe that a full alignment of interests is critical. We do not manage any of our own products, nor do we have any ancillary lines of business that could compromise our objectivity.
Is a discretionary mandate more expensive than a traditional consulting mandate?
Not necessarily. While Meketa Fiduciary Management may charge more for discretionary management as compensation for the increased administrative/operational workload and liability, there are a number of ways for clients to recognize cost savings as well. For example, through economies of scale, offloading of administrative/operational tasks and legal reviews, and the potential elimination of certain investment fees and expenses (e.g., management fees and carried interest of fund-of-funds) clients can often realize lower overall fees through a discretionary mandate with Meketa Fiduciary Management.
Why did Meketa Investment Group create Meketa Fiduciary Management?
Meketa Fiduciary Management was created as a response to the growing demand for discretionary investment services. Meketa Fiduciary Management will provide the same world class research and investment solutions that Meketa Investment Group has provided since 1978, only utilizing a different implementation structure for clients preferring to delegate discretion.