The structure and services of outsourced chief investment officers (OCIOs) can vary greatly. Some notable differences fall along a spectrum of customization, from fully bespoke to a one-fund approach. With bespoke services, investors may select their allocation and exposure to respective asset classes, strategies, and even managers, whereas a one-fund approach offers access to a seasoned portfolio of diversified strategies.
A common perception is that customization is always better. In cases where like-minded investors have similar investment objectives and time horizons, there are many benefits of a one-fund, or commingled approach. Such investors include small to mid-sized institutions that make up most of the non-profit endowment and foundation landscape today.
What is a Commingled Fund?
A commingled fund, also referred to as a pooled fund, is an investment vehicle that combines multiple assets into a single investable fund. Pooled funds provide institutional investors like pension plans, endowments, and foundations a core investment through a partnership with an investment advisor, such as an OCIO, that manages the fund.
Why are Commingled Funds a Good Fit for Non-Profit Investors?
Non-profit organizations have very specific investment guidelines and objectives; aligning the investment approach to an organization’s values is paramount. An institution may have goals such as risk management, ESG-specific considerations, or exposure to specific asset classes such as alternative investments. A core fund approach provides organizations the ability to meet these goals alongside similar, like-minded institutional investors.
Diversification
A commingled fund is designed with diversification in mind. Whether deployed as an organization’s sole investment or layered with other investments through a core-satellite approach, a core fund inherently provides access to a breadth of holdings. Exposures to asset classes, strategies, and managers are carefully selected to support investment objectives, risk tolerances, and liquidity needs with a goal of strong risk-adjusted returns.
Access
Large institutions often have advantages over smaller ones due to the ability to attract, target, and engage with high-quality fund managers that are closed to new investors, difficult to access, or have limited capacity. This may lead to smaller institutional investors being underserved compared to their larger counterparts. Leveraging a pooled fund investment allows these institutions to “punch above their weight.” The one-fund approach may include strategies and managers that are typically more difficult to access, like private equity and other alternative assets.
Efficiency
An added benefit to non-profit institutions in deploying a core fund approach is the inherent efficiency built into the relationship. Typically, non-profit organizations have lean teams, requiring them to scale operational efficiencies wherever possible. Investing in a core fund through an OCIO can offer added benefits such as back-office services for tax, audit, reporting, and management of cash flows, access to a peer network, and support with donor requests and board education.
Discipline
With a core fund approach, there is a team singularly focused on managing a diversified portfolio for its investors. Through portfolio construction, asset allocation, manager selection, and a deep understanding of the markets, non-profit institutions can rest assured they have a fiduciary with their interests as the primary focus.
While the services OCIOs provide can vary greatly, the one-fund approach may be a particularly good option for smaller non-profit organizations looking for a turn-key solution that provides access to investments they would not otherwise have, as well as a streamlined back-office operations team supporting them. Explore our blog to learn more about how an OCIO relationship can serve your non-profits institution’s investment needs.