BUILDING A BETTER INVESTMENT COMMITTEE
Part 1 of a Series
Establishing Effective Board
and Committee Processes
INDEPENDENT.
INTELLECTUALLY HONEST.
Christopher M. Meyer, CFA
Managing Principal, Truepoint Institutional Advisors
EXPERIENCED.
Renowned investment consultant and
WHY DO INSTITUTIONAL INVESTORS
author Charles D. Ellis, CFA, published
OFTEN FAIL TO MEET THEIR STATED
an article in the Financial Analyst Journal
BENCHMARK RETURNS?
in the summer of 2012. Reminiscent of
Agatha Christie’s novel Murder on the
Persistently disappointing returns are often
Orient Express, Ellis investigates who is
the result of ineffective board structures and
responsible for the underperformance of
misguided investor behavior. While these can
many institutional portfolios. He reviews
be considered distinct concerns, they are also
the suspects — investment managers, fund
interrelated. An ineffective board structure
executives, investment consultants, and
can lead to misguided behaviors. Likewise,
investment committees — and concludes
misguided behaviors can lead to ineffective
(as Hercule Poirot did in the novel) that
structures and processes.
all the suspects were guilty.
The structural and behavioral hurdles many
institutional investors encounter include:
~ The same reality may explain the
persistent failure of institutional
1. Absence of effective board and committee
processes
investors to achieve their ubiquitous
2. Inadequate investment committee
governance
but evanescent investment goal of
3. Insufficient consideration of agency costs
superior results or ‘beat the market
4. Lack of patience and discipline
performance.’ The results are
5. Misguided investment focus
persistently disappointing.~
Charles D. Ellis, “Murder on the
Orient Express: The Mystery of
Underperformance,” Financial
Analyst Journal, July/August 2012
2
This series examines how certain behaviors restrain long-term performance, while also offering
suggestions on where structures and processes can be improved. Recognizing how board
structures and investor behaviors impact performance is key to implementing an effective
investment strategy.
ESTABLISHING EFFECTIVE BOARD AND COMMITTEE PROCESSES
The first part of this series reviews critical steps that institutional investors should take:
1. Define the roles and responsibilities of fiduciaries
2. Assemble the investment committee
3. Design and implement an effective investment process
Effective governance requires that boards focus their attention on their fiduciary responsibilities,
including how the investment process is organized, implemented, and managed. Board members
often do not have adequate processes to assist them with their fiduciary responsibilities.
A successful approach begins with clearly defining each of the fiduciaries’ roles and
responsibilities, thoughtfully structuring the investment committee, and employing processes
to effectively implement the investment strategy.
This structure — and the reasoning behind it — should be communicated during board member
orientation to ensure a thorough understanding of how these organizational practices impact
the institution.
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
3
1. Define the roles and responsibilities of fiduciaries
In order to effectively execute a strategy, roles and responsibilities need to be clearly defined.
Poorly defined responsibilities and a lack of accountability can lead to inaction and confusion.
This is especially true for organizations like nonprofits, or even public pension funds, where the
board members are volunteers. These issues can also be found with retirement plan committees
where members have other full-time responsibilities and can only meet periodically to
review the plan.
Therefore, adopting a charter that defines the roles and responsibilities of the board, investment
committee, staff/chief investment officer (internal or external), consultants, and investment
managers is critical to ensuring accountability.
Responsibilities in the Investment Decision-Making Process
Board: Sets the strategic vision and
Consultants: Serve as an extension of
oversees the long-term execution of
the strategy
the staff and support both the staff/CIO
and the investment committee
Investment Committee: Formulates
Investment Managers: Manage
the investment strategy and evaluates
its implementation
specific portfolio assets on a daily basis
Staff/CIO: Provide daily execution
of the portfolio and oversee the
consultants, investment managers,
and other service providers
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BOARD
STAFF/CHIEF INVESTMENT OFFICER
The board has the ultimate fiduciary
Staff typically has daily responsibility for
responsibility for the investment portfolio.
administering the portfolio. For larger
Therefore, the board must ensure that
institutions, often a chief investment officer
appropriate policies are in place and that these
(CIO) serves in this capacity. Institutions
policies are being effectively implemented. At
unable to afford hiring an internal CIO should
board meetings, the focus should be on this
consider an outsourced CIO. Regardless of the
oversight role and not simply reviewing short-
structure, the CIO (internal or external) should
term performance. Second-guessing portfolio
be responsible for executing all investment
decisions or offering investment opinions is not
decisions and also serve as the primary contact
the role of the board. Rather, board members
for the portfolio’s investment managers,
should ensure the policies adopted are being
consultants, and custodians. Because of the
followed and the long-term investment
different governance structures, clear delineation
plan is being implemented.
of roles and who has discretion for which
decisions is imperative for effective execution.
INVESTMENT COMMITTEE
The investment committee is responsible for
CONSULTANTS
taking the board’s strategic vision for the
Investment consultants often are hired to
organization and developing an investment
assist the staff and investment committee in
strategy to achieve that mission. Before
overseeing the investment portfolio.
devising the investment strategy, however,
the investment committee needs to understand
Their responsibilities may include:
how it wants to accomplish its goals and
• Providing recommendations and reports
therefore must embrace a shared investment
(e.g., asset allocation studies, investment
philosophy. Without this philosophical
manager research, and education) to
underpinning, the committee risks taking a
assist in structuring the portfolio
haphazard approach to investing. Once the
committee has articulated a strategy and
• Monitoring the activities of each investment
manager and investment fund
philosophy, its primary focus should be to
ensure that the strategy is followed and to
oversee the administration of the fund. The
• Assisting in drafting the Investment
Policy Statement
investment committee is also charged with
• Issuing quarterly performance reports
meeting periodically (e.g., quarterly) to review
• Attending investment committee meetings
the portfolio, review the investment team, and
and being available to offer necessary
reaffirm the investment strategy and approach.
support and advice
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
5
These responsibilities will be significantly
The Rise of the Outsourced CIO
influenced by the depth of staff resources
and committee expertise. Institutions with
limited investment staff and modest committee
The outsourcing of the role of chief
investment officer has become more
popular in recent years.
member expertise understandably will
rely more on consultants than institutions
with large dedicated staffs and substantial
ADVANTAGES TO CONSIDER
committee member expertise. In order to
•
Clear accountability for performance
roles need to be clearly defined and
•
Increased oversight of assets
expectations plainly communicated.
•
Disciplined decision making
•
Efficient implementation
•
Better allocation of board and
committee time
effectively utilize the skills of a consultant,
Outsourced CIOs typically provide the
same services as a consultant, with the
additional responsibilities of supervising
investment managers (with the discretion
to hire and fire) and determining the
The outsourced CIO model is designed to
appropriate asset allocations within the
help institutional investors overcome many
investment policy parameters.
common barriers to success.
INVESTMENT MANAGERS
Investment managers are hired to manage specific mandates (e.g., large cap stocks, small
cap stocks, international stocks, bonds, or real estate). In this role, they are responsible for
the day-to-day management of their assigned portfolios. Although fairly straightforward,
the investment managers’ roles and duties still must be well understood.
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2. Assemble the investment committee
The investment committee provides the critical service of ensuring that
the investment fund meets the organization’s objectives, which are often
diverse and dynamic, and that the fund is administered properly. An
investment committee that is not focused, not sufficiently deliberative, or
does not clearly understand its objectives faces a considerable struggle to
execute its fiduciary duties.
Therefore, when assembling an investment committee, the board should
purposefully decide on the number of committee members, their terms,
and the desired skillsets and diversity. For nonprofit organizations,
membership should not be conferred simply to the largest donors or most
successful community members, but rather, to those who offer expertise
and are available to meet regularly. Moreover, boards should seek members
who are humble, open-minded, patient, consensus-oriented, and capable of
asking probing questions.
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
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SIZE
Large committees can be unwieldy, as well as
susceptible to groupthink and social loafing.
Attempting to organize a dozen or more people and
allowing each member to meaningfully
contribute is difficult. Large groups are more prone
to seeking harmony and minimizing conflict than
smaller groups. Often this will lead to decisions
without critical analysis from each member and the
Large groups are
difficult to manage,
more susceptible
to groupthink,
and more likely
to avoid conflict.
suppression of dissenting viewpoints. Furthermore,
large groups of people tend to exert less effort than
smaller groups. Generally, five to seven members
are sufficient to provide the necessary breadth of
opinions without being overly burdensome.
TERMS
Terms should be clearly defined to safeguard
against complacency and to ensure new members
have the opportunity to offer fresh ideas and
opinions. Unlike other board committees, however,
investing requires a long-term view, and that
perspective should be well understood. Therefore,
Terms of at least five
years balance the
need for continuity
and fresh ideas.
continuity of members and institutional knowledge
must be preserved.
Frequent committee turnover can lead to changing
investment beliefs, which can be detrimental to a
successful long-term investment strategy. Therefore,
members should serve terms of at least five years,
and re-appointments should be possible for
contributing members. This term structure allows
for one or two new members every few years while
maintaining long-term continuity.
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SKILLSET/DIVERSITY
Sometimes board and committee members
In selecting new members, diversity should
will have conflicts of interest, such as working
be considered. Multiple opinions and
for a firm that would like to be considered to
perspectives can be beneficial. If everyone
manage a portion of the portfolio. This should
had the same knowledge, same skillsets, same
be unacceptable, and a strong conflict of
life experiences, and the exact same beliefs,
interest policy should be adopted to prevent
there would be no need for a committee,
members from personally benefiting through
because one person could serve the role.
their role on the board or committee.
Therefore, carefully selecting members based
on their skillsets and life experiences can reap
These principles apply to all organizations,
enormous benefits. Having an investment
not just those that are forming investment
committee composed entirely of finance and
committees for the first time. For
investment professionals, despite the
organizations with functioning investment
apparent advantages, may not be the best
committees, the board should periodically
approach, as these individuals may not
evaluate the structure of the committee,
adequately consider outsiders’ perspectives.
including the number of members, the
Including business and community leaders
length of their terms, and the need for
with expertise in fields other than finance
diversity. If change is needed, the board can
can provide differing views and encourage
adopt new guidelines and enhance existing
the committee to thoughtfully reconsider
documentation to more thoughtfully structure
established beliefs.
the investment committee.
Although diverse perspectives can be
beneficial, the committee members should
share common values. For instance, in order
to benefit from each committee member’s
different skills and backgrounds, the members
Diversity of
perspective and
experience is
must be willing to embrace a degree of
important. Shared
conflict and share their views openly.
values are critical.
Furthermore, the committee members should
focus on the needs of the organization as
opposed to their own personal goals.
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
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3. Design and implement an effective investment process
Institutions with appropriate policies and
These questions encompass high-level, strategic
well-constructed boards still require effective
concerns, such as determining where the
investment processes to be successful. Boards
investment committee, managers, consultants,
can rely on proven practices in designing and
and staff believe they can add value. Areas to
implementing their approach.
discuss include:
• Strategic asset allocation – setting the
ARTICULATE THE INVESTMENT
long-term strategic target allocation
PHILOSOPHY AND STRATEGY FIRST
• Tactical asset allocation – purposefully
At the outset, the investment committee
deviating from the target allocation
must devote sufficient time to formulating an
investment philosophy to guide their strategy
discussions. These beliefs should be recorded
as an explicit investment creed or mission in
order to ensure continuity and adherence to a
long-term disciplined approach.
• Opportunistic investing – including
investments not in the target allocation
• Manager selection – hiring and firing
investment managers
• Active management – deviating from the
benchmark (index) portfolio
In defining the strategy, the committee should
Further, the implementation of these decisions
work through a number of critical questions,
must be clarified and communicated so all
the answers to which will enable clearer
stakeholders are keenly aware of their roles
communication of these beliefs. See sidebar:
and responsibilities.
An Investment Strategy Checklist.
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An Investment
Strategy Checklist
How do investment objectives align with
and contribute to the institution’s mission
or goals?
How is success defined?
Where can the fiduciaries (investment
committee, outside managers, consultants,
and staff) add value?
How does the organization
define risk?
Where is the group willing to take risks, and
who will manage and monitor those risks?
Is the committee comfortable with underperforming its benchmarks? If so, by how
much and for how long?
Is the committee willing to appear wrong
in the short term in order to be right over
the long term? If so, for how long will the
organization tolerate being wrong in terms
of underperformance?
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
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A key consideration in determining investment
Asset allocation: What asset classes should be
strategy is understanding various risks and the
in the portfolio? What are the target weights
ramifications to the institution when the port-
and ranges?
folio does not perform as expected. Examples
Further considerations include:
of risk include:
• What are the rebalancing guidelines (as
• Permanent impairment of capital
• Underperforming long-term
investment objectives
• Volatility
• Probability of loss
• Underperforming benchmarks
• Underperforming peers
The investment committee should prioritize
which risks are of concern and also seek to
understand how they will respond when faced
with these risks.
demonstrated by asset allocation ranges)?
• Should there be strategic factor tilts, such
as market capitalization, style (e.g., value),
or geography (e.g., U.S. vs. international;
developed vs. emerging markets)?
• Do illiquid assets provide a premium, and
how much liquidity is needed?
• Which assets should be actively managed
vs. passively managed?
• Should tactical asset allocation be
employed?
Manager evaluation: How will investment
DEVELOP AN INVESTMENT
managers be selected and evaluated? This
POLICY STATEMENT
is important to understand beforehand
Once the committee has determined the
as managers invariably will underperform
appropriate philosophy and strategy, it needs
at some point. Acknowledging this and
to document how that approach should be
determining how the committee will react
executed. These issues should be formally
to this inevitable occurrence is imperative to
articulated in an Investment Policy
long-term success.
Statement (IPS).
Guidelines and restrictions: What constraints
will be in place to control risk and ensure
Topics and questions to consider include:
Investment objectives: What is the long-term
the portfolio does not assume unintended
exposures?
goal of the portfolio, and how much short-
Performance and risk measurement: Which
term volatility can be tolerated?
metrics will be used to determine success?
Spending policy (endowments and
foundations): What spending is sustainable
based on the target asset allocation?
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BEST PRACTICES FOR
INVESTMENT COMMITTEE MEETINGS
Once the IPS is adopted, the investment
The best committee members understand
committee is responsible for ensuring
their roles as fiduciaries and recognize that
compliance with the agreed-upon provisions.
they are not responsible for managing the
Much of this work will occur in the investment
portfolio. Rather, they focus on the following:
committee meetings. Although monitoring
• Understanding the investment process
portfolio performance will be a part of
employed and determining whether it
this process, the committee should avoid
adheres to the institution’s strategic vision.
spending an inordinate amount of time
scrutinizing each investment manager and
their performance.
• Evaluating staff and other fiduciaries to
ensure they are properly implementing the
long-term investment strategy. This requires
Further, valuable committee meeting
time should not be devoted to discussing
members’ opinions on the economy or
participating in operational decisions, such
as manager selection, tactical asset
allocation, opportunistic investing, and
continuous communication and clarity of
the long-term objectives and short-term risk
tolerance outlined in the IPS.
• Periodically reviewing the investment
philosophy and strategy to ensure the
approach can achieve the institution’s mission.
rebalancing. Yet, these are often the agenda
items covered at investment committee
Well-run meetings begin with planning and
meetings, because people typically enjoy
preparation. An effective committee chair
discussing interesting topics and being part
will meet with staff to discuss the agenda,
of the operational decisions. In reality, though,
understand how much time should be devoted
the quarterly investment committee meeting
to each agenda item, and know what items
is ill-designed for operational decisions.
need approval and which are informational.
Attempting to make critical decisions such as
Materials should be sent well in advance to
these while meeting for a couple of hours four
give committee members enough time to
times a year is imprudent.
review and prepare for the meeting.
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
13
A Checklist for
Institutional Investing Success
Formal orientation programs for board
and committee members so they can
understand their precise roles and
responsibilities, as well as the organization’s
history and mission
An investment committee comprised of five
to seven members, who serve terms of at
least five years
A charter that clearly delineates the roles
and responsibilities for each group in the
fiduciary team
A conflict of interest statement for board
and investment committee members
A formal Investment Policy
Statement (IPS)
Effective meetings that focus on long-term
objectives, with investment committee
members serving as fiduciaries rather
than managers
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Discussions and decisions should be documented, and follow-up items should be identified and
assigned to the appropriate parties with target due dates. Meeting minutes, including follow-up
items, should be sent within a week after the meeting while the information is still fresh and not a
week before the next meeting. Devoting time and effort to these simple organizational processes
should lead to well-run meetings and more effective decision-making.
FOLLOWING A PROVEN PATH TO SUCCESS
The recommendations described above are
Organizations seeking to adopt these
common sense and few would disagree with
practices should focus on instituting or
adopting this course of action. Nonetheless, a
improving these areas in a deliberate manner.
surprising number of boards and committees
Board members should not assume that just
do not follow these modest organizational
because a structure is in place that it cannot
practices, frequently leading to ineffective
be improved. Providing additional and even
meetings and frustrated committee members.
simple structural supports can help a fiduciary
Understanding fiduciary roles and responsibilities
team run more efficiently and ultimately
should lead to better accountability. A more
improve investment returns.
thoughtful approach to committee composition
should result in members who work well together
and complement each other’s skillsets. Finally,
adhering to sound investment strategy processes
and understanding the intent of investment
committee meetings should lead to effectivelyrun meetings and well-reasoned decisions.
BUILDING A BETTER INVESTMENT COMMITTEE - PART 1
15
As Managing Principal of Truepoint Institutional Advisors, Chris guides
investment strategy and provides ongoing portfolio implementation and
oversight for institutional clients.
He has more than 25 years of investment experience, previously serving as
Managing Principal and Chief Investment Officer at Fund Evaluation Group.
A member of the CFA Society of Cincinnati, Chris holds the Chartered Financial
Analyst designation. He received his MBA in Finance from The Ohio State
Christopher M. Meyer, CFA
University and earned a B.S. degree in Statistics and Economics from the
University of Akron. Prior to graduate school, Chris worked in the trust
department of Fifth Third Bank.
Chris currently serves as the Investment Committee Chair for the Cincinnati
Retirement System (previously served as Board Chair), Chairman of the Board of
Directors for the Lambda Chi Alpha Educational Foundation (previously served as
investment committee chairman), and as a member of the Finance Council at
St. Antoninus Church.
He previously served as President of the Board of Trustees for the Cincinnati Reds
Hall of Fame and Museum, on the Finance Advisory Board for the University of
Cincinnati MSBA program, the board of the Madcap Productions Puppet Theatre,
and as Chair of the Parish Council for St. Antoninus Church.
Contact Us
Hal Maskery, CIMA®
About Truepoint Institutional Advisors
Truepoint Institutional Advisors is a division of Truepoint Wealth Counsel,
Director of Business Development
offering investment advisory services for endowments, foundations,
513.878.8045
nonprofits, trusts, retirement plans, and other institutional investors.
[email protected]
Our mission is to help small and mid-sized organizations manage their
Christopher M. Meyer, CFA
investments more effectively and efficiently. We believe in accountability,
Managing Principal
transparency, and an intellectually honest approach to investing.
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