The OCIO Landscape
Q CIO: There are around 80 firms providing OCIO services to US institutional investors at this point. That’s more than a crowd—it’s a mob. How quickly do you think the shakedown will occur? There’s no way all these firms survive.
Gilbert: It’s definitely been a land grab, and we’ve seen many new market participants emerge. But we continue to run into the same firms in finals. While there may be a multitude of players out there attempting to do this, at the end of the day, there are so many important ingredients in delivering a quality OCIO solution. It’s not easy. We’ve been continually improving our OCIO service for 35 years now, and we’re not done. I don’t think we’ll ever be done.
Q CIO: Once you’re in the finals, how would you want to be judged versus other players?
Gilbert: It’s really about the provider’s ability to achieve the desired outcome for their clients. Each client’s situation is custom, unique, and each one has a distinctive journey. Beyond the outcome, client service is also extremely important. Asset owners are making one of the largest decisions in their career to outsource their assets and we take that very seriously. We act as a trusted partner and an extension of the client’s staff.
Another significant component we’re judged on is the level of expertise in all of the areas that are required for an OCIO—and this is where I believe a lot of firms fall down. You have to be experienced in all asset classes, be global, and know how to work a multi-asset portfolio. You really need to have a fully developed trading and implementation capability. I believe that having expertise across all of these areas is table stakes for any firm that wants to manage OCIO assets.
Q CIO: There seems to be a very high barrier to entry in that new firms aren’t bringing all this to the table. Do you agree? How do you overcome that barrier to entry?
Gilbert: The real barrier to entry is the long-term ability to manage assets to the outcome that makes sense for each client. We find that firms that are good at managing these complex assets are those that have been doing it for a long time. The knowledge, expertise, and judgment that come into play in understanding the marketplace and the portfolio—that only matures over time. There are a lot of opportunities for experienced OCIO providers, and I’m not surprised there are so many participants. Our industry has a history of people showing up anywhere it looks like money is flowing.
Q CIO: More and more, OCIO consultants are acting as gatekeepers, especially in the smaller space, or the sweet spot of OCIO. How do you think about the conflicts with consultants in this space?
Gilbert: The existence of consultants in this space is part of the game. We have a consultant relations team to educate consulting firms on what we deliver in outsourcing relationships, because it is so complex. It’s not a five-minute conversation, especially when you get into the nuances of multi-asset investing. Clients have a well-founded desire to wrap their arms around what’s out there, and consultants help provide that with a degree of objectivity. In a way, they make our life easier because they do a thorough job of assessing providers, and when you look beyond marketing and sales materials to core capabilities, Russell Investments should be one of the firms you include in your RFP.
I think the true straight retainer-consultant model, especially in the smaller markets, is going to become extinct at some point. It’s already down, simply because these plans need to have better and more elegant asset management than has traditionally resulted from the retainer-consultant model.
Q CIO: What is Russell Investments’ view on multi-asset investing?
Gilbert: Multi-asset investing is clearly the future of asset management. Our experience is that the highest probability of attaining the desired outcome occurs when a multi-asset approach is employed. And by that I mean a global, all-asset class, customized pool of assets designed specifically to achieve that outcome. It’s managed from the top down, dynamically and with discretion. There needs to be a nimble mechanism across the entire portfolio to efficiently instruct your views, and you have to have intra-day, security level data from all of your managers and from all components of the portfolio. You need a trading capability to be able to act on that portfolio, and reporting and attribution around it to understand where you added value and where you didn’t. And you’ve got to be able to demonstrate a track record of doing this successfully.
While many OCIOs may offer some components of multi-asset investing, very few are offering the whole deal. I think part of the reason is because it’s very difficult and expensive. We developed this capability over many years by managing assets for nonprofits and pension funds. Essentially all of these systems, skills, insights, and capabilities had to be developed to help deliver the outcomes our clients needed.
Q CIO: Russell Investments’ OCIO business has been around for 30-odd years. The industry, however, has become mainstream in the last few years. Do you think CIOs and OCIOs can co-exist? Why would asset owners want to outsource when they could lose their jobs?
Gilbert: The presence of a fully functioning, healthy OCIO relationship can relieve the CIO of many operational and administrative duties. Asset owners—and investment committees—can focus much more strategically on the long term, and deal with broader components of the overall investment strategy. This is a good thing. A full outsourcing could result in a CIO losing his/her job, but there are just as many cases where the CIO is working with us hand-in-hand. We have the same goals in mind, our incentives are aligned, and we act as an extension of their staff. I think we have a strong formula for success.
Q CIO: Another myth: OCIO is a small players’ game. Everyone understands why a $50 million high school endowment should probably just outsource, but not really why, say, Xerox outsourced a $4 billion or $5 billion corporate fund.
Gilbert: Given all that’s required for true multi-asset investing—big infrastructure, big risk controls—it’s not a matter of picking managers and monitoring managers. It’s really about very actively and dynamically managing these assets. Consequently, CEOs and CFOs are finding that the cost of outsourcing makes a lot of sense. We’ve already made investments in the capabilities so they don’t have to. One of our $1 billion-plus OCIO clients came to us with a very specific relationship in mind. We were able to implement exactly the solution they needed, and they’re paying less than half of what they were paying prior to outsourcing to us.
Q CIO: Let’s switch to the Russell Investments story. What is the message to the market about Russell Investments and specifically the OCIO space that perhaps was blurred by the past year-and-a-half of transitions in ownership?
Gilbert: Our business has continued to grow. Nearly our entire client base stayed with us through the change, and we’ve continued to build out our asset management capability to deliver true multi-asset investing. We have better tools, better processes, better capabilities, and we are bringing more to the portfolios than we ever have. While the sale was challenging—especially on the sales team—we were able to effectively retain our asset base and concentrate on our clients.
Q CIO: What does the future hold for OCIO?
Gilbert: I think OCIOs that are strong, innovative, and have a deep set of capabilities will emerge as the winners. As the market becomes more complex, the ability to manage multi-asset portfolios is going to become more and more important for our clients in attaining their outcomes.
The industry seems to follow a very consistent market evolution. An opportunity is identified, everybody jumps in, and through consolidation and elimination of weaker competitors, most will fall by the wayside, and we’ll likely end up with two or three really strong OCIOs. The hope is that the winning OCIO providers will absolutely provide cutting edge solutions, with clients ending up in better positions. Competition is a good thing; it spurs innovation. It certainly has pushed us to develop better tools.
The next three years are going to be fascinating, simply because many participants that have a toe in the water will fall away pretty quickly. We’re also seeing OCIO move upscale, with larger pools of capital electing to outsource. I believe we’ll see good, strong step-wise gains in our ability to attribute the value we provide to OCIO clients. The demands placed on institutional investors have never been greater, and we’ve never been better positioned to help our clients succeed.