Starting in the 1920’s, research was begun to study the effects of work environment on employees’ productivity. Later this research was re-examined, and it was determined that some employees performed better simply because they were being studied. This “Hawthorne Effect” was named after the location where these studies took place: Western Electric’s Hawthorne Works in Hawthorne, Illinois.
This Hawthorne Effect can certainly be a factor in improving the performance of your Outsourced Chief Investment Officer (OCIO.) There are several reasons in each of the 5 primary OCIO functions this is true.
The 5 primary functions performed by an OCIO that determine your investment success are:
Strategic Asset Allocation
Tactical Asset Allocation
Manager Hiring
Manager Firing
Rebalancing
Employing an independent monitor (not a competing OCIO) as an extra set of expert eyes can help the OCIO in each of these functions, as well as improving your plan’s standing within the OCIO’s client hierarchy.
Strategic Asset Allocation
An OCIO monitor will track previous asset allocations and compare to future changes. This ongoing monitoring will document for the plan sponsor and OCIO the efficacy of those changes. By tracking these changes, the OCIO will have an independent and objective source to learn from these past changes and apply the findings to future strategic asset allocation changes.
Tactical Asset Allocation
Whether it is an overt strategy change by weighting or asset class; or simply allowing allocations to drift away from the strategic targets, tactical asset allocation is an important component of long-term investment success. Like strategic asset allocation, an OCIO monitor will quantify the success and value-add of these changes so that the OCIO will have an independent history to apply to future tactical asset allocation changes.
Manager Hiring & Firing
Academic studies have shown that plan sponsors have difficulty in hiring (firing) active managers that will out-perform (under-perform) in the future. Many behavioral finance theories suggest reasons for this phenomenon. A monitor will track the post-hire and post-fire performance of these manager changes. As more data is accumulated by the monitor, the OCIO and plan sponsor will be able to determine hiring and firing success as well as determine patterns and factors (heuristics) that can improve future manager hiring and firing outcomes.
Rebalancing
Rebalancing is perhaps the most under-appreciated discipline for investment success. Effective rebalancing will manage risk and capture incremental returns. Surprisingly, performance reporting of this critical discipline is often inadequate. The value-add of rebalancing executed is often neglected, and opportunities missed are ignored. Like the other disciplines, an independent OCIO monitor will track the rebalancing history that will serve as a guide for improving future outcomes.
Raising Client Priority
Although an OCIO is normally a fiduciary to each of its clients, the logical truth is that an OCIO firm sometimes must prioritize which clients receive a strategy change first. This is true when it comes to entering and exiting managers, as well as entering and exiting asset classes. This prioritization is especially acute when it comes to illiquid, quarterly-valued and subscription-based strategies. Having an independent monitor may likely move your plan up to the front of the line.
Please visit www.OCIOmonitor.com for more information about improving through monitoring.