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What is an outsourced CIO?

Outsourced CIO stands for outsourced chief investment officer, or, more broadly, outsourced investment management. The term refers to the full or partial outsourcing of an organisation’s investment function to a third party. In most cases, the third party is an asset management firm or investment consultant. In delegating investment tasks to a third party, the organisation typically retains some level of fiduciary responsibility — such as the organisation’s governance oversight.

Who uses outsourced CIOs and why?

Financial services organisations partner with outsourced CIO providers to satisfy a range of objectives, including portfolio customisation, fiduciary requirements, enhanced governance structure, decreased volatility, risk reductions and lower costs.

A range of uniquely tailored solutions

It’s worth emphasising that, above all else, there is no cookie-cutter approach to an outsourced CIO. The goals and objectives of organisations that have made the decision to outsource vary widely across the spectrum, and so too do the range of potential solutions. Leading outsourced CIO providers will be able to draw on their flexibilities and utilise the proper set of tools to align their investment outsourcing services with the precise needs of each organisation. The emphasis placed on customisation is one of the key calling cards in a trusted outsourced CIO partner.

Some organisations may choose to only outsource the strategic asset allocation management—while others may opt to take a full, holistic investment management approach. The lack of a one-size-fits-all solution means that each organisation receives its own uniquely tailored solution based upon its goals, circumstances, values and beliefs. Ultimately, this aims to improve the likelihood of the organisation achieving its goals, without compromising its values or beliefs.

How can an outsourced CIO help establish a robust governance structure?

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One key reason an organisation may shift the management of its investment program to an outsourced CIO provider is to improve its governance structure. The traditional governance model used by organisations to make investment decisions is rife with several shortcomings, many of which have been exacerbated by today’s increasingly complex regulatory and investing environment.

Many companies, for instance, establish and review their investment policies and asset allocation during quarterly meetings run by an investment board or committee. This means that on an annual basis, a shockingly small amount of time — as little as 16 hours — is spent making high-impact investment decisions. This isn’t even remotely close to the ballpark range of time that is necessary to review and refine an investment strategy.

An outsourced CIO provider, by contrast, works to establish an improved, robust governance process for organisations, with the provider assuming daily oversight of all investments. A skilled outsourced CIO provider will have the superior resources, expertise and implementation capabilities that this day-to-day attention demands, with clear visibility into a portfolio’s holdings at any given time. This is crucial due to the volatile nature of markets, where yesterday’s winners can become tomorrow’s laggards in the blink of an eye, as the events of last spring demonstrated all too clearly. Just as significant, market volatility can sway investors from their long-term goals, tempting them to make hasty decisions at odds with their overall strategic objectives. A strong, well-defined governance process helps prevent this from happening, ensuring that the organisation does not stray from its previously established investing mandates.

How can an outsourced CIO help with strained resources?

More and more organisations are facing resource constraints, tighter budgets and the need to keep on top of ongoing regulatory requirements. There’s increasingly less time to spend on activities that aren’t core to the business. A financial services organisation, for instance, is better served focusing its time on a client’s holistic financial goals and overall business objectives than on day-to-day investment portfolio management. Yet both demand stringent, around-the-clock attention. That’s where an outsourced CIO provider can step in.

How can an outsourced CIO help improve access to best-in-class money managers?

The right provider will not only have a dedicated team of in-house specialists to provide daily oversight and strategic advice, but also offer improved access to best-in-class investment managers on a global scale. A leading outsourced CIO provider will be able to extensively research and rate thousands of investment managers and opportunities to find those ideally suited to an organisation’s portfolio. In addition, skilled providers will possess a comprehensive risk management system — a necessity for effective portfolio management today. These systems typically show aggregated portfolio exposures across multiple managers, with a view of how exposures are likely to affect both risks and rewards — all with the click of a mouse.

Can outsourced CIOs also help with back-office functions?

Investment outsourcing also means that the Outsourced CIO provider takes charge of the associated daily administrative tasks, reducing the strain on an organisation’s resources. This, in turn, frees up more time for the organisation to spend on core business activities and programs — while simultaneously ensuring that its fiduciary duties are still being carried out.

Can an outsourced CIO provide cost savings?

Many organsations can also save significant amounts of money by outsourcing some or all of their investment function. How? There is a well-documented inverse relationship between asset management costs and portfolio size. In other words, large outsourced CIO providers — with billions of dollars in assets under management — can use their scale to negotiate more competitive rates with sub-managers. They can also accomplish this by pooling the assets of multiple organisations together. In aggregating this buying power, outsourced CIO providers can pass along these efficiencies, which are, quite frankly, unachievable when an organisation negotiates independently.

Can outsourced CIOs help with volatility?

Another key reason many organisations cite when switching to Outsourced CIO is a desire to reduce volatility. This is especially important for clients who may be closer to retirement due to sequencing risk (i.e. if drawdowns occur closer to retirement). Volatility is a key component of long-term asset allocation through diversification. A simple multi-asset fund with 70 per cent equities and 30 per cent bonds is no longer sufficient as bond yields have fallen to historic lows. A more diversified approach may enhance returns and reduce volatility. Dynamic asset allocation also factors in the management of volatility, especially when the market cycle becomes more extended and valuations become more expensive.

Best-in-class OCIO providers also offer the potential for improvements in a client’s overall financial wellbeing — an objective that is likely to increase in scope due to the dramatic drop in discount rates since the onset of the pandemic.

The bottom line

In today’s topsy-turvy pandemic world, financial services organisations are beset by a multitude of challenges. Investing shouldn’t be one of them. Consider partnering with a skilled outsourced CIO provider to improve your organisation’s client goals, alleviate resource strain and reduce your overall costs.

Neil Rogan, head of wholesale partnerships, Russell Investments

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What is an outsourced CIO?
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