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

Evaluat aluating ing OC OCIO IO Pr Providers viders

April 25, 2019

With Senior Consultant, Frank Szymanek

1

Discussion Agenda

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

2

Ne Needs s and d Benefit efits s

• f Evaluating

aluating an an OC OCIO

3

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

4

Representative OCIO Providers

Boutiques Traditional Consulting Firms Asset Managers Banks/ Wealth Management

Cornerstone Cambridge Blackrock Atlanta Consulting Group Hirtle Callaghan DeMarche Commonfund Goldman Sachs Global Endowment Management Ellwood Fidelity J.P . Morgan Perella / Agility Fund Evaluation Group Russell Morgan Stanley - Graystone Strategic Investment Group Mercer SEI Northern Trust TIAA NEPC Vanguard PNC

5

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

6

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

7

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

8

Case Study #1 – Private Higher Education Client

• Single oversight structure
• External expertise
• Better stewardship of endowment
• Internal oversight of portion; person retiring
• Broker oversight of portion; not sure of history
• No coordination of two

Governance Before

• Single, integrated oversight structure
• External OCIO expertise
• Better stewardship of endowment -> growth
• Hire consultant to lead search
• Internal oversight of portion; person retiring
• Student group oversight of portion; integration?
• Donors’ brokers’ oversight of portions; history?
• No coordination of separate program sleeves

Goal

Case Study # 2 – Private Higher Education Client

Goal

• More formal due diligence & oversight
• Assess expected returns & risk management on

spending policy

• Benchmarking of services & fees
• Better stewardship of endowment -> growth
• Hire consultant to lead review
• Longstanding provider; performance & service

issues

• Questions on alignment of provider’s approach

with institution’s goals

• Complexity of manager oversight
• Belief fees too high

Governance Before

9

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

10

Differing Styles and Approaches

Alternatives Research Active/ Passive Structure Focus

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

11

Differing Styles and Approaches

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

• f organization

Alternatives Research Active/ Passive Structure Focus

12

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 ▪ Investment pool structures include:

▫ Single manager funds ▫ Fund-of-funds (mutual v. common v. LPs) ▫ Separate accounts for larger pools ▫ 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

Alternatives Research Active/ Passive Structure Focus

13

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

• rganizational mission objectives

▪ Service model varies from a team approach to a dedicated CIO, and may include consultants / advisors who perform OCIO co-incidentally to other services ▪ Foundation / endowment focused firms look beyond the 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

Alternatives Research Active/ Passive Structure Focus

14

Case Study #1 – Private Higher Education Client Case Study # 2 – Private Higher Education Client

• Single oversight structure
• External expertise
• Better stewardship of endowment
• Internal oversight of portion; person retiring
• Broker oversight of portion; not sure of history
• No coordination of two

Before

• Update investment policy statement
• Comprehensive investment line-up review
• Assess use of indexing, alternatives & ESG
• Full transparency of fees
• Alignment of return / risk goals with tolerances &

spending policy

• Non-integrated investment management &

potential overlapping exposures

• Older investment policy statement & no

monitoring of implementation

• No alignment of investment program’s goals with

institutional goals

Goal Investment Review Goal

• Review & simplify investment structure
• More use of passive vehicles & thoughtful approach

to alternatives

• Full transparency of fees
• Alignment of return / risk goals with tolerances &

spending policy

• Emphasis on active management & alternatives
• Uncertain benefit of Illiquid assets
• Risk management concerns
• Belief fees too high

Before Investment Review

15

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

16

Evaluation Process

Step 1: Determine your objectives, preferences and needs – arguably most important step 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 Step 2: Screen consultant’s database and create appropriate short list (5-7 firms)

17

Assessing Your Needs

Preferences & Board / Management Input

▪ Confirm objectives & scoring criteria ▪ Identify decision makers ▪ Determination of desired board / mgmt. involvement ▪ Identification of political considerations ▪ Granting discretionary authority to OCIO ▪ Include incumbent OCIO

Evaluate Current Structure

▪ Investment Policy Statement ▪ Spending Policy ▪ Utilization of passive versus active management ▪ Alpha generation areas ▪ Unacceptable risk elements ▪ Fees ▪ Governance oversight & process ▪ Services

Key Attributes Matching

▪ Strengths, expertise of firm ▪ Depth of teams ฀Asset mgmt. / research ▪ Investment approach ▪ Service model & reporting ▪ Administrative services ▪ Fees (performance based)

18

Areas of Inquiry in Search

▪ Firm Profile – Number and type of OCIO clients, assets under management, strength of team, account size and fee minimums ▪ Investment Philosophy – Use of different asset classes, indexing, alternatives, ESG, funds, separate accounts, proprietary options ▪ Portfolio Construction – Asset allocation process, research management, liquidity, frequency of rebalancing, stress testing ▪ Governance – Decision making, adherence to Investment Policy Statement, risk management process ▪ Servicing – Frequency of meetings, strength of reporting (internal and governmental), custodian, gift stocks, administrative support ▪ Transition – Process, timing, handling of legacy assets ▪ Fees – Inclusive of all service providers, overlap, indirect compensation, guarantees, performance based

19

Sample Project Timeline

Q1 Q2 Q3 Q4 Goal Setting / Planning / Screening RFP Submission / Completion RFP Analysis / Finalist Meetings Negotiation / References / Contract Develop IPS / Asset Allocation Transition / Management

20

Evaluation Process – Short Form

Step 1: Determine your objectives, preferences and needs Step 2: Screen consultant’s database and create appropriate short list for RFI (3-5 firms) Step 5: Finalist presentations (1-2 firms) Step 6: Negotiations, reference checks and review contracts Step 7: Final selection & implementation Step 3: Create and send customized RFI (20-30 institution specific questions) to short list Step 4: Summarize RFI responses

21

Case Study #1 – Private Higher Education Client Case Study # 2 – Private Higher Education Client

• Single oversight structure
• External expertise
• Better stewardship of endowment
• Internal oversight of portion; person retiring
• Broker oversight of portion; not sure of history
• No coordination of two

Process

• Hire one provider for endowment & another for

long-term reserves given different objectives

• Update investment policy statement
• Comprehensive investment line-up revamp
• Reduction & full transparency of all fees
• Assess investment expectations’ impact on spending

policy

• Complete goals & objectives questionnaire
• Internal education on process & intended
• utcome
• Full RFP with 8 firms
• 3 firms + 1 existing manager for finalist meetings

Result Search Result

• Hire new provider
• Refresh investment policy statement
• Re-tool investment structure - more use of passive &

thoughtful approach to alternatives

• Reduction & full transparency of all fees
• Assess investment expectations’ impact on spending

policy

• Complete goals & objectives questionnaire
• Internal education on process & intended
• utcome
• Full RFP with 5 firms
• 3 firms including incumbent provider for finalist

meetings

Process Review

22

Frank Szymanek 223 W. Jackson Blvd., Suite 800 Chicago, IL 60606 www.planpilot.com (312) 973-4911

Th Thank ank you. u. Points ints to to Remem member ber

▪ Greater fiduciary governance ▪ Alignment of investment program with institutional goals ▪ Better risk / return expectations ▪ Lower costs ▪ Streamlined decision-making ▪ Better stewardship & growth potential