CFA Institute Produces Plan to Gauge OCIO Performance

The framework, now out for comment, calls for extending GIPS to outsourced investment managers, with rules for things like fee disclosures and benchmarking.

Asset allocators are increasingly farming out investment management, but the question always has loomed about how to assess the track records of outsourced CIOs. Now there is a proposal to do just that—although it must go through an extensive vetting process before it takes effect, sometime next year at the earliest.

The CFA Institute recently published a draft plan to extend Global Investment Performance Standards, used throughout financial services to establish full disclosure and fair representation of investment performance, to the burgeoning OCIO field. The organization, best known for awarding the Chartered Financial Analyst designation to finance practitioners, created GIPS in 1987.

The draft is the beginning of a long appraisal process by financial professionals, says Karyn Vincent, the institute’s senior head of global industry standards. After a comment period ends November 20, the CFA Institute’s working group, which formulated the proposed OCIO standards, will make further refinements.

The popularity of OCIO services is rabid, with $2.46 trillion in assets under management worldwide (the bulk of it in the U.S.) in 2021, the last year with available statistics, according to Chestnut Advisory Group, which specializes in the space. That is a doubling of the 2016 total. The research firm projects that total will reach $4.15 trillion by 2026.

The CFA group’s draft lays out what financial activities should fall under GIPS, calls for a system to determine fees and describes how to benchmark assets that do not fit into neat, traditional categories, such as large-cap equities or Treasury bonds. While GIPS are voluntary, some OCIO purveyors already use them. But they do this without the universal structure the institute seeks to propound.

In the draft, the intricate nature of OCIO arrangements produced detailed directions on such topics as, for instance, how an allocator may pay fees to the OCIO manager of its portfolio, to its outside managers and to pooled holdings of other investors. Some of these fees paid to the OCIO are offset by fees earmarked for others.

The draft is filled with other complex rules. Example: Private market investments have different reporting periods, so the CFA framework sets forth a way to reconcile mismatches between private and public assets and how to disclose them. Plus, the CFA guidance establishes when GIPS does not apply, such as to a manager who has no say in forming asset allocations or investment policy statements.

Early reactions among OCIO practitioners to the CFA Institute’s blueprint is positive. At OCIO provider Verus Investments, Kelli Barkov, senior associate director of performance analytics, greets the proposal as a major advance for the field. The draft’s standards “offer transparency to a market that has been compared by some to the Wild West,” she says.

There is a big incentive for OCIO providers to comply with the GIPS framework, she points out: If they do not, clients “will decide if that is acceptable,” with the assumption these allocators will not be pleased.

The benefits of the CFA Institute’s plan would be very helpful to the OCIO industry, says Joshua O’Brien, leader of the operations team at the Strategic Investment Group, an OCIO manager. “If widely embraced across the industry,” he says, “these standards have the potential to enhance the quality of performance reporting significantly.”