As the investment landscape grows more complex, an increasing number of not-for profits investors are turning to third parties to act as chief investment officers. Richard Williams, the finance director at one of the Church of England Diocese of Rochester, and George Dyer, executive director at the US-based International Endowments Network, joined our NFP investment podcast to discuss the issues.
Outsourcing Chief Investment Officer (OCIO), Fiduciary Management, Implemented Consulting – these are just some of the terms associated with the outsourcing of investment functions, which is a growing phenomenon. The Mercer Global NFP Investment Survey found 70% of endowments are using external investment support for their portfolio.
Increasing complexity is a key driver, with 44% of NFP investors saying their portfolios are now more complex than three years ago. The rising importance of the ESG agenda has added urgency and further complexity while the demand to diversify into private or alternative assets requires new skills and understanding.
Outsourcing and control
Richard Williams, the finance director at the Church of England Diocese of Rochester, explained how, in the past off-the-shelf solutions had been effective – seeking one or two funds with a good performance record and a strategy aligned with the diocese’s aims and values.
However, Williams said that came with restrictions. “Sometimes you might stick with the same fund managers, but in that context, you're stuck with that fund manager and its performance for a lengthy period of time.”
“For five years, you have no influence over its asset allocation and no influence over its ESG. So, whilst it's off the shelf, there are limitations and frustrations in the inability to really control what's going on,” said Williams.
Whether outsourcing to a chief investment officer or adopting a fiduciary management solution provides increases or decreases control is a key feature of the outsourcing – the answer is not necessarily black or white.
George Dyer is executive director at the US-based International Endowments Network, a peer-learning network that connects professionals across NFP investing from trustees to asset managers and advisers. Overall, Dyer is positive about the benefits, arguing it allows the board to spend more time and resources on the strategic issues. In effect, giving the board the ability to focus more on the values of the endowment, its aims and objectives, and less on administration.
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Lightening the load
The NFP Investment Survey found that reporting and administration, strategic asset allocation, and selecting and monitoring managers were key reasons for Outsourcing Chief Investment Officer (OCIO) with between 70% and 80% of those who had outsourced naming one or more of these as a reason for their decision.
“We've seen a lot of the endowments that we work with implement or move to an outsourced model, particularly what we would consider the small- and medium-sized endowments with under a billion or so,’ said Dyer. ‘One of the key reasons we've seen for that is that it opens up more time for that kind of governance level strategic decision making around concepts like ESG and mission alignment,’ he added.
This was exactly the benefit that the Diocese of Rochester found with its outsourcing approach, according to Williams. “We discovered that not only did we have the ability to control the asset allocation and determine the variance of the return that we were aiming for, but also the actual area of ESG,” he said, adding: “We were able to stay within the asset allocation where we wanted the focus to be, and particularly on equity on sustainability.”
Enabling private market investment
A growing interest in diversifying assets has also helped to drive the outsourcing trend. Private market investments are a growing proportion of many institutional investment portfolios. The Mercer NFP Investment Survey found that, among funds that had chosen OCIO, 30% had done so to help implement a private markets strategy.
“We were able to say there's an option of putting 15% in private equity specifically aimed at health care and climate change and sustainability,” says Williams. “It was aligned with our own values and our own objectives, and had very strong returns. It has given us much more input into where we want to put our money, but also into the choice of the fund managers.”
Outsourcing investment advice or implementation, either fully or partly, is a rapidly evolving trend in NFP investment and there is no ‘one-size fits all’ solution. However, as Williams and Dyer agree, when done right, outsourcing can deliver a double, and perhaps unexpected, benefit of reducing workload and complexity while also providing greater control over the key aims and objectives of an endowment.
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