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:
- Focus your time on the range of possible outcomes based on our current asset allocation and managers (active versus passive). Spend less time with your advisor reviewing economic information that could be readily accessed via the most recent Wall Street Journal or Barron’s articles.
- Monitor costs to ensure you know exactly what you are paying to your advisor, underlying managers, and administrator/custodian.
- Appoint a committee member(s) to be accountable for all decisions made in the portfolio: strategic asset allocation, tactical asset allocation, and implementation. The appointee should be able to articulate and report on the following:
- Strategic Asset Allocation - Communicate when strategic target allocations and ranges to emerging market bonds and hedge funds are added to the portfolio, and describe the impact of the allocations.
- Tactical Asset Allocation - Report when the advisor lowered exposure to MSCI EAFE, and communicate whether the outcome is positive or negative.
- Implementation - Should the advisor hired XYZ Manager to manage fixed income mandates to replace another fixed income manager, the appointed individual should communicate whether or not the hire of new management is beneficial.