Risk Management and Operations: 5 Takeaways from Commonfund Forum 2019

May 17, 2019 |
2 minute read
|

The majority of investors’ attention is often focused on the performance of the funds or managers in their portfolio.  And rightfully so.  The numbers that appear on statements month after month will determine to a large extent whether an institution can continue to pursue its mission over an extended period of time. 

Small levels of underperformance, when compounded, become material in just a few years. Great time and effort should be committed to finding managers and partners who have proven the ability to consistently generate strong returns. But those monthly performance statements are not the only arbiters of success or failure in the investing sphere.  The areas of risk, legal and compliance, operations and information technology, to name a few, can all drive meaningful, tangible effects on investment outcomes.

Here are a few ideas to think about that were raised by the expert panel at Commonfund Forum 2019, “Risk Management and Operations: The Back Office Comes to the Front.”

1

Conflict. If there is one thing to focus on while looking at investment managers, it is conflict.  Are there any areas where the interests of the manager and the investor are not aligned?  Are there affiliated entities siphoning off fees?  Are there multiple fund vehicles running in parallel?  Which one do the fund’s principals invest in?  What is the allocation policy between them? Get comfortable with any potential conflict as a first step in assessing a manager.

2

Fees. Look at audited financial statements, not sales presentations, to determine the true level of fees that an investment manager is charging you.  Many investment firms will trumpet their low management fee while passing virtually every expense they have through their investment vehicles.  A large difference between gross and net performance can be a red flag.

3

Back Office.  Established managers aren’t necessarily good managers when it comes to the back office.  We have seen plenty of successful investment managers rest on their laurels after achieving early success.  The push to spend valuable resources on supporting a best-in-class back office can take a back seat when fundraising is robust.  If investors don’t demand safeguards, independence and oversight, they won’t appear.  Once a fund or vehicle becomes capacity constrained, the investor has lost much of the leverage to force improvement.

4

Cybersecurity. One of the biggest risks that investment managers face these days is cybersecurity.   Firms that handle large sums of money are always going to be a target and the threat landscape is always evolving.  Each manager’s commitment to cybersecurity (through quality of staff, allocation of resources, etc.) is different.  Assessing that level of commitment is essential to protecting your investment.  If you aren’t equipped to do so, find an expert to help you.

5

Ongoing diligence. Lastly, do not let the day you sign the docs be the last contact you have with a manager.  This business is about relationships and the relationship between manager and investor is one that requires attention.  Be aware of what is going on with the manager in areas other than just performance.  Have there been personnel changes?  Regulatory inquiries? Service-provider changes?  The more informed you are as an investor the better equipped you will be to handle a new piece of information that comes your way or compare the new, shiny manager with the one you’ve been in regular contact with.

 

Visit our Commonfund Research Center to learn more about risk management. 

Amy Harlacker

Author

Amy Harlacker

Managing Director, Head of Operations

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.