Hot commodity or strategic necessity? The OCIO debate for nonprofits

Fidelity's Erika Murphy examines how outsourced chief investment officers (OCIOs) can help nonprofits, endowments, and foundations make smarter investment decisions, manage risk, and stretch every dollar further—especially when resources are tight.

Why everyone is talking about OCIOs

An OCIO is a delegated investment manager—typically for an entire or sizable portion of an investment portfolio. OCIOs are generally hired to serve as a co-fiduciary and manage everything on the investment side: Designing the portfolio to meet the institution's objectives, picking investments, managing risk, and providing ongoing reporting on performance and risk. Hiring an OCIO is a way to offload responsibilities from internal teams or volunteer investment committees such as research, trading, risk management, and operational functions associated with investment portfolios so that internal staff can focus on other important matters.

It is no surprise the OCIO model has taken off. U.S. assets managed by OCIO providers totaled $2.9 trillion by the end of 2023, according to Cerulli Associates' "U.S. Outsourced Chief Investment Officer 2024" report.¹ These assets grew at double-digit rates annually over the past five years. Cerulli expects more growth ahead, ranging from low single to low double digits annually over the next five years.

The U.S. nonprofit (endowments and foundations) OCIO market is estimated at $693 billion, according to Cerulli. Historically, nonprofits with under $1 billion of assets were the biggest users of OCIO services. About 50% to 60% of small and mid-sized endowments, and roughly 50% of small and 35% of mid-sized foundations already use an OCIO provider, according to Cerulli. The trend is shifting, with more large institutions—those with over $1 billion in assets—adopting the OCIO model. According to Cerulli, about 15% of university endowments and over 20% of private foundations in this size range have made the move to outsource their investment management.

There are several reasons why demand for OCIO services is on the rise:

1. Fiduciary responsibility: Institutions carry a fiduciary duty to deliver investment returns for stakeholders. Managing increasingly complex portfolios demands expertise, resources, and long-term planning, which can strain internal teams or volunteer committees. As a result, boards are increasingly encouraging the use of OCIO providers when internal capacity is limited. In such cases, the OCIO becomes a co-fiduciary, while the board retains oversight.
2. Costs: OCIO fees are modest relative to the value delivered. Large nonprofit institutions typically pay average advisory fees of less than 0.10% of assets annually, while smaller organizations pay around 0.20% to 0.30% in advisory fees, according to the Cerulli report. These fees provide access to a full investment team, research, portfolio management, trading, risk oversight, and reporting—often at a lower cost than what it would take to build and maintain an internal investment office.
3. Bundled solutions: OCIO providers increasingly offer bundled solutions beyond investment management.

That said, the OCIO market remains both fragmented and fiercely competitive. Boutique firms to large asset managers and investment consultants are competing for market share. Because of this competitive landscape, many OCIO providers are pursuing inorganic growth—acquiring firms that already manage OCIO assets or those that can expand their investment capabilities. In my view, OCIO providers are in hustle mode —and that competition is good for asset owners. More competition means sharper ideas, better execution, and greater value for nonprofits.

Many nonprofits are feeling especially stretched thin right now. In speaking with our clients, it is clear that many nonprofits have had a tough year—funding is down, costs are up, markets have had bouts of significant volatility, and some endowments are even facing higher taxes. And while demand for nonprofit services climbs, many are facing the difficult decision to either dip into reserves or cut services due to limited resources.

• Lost funding: The government's cost-cutting efforts this year, along with shrinking individual contributions, have resulted in funding gaps. Nonprofits received almost a third of their revenue from government agencies in recent years, according to the Urban Institute's Nonprofit Trends and Impacts 2021-2023 report.² Larger nonprofits with over $1 million in annual expenses received on average 46% of their revenue from government agencies. Meanwhile, donor giving is shrinking as families prioritize essentials over philanthropy.³
• Rising costs: Inflation is driving up rent, utilities, and supply costs. According to a survey of nonprofit leaders, 81% reported higher operating costs, with an average increase of 1596.⁴
• New taxes: As part of the One Big Beautiful Bill Act passed over the summer, certain private colleges' and universities' endowments will face a higher excise tax, up to an 8% tax on realized net investment income. So, the richest U.S. endowments must factor these taxes into budgets and investment objectives.

Fidelity OCIO in action

In today's ever-changing nonprofit landscape, OCIOs are playing increasingly vital roles. As an active member of the OCIO community, Fidelity is collaborating with nonprofit clients to navigate market volatility and manage their portfolios effectively. In today's environment, we are engaging in timely conversations around key investment themes, including:

• Aligning return targets with spending needs: For perpetual nonprofits, raising spending rates to cover funding gaps often means that nonprofits should target higher investment returns—typically by increasing investment risk and exposure to global public and private equity. While this adds volatility, it also increases access to markets that could deliver strong real returns over the next decade.
• Hedging against inflation risk: In a higher inflation environment, traditional equities and bonds may deliver less favorable outcomes. Nonprofits should consider incorporating inflation-hedging assets into their portfolios to preserve purchasing power and enhance resilience across market cycles.
• Implementing tax-efficient strategies: For organizations subject to tax, minimizing tax drag is key. This can be achieved through a variety of strategies including tax-managed separate accounts, use of ETFs versus pass-through income vehicles, and private strategies that can defer realized gains into the future.

Implementing any of the strategies outlined above requires a variety of research inputs, investment experience and resources—which is why we expect nonprofits will continue to find value in their OCIO partnerships—not just for investment expertise, but also to help drive efficiency and keep costs in check. After all, when every dollar counts, having the right support can go a long way.