Implementation Matters. Is Your OCIO Built to Execute?

Key Takeaways

A successful implementation process is critical to achieving investment success. Well-designed strategies often fail without strong execution capabilities in trading, overlays and transition management.
Effective portfolio implementation utilizes three key methods: Manager changes, manager weight adjustments and precise positioning strategies using tools like derivatives.
An experienced OCIO provider is well-equipped to handle these types of complex assignments.

You’re ready to make changes to your portfolio. Your OCIO has decided on the asset class shifts and the revised underlying asset class structures. They've researched specific investment manager products and selected the actual managers. If your OCIO has done all this well, you have a best-laid plan, right? What could go awry?

Here’s the blunt truth: Many great investment strategies fail because of poor implementation. Robust capabilities in trading, transition management, overlays and currencies are critical to executing a strategy. And there are three primary methods for putting a strategy into action, ranging from broad to precise:

Replacing money managers
Adjusting manager allocations
Implementing precise positioning strategies

A skilled OCIO provider will be equipped with the tools and have in-depth expertise in handling each of these changes.

Expertise Please

Let’s say that a money manager assigned to a portfolio needs to be replaced. Perhaps they are not executing their investment process as expected, or there has been turnover on the investment team that concerns you, or you simply have to make room for a higher conviction manager.

Once the hard work to identify the replacement has been completed, real-world considerations of how to actually transition assets come into focus. This can be a complex process depending on the country domiciles, regulatory environment, currency considerations and liquidity associated with the incoming and outgoing managers. For an OCIO without the right capabilities, this process can be fraught with opportunities for inefficiency, unwanted tax events and loss of market exposure.

Doing this well requires transition management expertise. An OCIO provider with these attributes can make the process highly efficient and minimize opportunity cost. But how do you know if the provider has your best interests in mind? At a minimum, make sure your provider fully discloses their fees and provides complete transparency, particularly while the event is in process.

Trade Vitals

Replacing a manager is a significant action. Instead of swapping out a manager completely, an OCIO provider may recommend looking at moving exposures from one manager to another depending on the risks and tactical opportunities observed.

But whenever exposure changes are made, there are still inefficiencies to avoid. Trading expertise is vital. For maximum trade efficiencies, we believe trading expertise should be held to a high bar, with the following best-practice characteristics:

24-hour staffing – When global markets are open, the trading desk should be open. Even with international exposure instruments that can be executed during U.S. trading hours, like futures and ETFs, large institutional investors need local market access to manage real time risk with minimal trading costs.
A pure agency model – The structure of an agency model removes potential conflicts of interest. The structure itself demands that the trading desk works on behalf of the client, not on behalf of the asset manager. By its nature, it eliminates conflicts associated with proprietary books.
Specialization – Markets are complex and understanding the nuances of individual asset classes is vital. We believe traders should be organized to specialize by asset class, including fixed income, equities, derivatives and foreign exchange transactions.
Risk management tools – Systems and technology that allow your manager to understand the risks involved in the implementation and minimize these risks in real time throughout the process.

Position Precision

When it comes to the fine-tuning of a portfolio, an OCIO may use internal positioning strategies separate from money managers. This allows for greater precision, speed and flexibility in achieving your dynamic preferred positioning. Positioning strategies may include derivative-based overlays or custom-built quantitative strategies.

How can this work in a global equity portfolio? Consider a situation where more exposure to Japanese equity is desired relative to the existing country exposure in a portfolio. However, active managers are typically chronically underweight Japanese equities. In this case, an OCIO may use a positioning strategy, such as a futures overlay, to bring the entire portfolio’s exposure to Japan in line with their preferred positioning. Additionally, depending on the hedging strategy desired in the portfolio, a positioning strategy can also include currency forward contracts to disentangle the Japan equity exposure from the Yen currency exposure.

Taken all together, positioning strategies are designed to ensure that a portfolio’s position is fine-tuned to improve both the risk and return profile of a portfolio, often with a focus on reducing downside risk. But to do this well, we believe expertise in trading both physical securities and derivatives in real time is a requirement.

The Bottom Line

Without the right tools in place to execute, even the most genius of investment strategies can fail. Make sure you have access to a powerful lineup of implementation tools with your OCIO provider.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.

Products and services described on this website are intended for United States residents only. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained on this website should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Persons outside the United States may find more information about products and services available within their jurisdictions by going to Russell Investments' Worldwide site.

Russell Investments is committed to ensuring digital accessibility for people with disabilities. We are continually improving the user experience for everyone, and applying the relevant accessibility standards.

Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates Management, L.P., with a significant minority stake held by funds managed by Reverence Capital Partners, L.P. Certain of Russell Investments' employees and Hamilton Lane Advisors, LLC also hold minority, non-controlling, ownership stakes.

© Russell Investments Group, LLC. 1995-2025. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.