Investment governance is seen by many in the industry as a differentiator when competing for risk-adjusted return. The structures implemented by institutional investors vary depending on the size of the asset pool, complexity of the portfolio and, ultimately, ownership of risk. It varies from complete lack of management and control (although this is seldom the case in the U.K) to large bureaucratic layers of paperwork where every decision needs scrutiny.
How can we measure if these structures work and how do we assess what is ‘fit for purpose’? Context is key.
Oversight is typically managed by the Board, with members including pension fund trustees, lay-people, investment professionals, advisors and so on. For smaller schemes, say sub £1bn, this maybe the only decision-making group. But for more complex and larger organisations, those with a major internal team, this could also include a sub-committee layer that compromises of say an Investment Committee, ALM Committee, Risk Committee and so on.
The presence of a CIO or Head of Investment, executive and investment all add to the intricacy.
The burden of accountability lies with the board and strategic thinking, assurance of mission and goal is critical.
Coupled with investment policy and investment beliefs the board should stay at thirty thousand feet. Not dissimilar to a corporate board. Yet, this is not always the case. Sure, most do tackle these themes on a periodic basis, but they also get into the weeds. By this I mean selecting all managers, monitoring performance regularly even with long time horizons, in addition to other more trivial matters. Surely delegating this down the chain of command would be efficient and effective, thereby sparing precious time to indeed focus on top-down thinking.
But where to start? A breakdown of the investment process could be useful. If we look at it in terms of;
· Mission, goal and policy
· Asset allocation
· Portfolio construction and implementation
· Monitoring and reporting.
The board could focus primarily on the first step and part of the second, but delegate the rest. Once the asset allocation is agreed it’s down to the CIO and investment team to implement it using skill and experience, be it internally-managed or through a suitable manager line-up. The CIO and team monitor this and report up to the board by exception.
The pros of this approach include sharing accountability for meeting investment goals across the organisation. The CIO should be given greater freedom when it comes to implementation. A greater level of ownership further down the organisation would also take away some of the burden of responsibility from the board. In addition, and perhaps controversially, there can be a measure of how much investment value is being added by the investment team over and above the policy benchmark or reference portfolio, agreed by the board. More importantly, reaction and changes to market conditions can be more handled more readily.
This approach could be taking activities from the board for the right reasons. However, it can seem a sense of loss of ownership, and board members may feel they are less in touch with the detail and arguably interesting topics, such as the approach to private markets research. This should be handled with sensitivity.
So, what can funds do to implement this approach effectively;
· Compare and contrast how other similar organisations handle delegation – peer analysis is helpful
· Define steps in the investment process
· Develop a sense of ownership through accountabilities and responsibilities throughout the governance structure
· Ensure the right skills and experience are in place.
Tej Dosanjh, Director at CEM Benchmarking
