Outside Investment: Why Nonprofits Are Turning to Outsourced CIOs

Assets under management by outsourced chief investment officers (OCIOs) jumped 90.5% over the five-year period ended March 31, 2021, representing more than $1.95 trillion in the current market¹. Historically, endowment portfolios were easier to manage, consisting of large cap equities and investment grade bonds picked by a nonprofit organization’s (NPO) internal committee. However, the current equity landscape is far more complex than the days when nonprofits managed their own investments.

With markets and investment products only growing more sophisticated, organizations are considering higher degrees of specialization. The cost of such expertise, vis-a-vis the rate of potential gains from an externally managed portfolio, tips in favor of outsourcing.

Outsourcing investment oversight is an option that not only affords NPOs the benefits of a skilled portfolio manager but relieves them of the cost of hiring one internally.

Below, PWM has compiled a simple use-case, based on Goldman Sachs Institutional Client Solutions’ white paper, Choosing an Outsourced Chief Investment Officer (OCIO). The following illustrates the function and benefits a skilled OCIO can offer a small to mid-sized charitable organization.

1. Efficient

When internal nonprofit investment teams shoulder the burden of financial stewardship, such responsibilities can distract from the organization’s mission. Outside advisors bring the expertise required to navigate both contemporary markets and investment products.

2. Accountable

While investment committees composed of volunteers are common, such teams are not as accountable as outside advisors who, by nature of their hire, are subject to the expectation that they’ll produce results in the form of clear and measurable portfolio gains.

3. Reciprocal

Even though portfolio decisions and operational responsibilities are outsourced to independent investment professionals, the OCIO model gives NPOs the option for the same kind of governance oversight expected from an internal investment team.

4. Unbiased

While no doubt well intentioned, teams free of standards mandated by compensation may steer portfolios toward biases. For example, a volunteer managing a hedge fund may decide to invest in other hedge funds. A skilled outside advisor will keep investment decisions equitable.

5. Bespoke

An OCIO takes into account an organization’s individual objectives, constraints, and operating environment. It’s from this basis that a skilled advisor will tailor strategic asset allocations customized to an NPO’s specific goals.

6. Transparent

A capable OCIO will provide transparent reports on which decisions contributed to and detracted from funds generated. Additionally, an advisor will provide educational opportunities for staff and board members as to how investment decisions are made.

It’s clear the pressures of stewardship NPOs face in a rapidly evolving investment landscape are challenging, which is why NPOs are turning to OCIOs to shoulder the burden. 

1. Christine Williamson, “OCIO rides market rebound to big growth,” Pensions & Investments, June 2021.