Board members discussing an the search for an Outsourced CIO.

An RFP process can yield hundreds of pages of submissions from dozens of candidate OCIOs – and assessing their investing acumen is a complex but critical task.

Rise of the OCIO Model

In response to the ever-increasing complexity of the investment landscape and demands placed upon fiduciaries, many small to mid-sized institutions are concluding that an outsourced CIO has the potential to deliver better outcomes than the traditional model of quarterly board meetings and investment consultants.

Their investment committees are often volunteers and comprised of a mixture of finance professionals with ties to the institution, and other stakeholders who may lack investment management expertise. In such cases, these institutions may conclude that their board is best positioned to act as a steward of the endowment’s strategic mission, serving in an oversight role while delegating some or all decision making to an OCIO.

Such a move can free up scarce internal resources to focus on the big picture. However, the success of a delegation strategy hinges on an institution’s ability to appoint a good-performing OCIO. Otherwise, an OCIO can simply add on another layer of fees being siphoned from the assets, or even underperform what the investment committee would have been able to achieve in house. OCIO performance evaluation is complicated by the fact that verified, apples-to-apples comparisons between providers are difficult to achieve.

An OCIO relationship involves a multi-year commitment and a major investment of resources in search, bilateral communication, and ongoing monitoring. Given the importance of getting the decision right, an up-front investment in due diligence makes sense to avoid the costs of disappointing performance and switching providers down the road.

The OCIO Selection Challenge

An ever-growing number of providers are competing for a share of the rapidly-growing outsourced CIO market, and making a selection can be daunting.

An RFP process can yield hundreds of pages of submissions from dozens of candidate OCIOs – many of whom can appear very similar. At the same time, the composition of the OCIO landscape is diverse. While there are a number of firms dedicated exclusively to providing OCIO services, many providers were formed as bolt-ons to an integrated upstream investment consulting or downstream asset management business, with the goal of capturing synergies and increasing clients’ share of wallet.

Whether managing a search internally or utilizing a consultant, asset owners need to begin by establishing a clear set of objectives for the relationship. How will success be measured? What is the relative importance of each financial and non-financial objective? Five years from now, what would be a good outcome versus a cause for termination?

Achieving clarity and internal agreement on the goals will make for a more organized and effective process, and will facilitate ongoing monitoring. An evaluation scorecard must be in place before RFPs are reviewed, and certainly before interviews are underway, and it must have strong buy-in from decision makers, to avoid second-guessing the process in the final stages of due diligence.

The ultimate goal and evaluation yardstick of an OCIO must be investment performance – specifically, expected future investment performance over the course of the individual relationship. After all, the OCIO is being hired to manage a portfolio. Other attributes, such as relationships with asset managers and great client service, are clearly secondary to financial value added. Nevertheless, a typical OCIO search RFP or due diligence scorecard may focus on a variety of qualitative elements, such as:

  • Organizational history and leadership
  • Existing client base and references
  • Investment philosophy and portfolio management process
  • Risk management and compliance capabilities

For the most part, attention is devoted to these areas not because they are so important in and of themselves, but rather because they are believed to shed light on future performance potential. The theory is that OCIOs which possess certain characteristics – such as significant experience, a similar client base, a sensible asset allocation approach, and a strong compliance culture – are more likely to be able to deliver strong investment results.

In other words, the search committee of a small university need not care whether an OCIO has other small universities as clients per se. The committee cares because having those clients suggests that the OCIO is experienced managing the portfolios of small universities, and thus may be more likely to be able to generate strong results than a competitor with no history of servicing university endowments.

The need to focus on indirect measures like these arises because reliable performance data is difficult to come by. Few OCIOs claim compliance to the Global Investment Performance Standards (GIPS), and when they do provide past performance data, it can often be skewed by issues such as legacy investments (such as illiquid holdings), varying levels of discretion, small sample sizes, and opaque fee schedules.  Therefore, search committees are left to rely heavily on other assessment factors which they believe may translate into investment performance.

Once an OCIO is appointed, having a framework for ongoing performance monitoring is equally essential. An objective basis is needed to determine whether the performance being delivered by the OCIO is adding value, or whether better results should have been expected.

Assessing OCIO Performance

The challenges inherent in OCIO performance evaluation bear many similarities to the problem of assessing skill at the fund manager level. The realized results of a given OCIO client portfolio are a combination of the parameters imposed by the client, the OCIO’s discretionary actions, the market environment over the period, and random market fluctuations.

While performance evaluation of an OCIO that manages a single model portfolio (or “fund of funds”) is comparatively straightforward, most institutions will at least consider providers that offer customized solutions. In this case, each client of the OCIO achieves different performance depending on their own objectives and constraints. This is one reason why, while nascent efforts are underway to create OCIO performance indexes, these have many important shortcomings and are not yet suitable for use in as an evaluation measure.

Evaluating OCIO skill thus requires isolating the scope of control and then measuring decision quality: within the range of the outsourced CIO’s discretion, how well did its actual decisions perform relative to its opportunity set?

Carrying out this analysis requires constructing what is effectively a custom benchmark at the client account level for each OCIO. While this task may sound daunting, Empirically has developed a proprietary methodology for performing this analysis at scale. Using our simulation technology and advanced analytical techniques, we can extract statistically significant information about skill even from small sample sizes in terms of number of accounts and track record length.

OCIO Performance Measurement in Action

Schedule a Demo to see a walk-through of how our analytics can transform opaque and biased OCIO performance statistics into objective measures of investment allocation and selection skill.


Empirically analytics can be integrated seamlessly with any internally-conducted or consultant-managed search process; regardless, a quantitative assessment of investing skill should be a core component of any OCIO due diligence process. This arms the search committee with objective, evidence-based documentation of candidate providers’ capabilities. Oftentimes, it can be used to draw important distinctions among OCIOs who otherwise look similar on paper.

Once a selection is made, the same methodology should employed to monitor the OCIO’s performance relative to objectives on a regular basis – at least annually. Accurate custom benchmarking can not only judge the quality of performance, but also attribute the exact contributors to value-additive and value-destructive decisions.

A consistent, quantitative review process empowers investment committees to understand which areas the OCIO excels at, and which areas are falling short of expectations. This data-driven feedback can be used to improve weak areas, as well as assess the potential value uplift from a switch to an alternative provider.

Author Information: Jordan Boslego is a Partner at Empirically.

Updated October 2020.