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Confessions Of A Former CIO…On OCIO

Date: Monday, June 17, 2019 7:22 PM EDT
  • By delegating discretion to multiple external parties, most corporate pension plans have been outsourcing for years, but many have not considered a comprehensive OCIO solution.
  • Our OCIO solution represents a strong value proposition: delivery of more robust and effective investing programs at a lower cost—even for large pools of capital.
  • OCIO won't work for every asset owner, but it seems prudent that fiduciaries at least explore the possibility.

"You don't know what you don't know"

During my 20-year stint as a former chief investment officer (CIO) at a large publicly-traded California utility company, I thought I had the best job around. Although I wasn't directly involved in delivering gas and electric services to customers, I was helping to secure the retirement of my colleagues that did, lending a certain nobility and heft to my small team's mission. Running a corporate pension plan portfolio is also a pretty specialized task. That meant I could play an expert role on the topic of financial security in the eyes of senior management and my peers. And finally, because I was responsible for $20 billion in assets (including a $12 billion defined-benefit plan trust), I got to meet the best and brightest minds in the investment industry. I was an in-demand customer—everyone wanted our business. Somehow, my jokes were always funnier at work when I was being pitched by a money manager than they ever were at home.

But early in my new Outsourced Chief Investment Officer (OCIO) role, I was reminded of one of my grandmother's favorite observations: Remember, you don't know what you don't know.

This simple saying has rung in my ears at several key points in my life. And it has applied in spades as I have transitioned from being an asset owner to helping clients achieve their objectives as part of a team delivering OCIO solutions. This simple change in perspective has resulted in aha moments that have been both confirming and revelatory about what I had accomplished in my former role.

On the gratifying side of the ledger, the strategic investment policy we developed has proved to be on-point. I'd estimate that the overwhelming majority of a corporate pension plan's investment-program success or failure can be traced back to its strategic asset allocation and liability hedging strategy. With the best advice available, I believe I got this right for my investment committee, plan participants and the company.

But honestly, when it came to selecting and combining money managers, there was a problem—one that I didn't perceive at the time. You see, while setting overall strategy was a low frequency/high impact activity, my day-to-day charge as CIO was to put the best money managers together and generate positive excess returns. To do this, I worked with a stream of top consultants to identify and hire the best managers. I then combined these managers in a way that I thought controlled risk and delivered attractive active management results. Sounds simple. But to be frank, it was really a lot harder than it seemed. And when patience with mixed results became strained, giving up on active management was viewed as the only alternative. That was what I knew.

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