There are fundamental principles of effective endowment management that we have organized into what we call “the 6 Ps of Investment Stewardship”– Purpose, Policy, Process, Portfolio, People and Perspective. As the third blog in our Investment Stewardship series we will address “Process”, with a focus on investment committee roles and responsibilities. (Read about Purpose and Policy.)
Fiduciary effectiveness is a matter of structure, processes and people, i.e., the governance structure of the organization, the processes within that structure and the people who inhabit that structure (the decision-makers). The key elements of structure are professionalism, the composition of the board, how engaged the board is and how transparent the organization is to its constituencies and beneficiaries—whomever has a stake in what the board is doing.
The board of trustees is the governing body at nonprofit institutions. A subset of that board of trustees is tasked with being part of an investment committee. An investment committee that is properly aligned with the board is also focused on governing. Ultimate fiduciary responsibility remains with the full board, with the investment committee being responsible to the board.
When created as a standing committee, the primary purpose and functions of the investment committee are:
- To provide the institution with an experienced and manageable group of people who take responsibility for developing and maintaining (with full board approval) the guiding document of endowment management—the investment policy statement.
- To be the source of specialized skill, knowledge and experience required to oversee an investment portfolio as a fiduciary under the board-approved policy.
- To handle risk in a world in which financial markets change rapidly.
- To bring to bear the necessary experience with and knowledge of the highly complex financial instruments and investment strategies that have emerged over the past several years and demonstrate a willingness to understand these complex instruments.
Defining and implementing processes provides a structure for boards to be effective and guide their institution to support their missions. To have effective processes, trustees should keep the following in mind:
Know the Difference
Governance vs Management
There is a difference between governance and management - and boards should distinguish between the two. It’s useful to keep in mind that the word governance comes from a Greek term meaning “to steer.” Discussions about choosing one supplier over another, for instance, are best left to staff members as opposed to occupying the time and energy of the board.
Strategic Issues vs Tactical Issues
Trustees should focus on strategic items vs tactical items. For example, in the case of investment manager selection, the investment committee’s role is one of oversight. Internal staff, external consultants or an outsourced chief investment officer (“OCIO,” explained further under Principle V of the complete Guide) can perform the detailed and time-consuming work of investment manager evaluation and make recommendations to the committee for final selection.
Know your manager
The common ground for manager and client is a world view that is consistently reflected throughout the portfolio. A client institution can’t be confident in a new manager hire unless it is first satisfied that there is a strongly-held investment thesis; that is, the manager is not simply acting in way that will bring in assets or is taking a particular action because it will promote client retention. Rather, the firm has a well-grounded view of its own discipline and is able to articulate how this view is put into action. This relationship should also be monitored through time. Any review should start with the mandate and investment objectives and then extend to the rationale for investment decisions relative to the manager’s assignment.
Know your portfolio
Both individual managers and the portfolio itself must be monitored through time. Obviously, there are many metrics available for measuring performance, starting with absolute and relative returns for the immediate past period, the calendar or fiscal year to date, and for trailing one-, three- five- and 10-year periods (as well as since inception of the relationship). Typically, relative returns are compared with external benchmarks relevant to the manager’s mandate or, in some instances, to a custom benchmark constructed in the case of managers with a multi-asset or multi-strategy assignment. Beneath the topline returns are many other metrics that provide color and context such as portfolio characteristics and risk measures. Indeed, performance is not just a number, but, rather, the outcome of the balance between risk accepted and return gained.
Learn more details about Process and the 6 Ps of Investment Stewardship by downloading your full Copy of “Principles of Investment Stewardship for Nonprofit Organizations.”