The average investment committee has a finite number of opportunities to meet each year to review the portfolio and make decisions. Your group could certainly meet more than the average four times per annum, but the reality is that most committee members are busy community leaders with limited additional capacity for further engagement on any one board. Thus, it is even more critical to spend your valuable time measuring areas of importance.
Michael Mauboussin, in a 2009 report for Legg Mason, characterized this process as focusing on the important unknowables. In other words, spend more time on your process and considering the implications of items such as greater volatility in the portfolio and long term asset class trends. Then, you can spend “little time” on the unimportant knowables, such as whether GDP data for the fourth quarter of the most recent year was revised downward by 0.1%. This concept seems straightforward, but you would be surprised by the time allocated to such topics in investment committee meetings.
Instead, your committee should set aside greater time to think about prospective returns rather than historical returns. This is not to say that committees should ignore the recent portfolio returns and allocations. Rather, your group should allocate a greater percentage of your time considering the long-term investment strategy of the organization through the development and review of the appropriate targets and ranges for the strategic allocations in the investment policy statement.
These targets and ranges will guide the group over time and allow the committee to focus more broadly where the portfolio should be going as opposed to than where it has been. The review process coupled with the use of expected return and volatility simulations for the portfolio will generate even greater understanding by the committee. In addition, the process gives the committee's investment advisor or consultant the requisite flexibility and accountability to make decisions on the committee's behalf within the specified guidelines.
To summarize, the key areas of focus are:
Areas of Knowables, Importance and Time
This article is general in nature and does not constitute legal, tax, or investment advice. SunTrust makes no warranties as to accuracy or completeness of this information, does not endorse any non-SunTrust companies, products, or services described here, and takes no liability for your use of this information.
©2013 SunTrust Banks, Inc. SunTrust and SunTrust Foundations and Endowments Specialty Practice are federally registered service marks of SunTrust Banks, Inc. SunTrust PortfolioView, and SunTrust eGrants are service marks of SunTrust Banks, Inc.