While it’s easy for a plan sponsor to determine how an equity or fixed income manager is performing, it isn’t as straightforward to assess the performance of an outsourced chief investment officer.

“There’s a lot of similarities in OCIO providers out there, but there’s also a lot of differences,” said Eric Menzer, global head of pension and fiduciary solutions at Manulife Investment Management, speaking at the Canadian Investment Review’s 2019 Defined Benefit Investment Forum in Toronto on Dec. 6.

The four key considerations for a good OCIO provider, he noted, are asset allocation, liability-driven investment capabilities, private markets expertise and open architecture.

On the asset allocation front, setting a strategic mix and then only looking quarterly at the portfolio won’t cut it, Menzer said. “We believe that, particularly in today’s environment, in order to have a good OCIO relationship and provider, you need an asset allocator that is going to be looking at that portfolio every single day. That’s real-time monitoring positions. That’s real-time monitoring of funded status on a daily basis. That’s having the ability to track funding and de-risk on a real-time basis.”

Asset allocation is extremely important in today’s low return world, he added.

“While us, as pension plan sponsors, have a long-term strategic view and we need to be focused on the long-term strategic view as a top priority and a primary objective, there is value to be created from a secondary objective of being able to react tactically around asset classes and around the markets as opportunities present themselves.”

Another key consideration is choosing an OCIO provider with liability-driven investing capabilities, said Menzer. “LDI in and of itself doesn’t necessarily mean that plan sponsors have to 100 per cent take all of their assets and put it into fixed income; there’s various stages along the spectrum for LDI.

“But it is important to have a manager, consultant, advisor — whatever your relationships are within an OCIO framework — that can understand the liability, that take the time with the expertise to gather the cash flows, to model things out appropriately and provide a solution both in the short, the mid and the long term around those cash flows and how the plan is going to manage risk around those liabilities.”

It’s also important to look for an OCIO provider with capabilities in private markets, said Menzer.

Pension plan sponsors can also think about alternatives in the context of their liabilities. “We’ve done a lot of work and a lot of modelling around this, and our teams have thought about how to incorporate solutions that include real assets bolted onto liability-hedging assets to basically create a spread where you’re spending your risk budget, or you’re hedging your risk budget more effectively, because while you’re getting a hedge against the liability you’re not taking a complete beating because yields are where they are.”

A final item for plan sponsors to look for is an open-architecture platform, Menzer said, since no single asset manager can do everything well. “The integrated platform is important, not just for access and ease of doing business, but also for scalability and cost.”