“One solution for pension funds to generate higher returns in a low-yield environment would be to introduce good governance”. Keith Ambachtsheer
One of the leading voices in investment governance, Keith Ambrachtsheer, specifically refers to pension funds in his quote above, but it applies to all forms of investing. However, there are a number of challenges to introducing good investment governance, including how you define what it actually is.
What is good investment governance?
There is no single answer to this question, but the academic studies on this subject tend to identify the following three key attributes:
- Clarity of purpose
- Alignment to this purpose
- Desire to improve
It is also important to ensure that governance is not just a “tick box” exercise or about “going through the motions”, but instead that it’s actively integrated into your investment process and can be evidenced and reported on. This is the IMX approach to achieving good investment governance, with the ultimate aim of achieving successful outcomes for clients.
Clarity of purpose
Those involved in the process should have a clear sense of what “success” looks like and how it will be achieved. This typically means having clear objectives and well-defined beliefs in place which frame the investment process. This gives a clear sense of strategic direction for all portfolios.
Alignment to this purpose
It is important that investment policies and processes are aligned to the objectives and beliefs set out, and those involved in the investment process are fully bought-in to these. This ensures consistency of approach; priorities are identified and resource is aligned to areas that will have the most impact on future outcomes.
In well-governed operations, a suitable balance needs to be struck between rigorous yet challenged decision-making and the process also being sufficiently “fleet of foot” to meet short-term challenges and opportunities. Focus needs to be given to understanding the fees and costs associated with the investment process to consider how these “return leakages” can be managed to improve future net returns.
Desire to improve
- assessing portfolio and manager performance
- carrying out an honest reflection of existing processes to identify if there are areas of improvement
- having an ongoing training programme; and
- having a willingness to learn from, and encouraging others, to improve their governance practices.
While following these key principles cannot guarantee success, they certainly increase the probability of successful investment outcomes being achieved. In his 2006 publication, “How much is good governance worth”, Ambachtsheer estimated that good governance could add between 1 and 2% in additional returns per annum.
The IMX approach is good governance
Good governance is embedded in IMX’s investment approach: “Good governance adds value and will be transparent and accountable in all our actions and communications” is a core investment belief. Further evidence of this governance focus includes:
Independent oversight: IMX has formed a committee to oversee all aspects of the investment process. This committee is made up of internal and external members with a range of backgrounds, including investment management, consultancy and asset owners. This diverse background results in strong challenge and robust oversight, it also offers considerable opportunities for learnings to take place from across the investment industry.
Dedicated resource with suitable delegations: A specialist IMX investment team has been put in place to create and support the management of the IMX portfolios. This team has an agreed set of delegations, any decision that sits outside these delegations must be brought back to the Investment Committee for discussion and approval. The IMX team is supported by Hymans Robertson, a leading investment consultant. The dedicated investment team, with its delegations and external support, allows key decisions and analysis to take place on a timely basis.
Clear beliefs: Eight investment beliefs are in place. These provide a framework for decision-making and can be used to help advisors understand IMX’s approach to achieving their customers’ goals. Everyone involved in the investment process is aware of and has bought into these beliefs. Having these beliefs in place helps support consistency of process and prioritisation of investment activity as well as providing investors with greater transparency.
Goals based approach: The IMX proposition has a stated aim to “help advisors create value for their customers by improving the alignment between these customers’ goals and their investments”. The investment process also has an objective-based emphasis, setting out potential investor goals and identifying investment portfolios that are most appropriate to meet these goals.
This “goals based” process is a genuine differentiator from other discretionary fund manager propositions. It ensures an alignment between clients’ objectives and the investment process and portfolio implementation. This consistency of approach reduces the scope for potential “leakages” between the asset allocation setting process and the funds used to implement the asset allocation, all of which is expected to improve future outcomes.
Focus on fees and costs: A range of asset managers are used in the IMX portfolios, with each having their own specific role. The process of selecting these managers includes a detailed assessment of each to get a sense of their future return prospects. The selection process includes an assessment of the managers’ explicit fees and the other fees incurred in the fund e.g. trading costs. This has enabled competitive terms to be negotiated by IMX, with these savings passed through to the underlying portfolio investors.
Ongoing monitoring: IMX has put in place a number of steps to monitor its asset managers, including reviewing past performance, assessing forward looking prospects, and the managers’ approach to voting and engagement on environmental, social and governance related matters.
IMX is a strong believer that good governance adds value. As a result, good governance is a core part of the IMX investment proposition and will ensure the proposition will evolve to meet our clients’ needs.
Partner, Hymans Robertson
Risk warning: This communication has been approved and issued by Hymans Robertson LLP (HR) on behalf of Hymans Robertson Investment Services LLP (HRIS) and is based upon their understanding of events as at date of publication. It is designed to be a general summary of topical investments issues, it does not constitute investment advice and is not specific to the circumstances of any particular financial advisory firm. Please note where reference is made to legal matters, HRIS is not qualified to provide legal opinions and you may wish to seek independent legal advice. HRIS accepts no liability for errors or omissions.
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