CIOs face many new challenges as markets and sources of return shift and as technological advances become more sophisticated and expensive. To succeed in this new environment, they are enhancing operational efficiencies and revisiting investment strategies.
Outsourced CIO providers are adapting to these new challenges as well. Capitalizing on the efficiency and effectiveness harnessed by economies of scale, they use new technology and hire specialists in growing investment areas, applying what they have learned across multiple sectors and situations to benefit all asset owners.
Addressing these challenges and opportunities is a balancing act for CIOs and OCIOs as they seek to structure their investment strategies and operations and explore how new technology will change their work and their teams.
Office Structure at Texas Tech
An asset owner’s governance is integral to how the CIO can structure its office, says Tim Barrett, the associate vice chancellor and CIO of the Texas Tech University System, who manages $3.1 billion with his team of eight other investment and operational professionals.
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Although Barrett reports to the chief financial officer of the university system’s board of regents, which approves the investment policy, and to a few other entities in university, the day-to-day portfolio management, strategy and staffing decisions are his to make, which gives him flexibility.
Barrett hires generalists for his investment team, which consists of three senior investment officers and two associates, plus three people in operations. His investment officers each manage part of the portfolio, but the team also collaborates and has input into all parts of the portfolio, including vetting potential managers across asset classes. It works as a training program, Barrett says, since the team members learn about all aspects of the portfolio, may find new ideas and could likely step into new roles if needed.
“I want my senior investment officers to act like CIOs,” he says. “It’s critical because we’re all paid off of how the whole performance does for the fund, not how one vertical does.”
Barrett says the small staff means the group uses mostly external investment managers, relying on the managers’ expertise in niche areas. They use external managers for investments such as credit hedge fund strategies and a private credit structure similar to collateralized loan obligations but using infrastructure loans, which he says are less volatile. On the private equity side, Barrett’s team is shifting from venture capital and larger buyout strategies to add more secondary-market exposure across the board, specifically with smaller firms and European firms. The team does its own derivatives work in house, as 75% of their public equities allocation is invested in a portable alpha strategy, which it trades itself.
Costs are always a consideration, and at Texas Tech, the CIO office budget is 0.24% of its annual AUM. Barrett recently hired an operations analyst, but as he looks to the future, spending may get more complicated as technology and platforms evolve. The office is waiting for the university to release its artificial intelligence policy to decide on its next step in that area.
“We’re going to see what kind of capabilities they’re going to bring to the table that we can piggyback off of, versus what do we need to count on [from] providers,” he says.
Whatever happens, Barrett says AI will bring a “monumental shift” to the investment office in who and how it hires and how it trains team members. AI may make training faster, perhaps allowing a beginner analyst to get up to speed much more quickly than in years past.
For now, Barrett says he does not see a way to use AI on the investment management side but sees ample opportunity in operations, research and training. He expects, once his group receives direction from the university, it would likely add AI slowly, in small increments and testing frequently for accuracy.
AI Already Practical for OCIOs
Much of OCIOs’ efficiency often comes from action behind the scenes, as these firms use technology to eliminate repetitive tasks or summarize reams of information from manager meetings or other data. Artificial intelligence has become useful in these areas.
Michael Rosen, CIO of $37.7 billion Angeles Investments, says beyond just summarization, AI tools can highlight areas or word combinations, allowing the human team to follow up if they want more information. On the portfolio side, AI may identify certain risk factors that are becoming more, or less, important in determining portfolio performance.
“That’s something that clients see directly, … just in helping us being more efficient and hopefully more accurate in in the work that we do,” Rosen says.
Tim Braude, co-head of multi-asset solutions at $386 billion Goldman Sachs Asset Management, which oversees the company’s OCIO business, concurs.
Goldman is testing AI, using an internal AI assistant called GSAI, with human oversight, on tasks such as helping to write client memos on detailed investment ideas, translating documents or generating content during turbulent markets. It frees up Goldman’s specialists to focus on more sophisticated strategies to enhance portfolio performance, Braude says.
On staffing, Goldman uses experienced market specialists who can quickly spot dislocations across sectors, and Braude intentionally created a seating plan in each office to ensure members of different teams are interspersed to encourage collaboration.
Angeles’ Rosen says in the past few years, the firm has added significantly to its private market staffing relative to experts in public markets.
“Private markets are still rather inefficient, and so there’s a real benefit to be able to capture some of those inefficiencies,” he says.
OCIOs offer asset owners economies of scale in both investing and operations because asset managers have extensive platforms and may have more ability to invest in technology, systems and tools while still being able to collaborate with asset owners on their individual needs. Working with different pension plans can also spark ideas that can benefit other asset owners.
As an example, Braude says Goldman saw a novel way U.K.-based BAE Systems’ pension plan incorporated cash-flow-driven investing into a larger, liability-driven portfolio.
“Being able to study how they did that, and then apply it within our systems, and then utilize it for other clients is, candidly, a really efficient way of bringing a new and innovative idea to a broader client base,” he says.
Tags: Angeles Investments, Artificial Intelligence, Goldman Sachs Asset Management, Investment Team Structure, Michael Rosen, OCIO, Texas Tech University System Office of Investments, Tim Barrett, Tim Braude
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