Evaluating the Performance of an OCIO: Navigating Success Metrics

Selecting an Outsourced Chief Investment Officer (OCIO) is a significant decision that can greatly influence an organization's financial future. But once the decision has been made and the OCIO is in place, how do you measure their performance? Below, we provide guidelines on how organizations can evaluate the performance of their OCIO, including what benchmarks or standards they should use.

The Role of Performance Measurement

Assessing the performance of an OCIO is a critical part of ensuring that your organization's investment strategy is on track to meet its financial goals. Regular performance evaluations can help identify areas of strength and highlight opportunities for improvement. Furthermore, they provide a level of transparency that is crucial in maintaining trust between the organization and the OCIO.

Establishing Benchmarks

The first step in evaluating the performance of an OCIO is to establish relevant benchmarks. Benchmarks provide a reference point against which performance can be measured and should be aligned with your organization's investment objectives. There are generally three types of benchmarks:

1. Absolute Benchmarks: These are fixed return targets, such as a specific percentage return each year.
2. Relative Benchmarks: These compare the portfolio's return to a specific market index or a peer group of similar portfolios.
3. Risk-Adjusted Benchmarks: These take into account the level of risk taken to achieve the returns, using metrics like the Sharpe ratio.

Remember, the most suitable benchmark depends on your organization's unique investment objectives, risk tolerance, and time horizon. Also, multiple benchmarks may be used to gain a comprehensive view of the OCIO's performance.

Key Performance Indicators (KPIs)

In addition to benchmarks, specific KPIs can be used to evaluate the OCIO's performance. These may include:

• Returns: The portfolio's total return, including capital appreciation and income.
• Risk: Measures such as standard deviation that indicate the portfolio's risk level.
• Cost: Total costs incurred, including management fees, transaction costs, and any other expenses.
• Compliance: The extent to which the OCIO adheres to the guidelines and restrictions laid out in the Investment Policy Statement (IPS).

Regular Reporting

An important aspect of performance evaluation is regular reporting by the OCIO. The frequency and level of detail in the reports will depend on the organization's needs but should be sufficient to facilitate a thorough evaluation of performance. The reports should ideally include information on returns, risk, costs, and any significant changes to the portfolio or investment strategy.

Conducting Regular Reviews

Lastly, regular reviews should be conducted to assess the OCIO's performance. These reviews should involve not only examining the quantitative data but also qualitative aspects such as the OCIO's communication, responsiveness, and adherence to the organization's investment strategy and principles.

Conclusion

Evaluating the performance of an OCIO is a critical aspect of investment oversight. By setting appropriate benchmarks, monitoring key performance indicators, receiving regular reports, and conducting regular reviews, organizations can ensure they are getting the most out of their OCIO relationship.