Achieving Investment Excellence: A Practical Guide for Pension Funds, Endowments, and Foundation Trustees. 2019. Kees Koedijk, Alfred Slager, and Jaap van Dam. John Wiley & Sons.
Most investment books focus on portfolio management and asset allocation. Although little effort is made to understand the governance of pension funds and endowments, pension oversight – the relationship between trustees and portfolio managers as agents of the board – is critical to performance success. A trained financial professional hamstrung with poor trustees and will probably fail. A high quality portfolio manager whose a high quality board fully engaged with his trusted responsibilities will probably create long term performance. Trustees need to understand and appreciate their duty to all stakeholders and finance professionals working for pension plans and endowments to understand how to manage their trustee relationship.
Achieve investment excellence A comprehensive guide to the roles and responsibilities of trustees and board members that focuses on the practical aspects of pension management. The authors, experienced European academics and investment practitioners, go through all the requirements to become a successful trustee and to create the necessary boards that fully address the needs of the stakeholders. Trustees are not portfolio managers, but their supervision and guidance provide the necessary direction for effective management.
Kees Koedijk, Alfred Slager, and Jaap van Dam provide a roadmap that will make any trustee and board more effective. The book is divided into five main sections: the role and mission of pensions, designing processes, implementing investments, organizing boards and learning how to adapt to a changing world. Each chapter begins with a short list of key takeaways, shows clear graphics to illustrate key ideas, and ends with a case study of how major organizations deal with critical issues and ideas. This book is the text of a master class on trustee management and pension management.
While the role and mission of a pension plan may seem simple, the authors describe a number of key issues that should be addressed by the board. These issues include defining the responsibilities and core missions of all parties involved in the process. If the pension mission is not well understood, investment choices may conflict with institutional goals. The mission involves more than just setting obligations or minimum returns.
For the design process of an endowment, trustees need to understand not only the classic investment requirements such as returns and risks, but also key choices – between conventional and alternative assets, active versus passive management, style and factor beta – and socially responsible investments. The authors have touched on all these important concepts, although more detailed explanations would have been helpful in drawing. The problem is always waiting for trustees who do not realize that low volatility is not equal to low risk or that there is a clear value for risk.
The authors highlight the key issues of investment confidence as the basis for setting guidelines. If trustees have no philosophy or a set of core beliefs about how markets work, they will easily be influenced by the fad and fashion of investing. The authors emphasize the importance of trust as a guiding principle, such as creating central investment questions, for example, whether a pension plan should focus on active management or cost control and indicators.
The investment chapter reviews the available models for pension plans and endowments. Boards can choose from traditional thematic asset allocation, endowment models, or a factor allocation model, as well as an opportunity cost, operational benchmark, or risk equality model. Everyone has different advantages and disadvantages, including different responsibilities and costs. For trustees working with management, these critical choices must be consistent with the core beliefs. As the authors have indicated, the endowment model may work for Yale University, but that does not mean that it will work for all endowments; In some cases, this may be the wrong choice.
The book discusses a number of trustee oversight issues as a result of the implementation of investment strategies. The authors review managing costs, manager selection, monitoring and evaluation, and the role of the board. This section discusses why implementing a strategy is not easy and requires extensive, clear communication between the board and management.
The fourth section reviews the organization and composition of the board, the appointment of new boards, and the elements necessary for the formation of an effective board. Boards should not try to be portfolio managers, but they can play an active role in increasing performance through their supervision. The final section discusses how trustees need to be active students who take advice and take practical steps to achieve investment excellence.
Considering their deep experience and background, writers can give strong opinions on what works and what fails. Instead, they focus on the best practice in general with options. They could spend more time managing liabilities, underfunding, setting the right discount rate, balancing liquid and liquid investments, and minimizing cash flow. All of these items were explored, but made for a much longer book. The authors focus on critical questions of governance through a dynamic, learning board, and if trustees follow the book’s prescription, they should have the appropriate structure to address these other issues.
Serving on several investment boards for small endowments and working with different pension plans of different sizes and practices, I have noticed a wide variety of skills, supervision and knowledge levels. How portfolios change, serve stakeholders, and trustee skills in dealing with crises can have a huge impact. All parties will benefit if all trustees or board members study this book as part of their responsibilities. Managers should have it on their shelves to understand the role of trustees and boards and to help the organization operate effectively.
To learn more about this, don’t miss out Investment Trustee: Understanding the responsibilities of the Investment Committee Jeffrey V. from the CFA Institute Research Foundation. Bailey, CFA and Thomas M. Richards, CFA.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.