I’ve written here about how endowment and foundation investment offices look at opportunities, how managers might consider approaching these investment offices, and how young professionals can develop their skills within investment offices.
What we haven’t discussed, is whether any given investment office should exist in the first place. It’s a sensitive topic, but it’s probably more straightforward than most organizations might like to admit.
This week’s question comes from a reader who engages with a lot of smaller endowments and foundations, and these institutions often pose the same question.
Are we big enough to have our own internal investment office? At what size does it make sense?
As a quick aside before diving in – while this specific query focuses on endowments and foundations, I think the spirit of the question cuts across investor types. It’s natural for investors, whether individual or institutional, to want greater control over their portfolios. But it often may be far more rational, and potentially more successful, to outsource the effort.1 I’ll direct my response below toward endowments and foundations, but I think the considerations are broadly applicable.
Ok, back to the question at hand. I suspect that institutions asking these questions might be hoping for affirmative responses. I get it. There are certain things that an internal investment office can do that would be very difficult to replicate externally. As I noted above, internal management offers greater control over processes and investments. An internal team can build a highly customized portfolio to meet the needs and preferences of the institution. Having an internal investment office might also carry with it a certain cachet. But ultimately, running an effective internal investment office is expensive. For smaller institutions, the math often just doesn’t pencil out.
I’m going to draw a blunt line in the sand, acknowledging that there are exceptions (there are always exceptions): $1 billion. That’s the size above which an institution probably should take on the cost and complexity of an internal investment office. On the flip side, the farther an institution is below $1 billion, the less sense it makes to run the function internally.
Let me also be explicit, in case it isn’t obvious considering my own professional background – I am a huge proponent of internal investment offices. Internal investment offices generally can be more nimble, more readily access selective managers and strategies, and invest more “out of the box.” They also build and retain institutional knowledge that should, over time, compound into better decision making, specific to the needs of that institution.
Having spent my career inside internal investment offices, I also know how complex they are to run. How dependent they are on good governance and effective collaboration to achieve their full potential. How tough the competition is for the best talent to fill their investment and operations roles. All of these constraints add up to higher costs than some institutions are able or willing to bear. And here I’ll express an opinion that is more controversial than it should be – a poorly resourced internal investment office is worse than none at all.
For institutions without internal investment offices, the alternatives broadly fall under the category of Outsourced Chief Investment Officer (“OCIO”). These offerings are exactly what they sound like – third party consultants overseeing, with or without discretion, institutional investment portfolios.
There are a huge number of OCIO shops these days, and the ensuing competition has significantly compressed fees over the past two decades. Per Cerulli Associates’ 2024 OCIO Providers Survey, OCIO advisory fees typically fall between 0.21% to 0.30% for nonprofits at or below $100 million of assets.2 That’s an investment management cost of between $210,000 to $300,000 for a $100 million endowment or foundation.
There’s no way to run an effective internal investment office with that budget. That budget could afford an institution the salary and benefits of a single mid-level endowment professional, with nothing else left over for software, support, travel – all the things that allow an investment office to do its job well.
Of course, there are tradeoffs. When that $100 million institution works with an OCIO, it will likely build its portfolio with selections from a set of established menu options. And that’s not a knock on OCIOs. OCIOs bring plenty of other scale benefits to their smaller clients (e.g., reduced management fees and/or better fund terms through aggregated client assets), who arguably benefit far more from that scale than are hurt by the absence of a niche manager here or there.
Even at or below $500 million, it’s hard to imagine an institution could overcome the budget and talent constraints to realize the benefits of an internal investment office.3 From $500 million to $1 billion, it’s a little murkier. Between the bookends of OCIO and full internal investment team, there’s a spectrum that might include some internal staff coupled with some third party consultant/extension of staff services.
Perhaps I’m coming across as having too harsh an opinion on this matter. I stand by it. Across the board – institutions, family offices, individuals – investors would benefit by asking themselves more frequently: do I have a reason to do this myself? Do I possess a sourcing, execution, or skill advantage? If not, can I realistically acquire these advantages at a reasonable cost and in a reasonable time frame? Sometimes the answer is no, and that is perfectly ok.
Alright, that’s it for this week. Thanks for joining, and as always, please reach out with questions: askacio@ivyinvest.co!
See you in two weeks,
Wendy
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The question comes up a lot in the family office world as, when does a single family office make sense? Probably a lot less often than the number of single family offices that exist might suggest.
Unlocking OCIO value for endowments and foundations, February 2025.
Maybe if the institution has a heavy hitter Investment Committee, with a legendary hedge fund manager willing to manage assets at no fee or carry. Purely hypothetically speaking.