Published by Scott Eason on
This blog sets out our 7 top tips for creating an effective investment governance framework for with-profits funds.
The most valuable investment action a Board can take is to agree its corporate Aims, Beliefs and Constraints for investments. Giving yourself (or your investment committee) a clear mandate on what is required and how you believe this should be achieved, makes the rest of the process so much easier. Our back to basics blog elaborates.
It makes sense that the more freedom that an asset manager has, the more opportunity it has to outperform. But, don’t forget that many of the top managers hold only a relatively small number of high conviction assets. Consider how you can gain access to greater numbers of opportunities but don’t blindly invest widely – only do so where you can improve performance or reduce risk.
It always amazes us how many insurer mandates have a benchmark, with either no or an easily hit performance target (for example, a corporate bond mandate with a gilt benchmark). Often, there is not even a benchmark! In these cases, how can you assess if your manager is doing a good job? Risk constraints are often given as an excuse for not being able to beat a benchmark but in most cases, a suitable benchmark and performance target reflecting the level of risk can be found.
Managers are often selected based on a track record without an understanding of how they have achieved this. However, it clearly makes sense to select asset managers whose expertise and methodologies align with your agreed ABC’s (see tip 1).
Some fund managers have a large amount of autonomy. Some are subject to committee review or input. There will be differences in the level and quality of research being utilised. Whilst it doesn’t guarantee success, we generally like funds with simple and transparent philosophies and processes, and clear responsibility for investment decisions.
Asset managers are generally not tree-friendly in their reporting. It can be difficult to find the information you need in their standard reports, which may include vast amounts of line-by-line holdings information, but don’t allow you to readily assess performance and monitor risks. Ensure your management information gives you what you want.
The world is constantly moving. Whilst we are not suggesting regular changing of investment managers, inertia is the biggest killer of performance. Key people move jobs, processes change, new monies arrive and existing money leaves. All of these can impact the ability of a manager to perform and it is a good idea to keep on top of the market, not just your own manager. Just because they were the best manager when you selected them, it does not mean they necessarily are now.