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This study analyzes small-sized asset owners’ optimal choice problems in selecting an outsourced chief investment officer (OCIO). While large-sized asset owners can select OCIOs through procurement auctions, it is difficult for small-sized asset owners to use this method. Instead, they access OCIO services by participating in an investment pool or utilizing OCIO funds. In this study, the authors compare the two OCIO selection methods. The authors construct an agent-based model for OCIO selection to reflect the heterogeneity in production efficiency and preferences. The results of this study imply that when the market has enough investment pools, the utility of all small-sized asset owners increases. To enhance the growth in the OCIO market, the investment pool should represent the preferences of small-sized asset owners and enable individual owners to find an appropriate OCIO.

This paper reviews the history of OCIO (outsourced chief investment officer) and surveys the critical success factors of OCIO business in Korea. The market size of OCIO business in Korea has rapidly grown up, and the asset management for the retirement pension fund is expected to be the blue ocean for OCIO business. Survey study for OCIO business shows that the main interest of incumbent OCIOs and the potential candidates of Korea is the profitability, although OCIOs in the major foreign financial markets have their main interest in the risk management and/or the effectiveness of in-house supports. This result suggests that the potential OCIOs who prepare the entrance to the OCIO business should consider the needs and/or the purpose of the OCIO adopters and their practical constraints. OCIOs should develop their own unique professional field rather than the general expertise. Also, the Korean financial regulator is supposed to introduce the financial institutions specialized in OCIO business only.

This article investigates the effect of the performance evaluation period on the long-term investment portfolio choice and the agency problem of outsourced investments. Though investors with the prospect utility are required to raise the portfolio weight on risky assets such as stocks for a long investment horizon, institutional investors and professional fund managers cannot help lowering the portfolio weight on risky assets to minimize the loss and to avoid disappointing clients with a short evaluation period. We find empirical evidence in the Korean capital market that stocks and bonds are indifferent to investors with the prospect utility for an evaluation period with 16 months and the optimal portfolio weight of stocks and bonds is 30% to 70%. Therefore there exists the agency problem between investors (principal) and managers (agent) due to frequent performance evaluations, which is able to explain current excessive investment in fixed income markets of most national pension funds. Our result implies that we need to consider extending the evaluation period of the investment performance to achieve the goal of asset and liability management (ALM) of national long-term funds in this low-interest-rate environment.

This study aims to empirically analyze the asset allocation capabilities of Outsourced Chief Investment Officers (OCIOs) in Korea. The empirical analysis used data from 35 funds that were evaluated by the Ministry of Strategy and Finance from 2012 to 2020. The results of the analysis are summarized as follows. First, this study found that funds that adopted OCIO improved their asset allocation performance. Second, the sensitivity between risk-taking and performance decreased for funds that adopted OCIO. Third, it is found that OCIO adoption improves a fund's asset management execution (tactical capabilities). This study has methodological limitations in which the methodology used in this study is not based on theoretical prior research, but on practical applications. However, considering the need to clearly analyze the capabilities of OCIO and the timeliness of the topic, this study is valuable and can provide meaningful information to funders who are considering adopting OCIO in the future.

Given the importance of style allocation strategy under the outsourced chief investment officer (OCIO) structure, the authors examine the validity of style allocation strategies in the Korean stock market. The authors find that external investment agencies can improve performance by using newly suggested investment styles such as high dividend yield and low volatility as well as traditional styles. In addition, the authors find that the style combination strategies create economically large and statistically significant returns. Finally, empirical results indicate that factor timing strategies suggested in this study can improve the reward-to-risk ratio. In sum, the empirical findings indicate that external investment agencies under the OCIO structure can improve performance using active style allocation strategies.

It is well-reported that financial and investment sectors of the economy have grown in recent years, but also that problems of corruption, both institutional and venal, are present. Within the sector, financial auditors and investment consultants have been entrusted to work with and for those for whom financial sector stability and adequate financial returns are crucial. However, these two professions have too often served as handmaidens of corruption. This chapter reviews the history of financial auditing and investment consulting and outlines areas in which corruption manifests. It argues for an end to corruption and it asserts that the two professions could and should be the core of an uncorrupted robust system of financial practice and regulation. Such an arrangement could safeguard a world in which investment business practices are sustainable, honest, and truly productive.

This study investigates the performance distribution of passive funds in the Korean market and compares it with the performance distribution of active funds. The key findings are as follows, first, the performance distribution of passive funds has a thicker tail compared to that of active funds. There are passive funds that achieve outstanding performance, and both the false discovery rate (FDR) analysis and simulation analysis suggest that their outperformance is driven by managerial skill rather than luck. Second, passive fund performance is more persistent compared to active fund performance. Third, investors are less responsive to passive fund performance compared to active fund performance. The fund flow-performance relationship is significantly positive for active funds but not for passive funds. This implies that investors may not recognize the managerial skills of passive funds.