Ravi Venkataraman
The increase in the complexity of investor objectives and evolution of the investment markets has led to a huge growth in investment solutions products and services, most notably the Outsourced Chief Investment Officer model. However, the evaluation and oversight of these providers has evolved little beyond the traditional two-dimensional (performance and fee) framework that was developed for a simpler investment management-only, single asset class world. Chestnut Solutions Institute has developed a Holistic Value Measurement framework that aims to shift the solutions provider evaluation paradigm beyond the traditional two-dimensional assessment process toward a broader view of a provider’s ability to ensure the investor achieves their desired outcome.
The framework recognizes that most OCIO and investment solutions deliver value across investment, operating and service dimensions as part of each custom engagement, and encourages asset owners and providers to adopt a partnership approach that leverages broader value metrics over longer evaluation horizons. The goal is to foster stronger, well-aligned relationships between asset owners and solutions providers through a transparent, systematic evaluation process that emphasizes governance, investment capabilities, and service value additions.
Framework Objectives and Rationale
The HVM framework targets both asset owners and OCIO providers with the following core objectives:
- Enhanced Governance: Aims to create a shared language and metrics for investment committees and boards to better align on success criteria.
- Resisting Anchoring Bias: Helps stakeholders resist the influence of single-point measures (e.g., recent returns), focusing instead on a balanced evaluation across diverse criteria.
- Encouraging Long-Term Evaluation: Urges asset owners to lengthen their evaluation timelines, allowing providers to deliver on strategic goals rather than short term performance alone.
- Mutual Understanding of Success Measures: Fosters a comprehensive and shared understanding of what defines success, supporting the alignment of interests between asset owners and investment solutions providers.
Evaluating Investment, Operating and Service Capabilities
Every investment solution consists of some combination of three distinct sets of capabilities: Investment; Operations; and Service. Within each broad category, a typical investment solution delivers value across several other capabilities.
Investment capabilities fall into two buckets: strategy and implementation. Investment strategy capabilities consist of approaches to asset allocation and require extensive technical competence and expertise.
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Implementation capabilities vary by provider and provider type. Some focus on alpha generation, while others excel at risk and liability management, diversification and customization.
Investing operating models, technology, procedures, and protocols can have a huge impact on investment efficiency and risk management. We believe the importance of these operating capabilities is routinely underestimated and under-evaluated, often due to lack of expertise or access to appropriate tools and data.
Larger solutions provider firms may be able to lever their scale, offering sophisticated technology and services that require a large infrastructure. Trading capabilities, cash flow management, portfolio rebalancing, and risk modeling are among the other crucially important operating capabilities that are embedded in delivering any investment solution and that can vary widely based on the core competency of the provider.
The third and final capability category is the value add around client servicing, beyond the investing and operating abilities. It is often referred to as “client alpha.” These services are important contributors to a client feeling that their provider is meeting their unique needs – or not.
Value-add services are important functions like providing business support or education for staff and board members. Access to portfolio managers and research analysts at asset management firms can provide invaluable learning opportunities as are thought leadership, insights and custom client research projects.
Provider Evaluation Rating Methodology
In the HVM framework, asset owners rate a provider on each capability on a satisfaction scale of 0% – 100%. Assessment of ratings in each category may either be qualitative, quantitative or a combination of the two. An important part of the framework is that asset owners also assign a weight to each evaluation category reflecting the importance of that category to the achievement of their long-term goals and near-term needs. Investment committees should consider these weights carefully based on their needs and circumstances, and should regularly revisit these weights over time, modifying them as their needs evolve.
Once the weighted average rating for each of the provider capability categories has been calculated, the client then assigns each category a weighting on a 100-point scale. The weighted capabilities evaluation total is themeasure of overall satisfaction with the capabilities of the solutions provider at that given point in time.
Capability Evaluation Ratings Summary
Current Period Evaluation: 6/30/23 – 6/30/2024
Evaluator: ABC Foundation
Solutions Provider: XYZ Asset Management
| Capability Satisfaction | Rating | Weighting |
| Investment Capabilities | 81% | 50.0% |
| Operating Capabilities | 87% | 25.0% |
| Service Value Add Capabilities | 79% | 25.0% |
| 100.0% | ||
| Weighted Capabilities Satisfaction | 81.9% |
Source: Chestnut Advisory Group
The rating exercise should be repeated periodically. Trends in individual categories can be useful in flagging areas for further investigation and/or intervention.
Solutions Provider Client Satisfaction
Investment Capabilities
Operating Capabilities
Service Capabilities
Threshold
Weighted Average
Source: Chestnut Advisory Group
In the example above, each individual capability category and the composite score are tracked. Optionally, a minimum threshold satisfaction score (75% in the example above) can serve as a warning or watch mechanism.
For Asset Owners
The framework presents several advantages that enhance governance and improve decision-making quality:
- Clearer Decision-Making Criteria
- Improved Internal Alignment
- Enhanced Focus on Long-Term Partnerships
For Providers
Investment solutions providers benefit by having the opportunity to showcase their broader value proposition, allowing for a more comprehensive narrative around their capabilities:
- Demonstrating Full Value Beyond Fees and Performance
- Encouraging Collaborative Client Relationships
- Resisting Performance-Driven Volatility
The Holistic Value Measurement framework marks an important evolution in OCIO and investment solutions provider evaluation. By moving away from narrow performance-focused assessments, the framework aligns with a growing industry trend toward comprehensive, partnership-based engagements.
Ravi Venkataraman is managing partner at Chestnut Advisory Group. He co-leads Chestnut’s strategic advisory practice, partnering with asset managers and OCIOs across a diverse mix of asset classes and firm sizes.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.
Tags: benchmarks, Chestnut Advisory, evaluations, OCIO, outsourced chief investment officer
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