Fundamental to the foundation of many institutional investors’ robust portfolios is a strong governance structure that fosters communication, collaboration and alignment of goals between investment professionals and the board of trustees. Good governance can propel the investable capital to new heights, while poor governance can cripple even the savviest of investment strategies.
We have interviewed over 40 institutional investors. In this week's edition of Trusted Answers, we look at some of their insights on what role governance plays in a strong portfolio:
"...Governance of the organization is number one and number one in huge font. The organization needs to set up a good governance model, needs to follow the model, and if it does the success of the investment team will follow from that. When the governance model is not set up right, or when it gets broken then one often sees performance suffer. If you have a good team you can work through a broken model, but it’s very difficult. Seeing the foundation and how it’s operated, every day I think “governance, governance, governance,” and how it makes our job easier and makes it easier to communicate with roles and responsibilities being very clearly defined. That’s been so clear and so gratifying for us. This is right at the very top.
...After coming to the foundation and talking with board members and senior leadership, we focused on getting the office infrastructure created and setting up the procedures and policies by which we would operate. This was important to establish before we began to re-configure the underlying portfolio. There was going to be a high level of educational content connected to the prospective changes as well, so we could explain the rationale for the changes and educate our board as we worked through the evolution.
...We really wanted to keep it very simple and make sure that the trustees understood what we were doing, why we were doing it and spending time with them to make sure they were comfortable with the decision to bring the investment function in-house.
We think it’s going well based upon the feedback that we have received. We have the nice ability to talk everyday with at least one of our trustees and the President. Two of them sit right down the hall from me, and the president of the foundation is on the other side of their offices. It’s a very short chain of command, and the lines of communication are direct. Everyone has been exceptionally good to work with, very attentive and very good listeners as we have been working at building the portfolio into its new form."
"...When you are under short-term pressure for executing due diligence processes, finding managers and sourcing funds, something that often falls on the backburner is governance, but its importance should be emphasized.
Pay attention to the investment policy statement and use that as a living document. Get people to agree, not in the heat of the moment, but in the calmness of a calm market, to a sound long-term strategy and to a governance structure that best supports that long-term strategy.
Memorialize that in your investment policy statement, and then pull that out and make it a living document. "Here’s what we agreed to regarding how to run the program, how to make decisions, how to benchmark, how to look at opportunities. This document controls how we think about and process investment ideas. So when you’re in the storms of a choppy market, you’re not tempted to look at things that are going to take you off course. Or in a bullish market, you are not tempted to chase the bright, shiny things that can distract people from pursuing a long-term strategy."
"Doug Brown, CIO, was very strategic when he developed the governance structure at Exelon. We’re much more like an endowment as opposed to a corporate pension. We report to an Investment Committee that approves investment strategy, allocations and investment limits. However, the managers’ selection process lies within the investment office under a certain dollar amount; so in those cases it doesn't need to get approval from the investment committee. As a result, we are able to operate with a lot of flexibility and can move quickly if we need to. I think that really sets us apart from our peers."
"It really comes down to being disciplined, managing risk appropriately, being transparent with your board and your constituents, and assuring them that we are in this for the long run. Staying diversified and having uncorrelated assets as best we can within the portfolio should help us meet our objectives. In the short run, it's going to be a challenging couple of years – that’s for sure."
Jeremy Wolfson, Chief Investment Officer, Los Angeles Water and Power Employees' Retirement Plan
Read the full interview here.
Trusted Answers is a weekly series that delves into some of the most pertinent issues within institutional investing, and shares some of the insightful responses from the 40+ institutional investors we have interviewed in the past year. Take a look at some of our other Trusted Answers.