For years, asset owners and search consultants have requested more transparent and comparable performance results from Outsourced Chief Investment Officer (OCIO) firms. At the same time, OCIO firms have voiced frustration over the inconsistent requests they receive for performance data. Acknowledging that the industry needs agreement, the CFA Institute adopted the Guidance Statement for OCIO Portfolios in an attempt to construct a framework that addresses these concerns.
While this guidance offers much-needed flexibility and is expected to encourage broader adoption of these Global Investment Performance Standards (GIPS®) across a wide range of investment managers, firms managing OCIO portfolios still face challenges. Specifically, managers need to adapt their processes to ensure compliance with the standards while maintaining operational efficiency.
Challenge: Legacy Assets in Composites
Legacy assets are inherited assets the firm may not be able to sell. The treatment of legacy assets for accounts entering a composite can present challenges, particularly with regard to consistency, comparability, and the reporting of performance. When integrating legacy assets into composites, the primary goal is to ensure all assets in a composite are managed according to the same mandate or strategy, and performance calculations are in accordance with GIPS standards.
The Guidance Statement presents three options for dealing with legacy assets:
- Exclude from composites when legacy assets materially impact the firm’s ability to implement its intended strategy: This option allows firms to consider things like type of legacy asset and amount of legacy assets and determine if they can implement their intended strategy. If so, the account would enter a composite. If not, the account would be considered non-discretionary and ineligible for composite inclusion.
- Include in composites: This option allows firms to include accounts with legacy assets in composites regardless of the amount or type of legacy assets. Firms determine they can manage the accounts containing legacy assets to their intended strategy, regardless of legacy holdings.
- Include only the portion of the account that excludes legacy assets in composites: This option allows firms to include portions of accounts in composites, effectively deeming the portion of the composite that includes legacy assets non-discretionary and only include the portion of the account that the firm is able to actively manage to the intended strategy.
Our Guidance
The most common approach is to exclude portfolios of certain types or percentage of legacy assets, which allows for a two-tiered approach to making the decision. The first tier involves determining if the type of legacy asset is discretionary. Factors influencing this decision might include whether the asset owner pays fees on the legacy assets or if the legacy assets align with what the OCIO firm would typically recommend. In the second tier, the firm assesses if a certain percentage or threshold of legacy assets still allows them to effectively implement their strategy.
Key considerations include:
- The future impact of this decision.
- How to determine legacy asset holdings in existing portfolios.
- Ongoing maintenance of the legacy asset policy.
Challenge: Hedge Fund Assets Classification in OCIO Composites
The Guidance Statement introduces a requirement to classify assets as risk-mitigating, liability-hedging, or growth-oriented. While guidance is provided for asset classes, such as fixed income and cash, firms are responsible for determining how to classify hedge fund assets. When managed within an OCIO structure, hedge fund assets must be classified carefully to ensure the performance reporting accurately reflects how the hedge fund is being used. Hedge funds typically engage in alternative investment strategies (e.g., long/short equity or arbitrage) that yield different return profiles compared to traditional asset classes like equities or fixed income.
Our Guidance
While the Guidance Statement does not recommend a specific classification for hedge funds, we have found that most firms plan to classify hedge funds as risk-mitigating. Firms generally intend to follow the classification recommendations for other asset classes as outlined in the guidance.
Challenge: Marketing of Composites
The Guidance Statement introduces the concept of required composites. In addition, firms may choose to market additional strategies. The thought surrounding these required composites is that they are primarily in place to satisfy search consultants who will be using these specific composites in their searches. In a recent ACA webcast , Brad Alford, Founder of Alpha Capital Management, and Phil Edwards, Principal at Curcio Webb, confirmed they expect to ask for data in line with the requirements of the Guidance Statement, noting there is a greater level of confidence in firms that are GIPS compliant and that OCIO firms have and will be excluded if the plan sponsor cannot gain confidence. Asset owners place high importance on ensuring that OCIOs are consistently adhering to industry best practices.
The challenge to firms with an existing composite framework is to align existing composites with the newly required composite framework.
Our Guidance
In our discussions with clients, firms that are already GIPS compliant noted plans to provide the required GIPS reports along with a GIPS report for the existing strategy they are marketing. Under this new guidance, we expect to see firms providing multiple GIPS reports to search consultants and prospects to meet the new requirements.
Firms beginning their compliance journey are prioritizing the required composite structure, using it as a foundational starting point for building their composites. Similarly, some GIPS compliant firms have indicated an intent to onboard new accounts within the required composite framework and gradually transition away from other existing composites in favor of the required allocations.
Challenge: Adoption Timeline
Any GIPS report or marketing material presenting performance as of December 31, 2025, must align with the Guidance Statement for OCIO Portfolios. Most firms have set a goal to adopt the new requirements by the end of 2025, positioning themselves to present performance data in accordance with the revised standards by 2026. In general, firms are planning to meet the five-year lookback requirement using the new composite structure and related updates. Some are also proactively evaluating performance data from inception, anticipating future requests for more comprehensive historical information.
Our Guidance
It is understood in the industry that the Guidance Statement for OCIO Portfolios will not be the end all be all for OCIO performance reporting, but per Edwards on the ACA webcast “it provides a good foundation to begin to analyze performance and provide more comparable performance”. As both Edwards and Alford mentioned in the webcast, over time, if firms are not GIPS compliant, search consultants and their clients will be asking “why not?”
While this guidance does not solve for all performance inconsistencies the OCIO industry faces, it offers a starting point. Many in the industry hope this will create a more level playing field, and the required composites will become a mainstay—supporting more reliable performance. OCIO managers will need to adapt their processes to keep up with the new expectations regardless of whether they are claiming GIPS compliance or not.
Edwards noted during a recent webcast that, “while the new guidance may present hurdles during initial implementation, it ultimately “gives the industry better confidence in the information they are getting to make these important decisions.”
Let ACA help you implement these standards.
Learn More About the Guidance Statement
We’ve created assets to help you understand the criteria in the Guidance Statement and how it applies to your firm.
- Webcast: Trends in the Application of the Guidance Statement for OCIO Portfolios: How Are OCIO Firms Applying this New Policy?
- Webcast: Guidance Statement for OCIO Portfolios: What you need to know
- Article: Countdown for OCIO Portfolios to Comply with the GIPS Standards Newest Guidance Statement
How We Help
Navigating the complexities of the Guidance Statement and ensuring GIPS compliance can be challenging for OCIO firms. We offer a comprehensive suite of services designed to help OCIO firms address these evolving requirements with confidence.
- Composite maintenance and calculation outsourcing: We can manage the entire GIPS compliance process, including composite maintenance, data validation, and GIPS standards’ reporting, enabling your team to focus on strategic priorities while we handle compliance with precision and efficiency.
- GIPS standards gap analysis: We can conduct a detailed assessment of your investment performance framework, identifying gaps specific to the GIPS standards and OCIO Guidance Statement while providing actionable recommendations to align your policies and reports with new requirements.
- GIPS standards consulting and verification: We can provide internal and external assurance with GIPS compliance consulting and verification. Verification is conducted on an annual basis looking at the prior periods as required by the GIPS Standards for Verifiers.
Reach out to your ACA consultant, or contact us here to learn how we can help you launch, grow, and protect your firm.