We are big believers in the virtues of with-profits funds (see our briefing note - A new dawn for With-Profits). However, in our 2017 With-Profits survey, we identified a wide range in asset performance within UK with-profits funds and we challenged insurers to enhance their investment governance procedures to increase investment returns for their members, policyholders and shareholders.
This blog sets out our 7 top tips for creating an effective investment governance framework for with-profits funds.
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.
With-Profits Survey 2017
In our annual With-Profits survey, we uncover significant differences in the investment performance of UK with-profit funds.Find out more
Blog: Back to basics for insurers
Time spent agreeing and documenting ABCs is one of the most valuable things a board can do.Find out more
A new dawn for with-profits business
We continue to believe that with-profits remains a critical part of the UK life insurance armory in finding solutions for its customers. Our new dawn briefing note was written in 2016 but remains valid, as we near the end of 2017.Find out more