setting investment policy and guidelines

8/8/2019 Setting Investment Policy and Guidelines

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This presentation was originallygiven by:

Kelley Fairbank

Sr. Portfolio StrategistRussell Investment Group

At the 2003 Investment Management for Institutional

Investors Conference

For questions about this material contact Kelley at:

[email protected]


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Setting Investment Policy and GuidelinesSetting Investment Policy and Guidelines

Kelley FairbankSr. Portfolio Strategist Russell Investment GroupKelley FairbankSr. Portfolio Strategist Russell Investment Group

Investment Management for Institutional Investors ConferenceNovember 2003

Investment Management for Institutional Investors Conference

November 2003


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3

Are actions consistent with policies?

Plan

Implement

Review

Investment

Policy


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4

Investment fund is asignificant operation

BusinessOperations

Organization

InvestmentOperations

Assets AssetsLiabilitiesLiabilities/

Obligations


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Basic elements of the investment policy

Who are we?

Key decision-makers

Roles and responsibilities

What do we believe?

Investment objectives Asset allocation framework

Asset class guidelines

What is acceptable?

Basic considerations regarding cash flow, spendingpolicy, liquidity and volatility of returns

Basic guidelines regarding acceptable investments andinvestment strategies


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Example of an investmentpolicy statement

Individual asset classes- equity

- fixed income

- real estate

- private equity

- currency- cash and other

Manager selection guidelines

Monitoring process

- reporting- auditing

Proxy voting

Scope of policyPurpose of assets

Investment philosophy

Investment objectives

Policy asset allocationand ranges

Performance benchmarks

and objectives

Diversification guidelines


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The fiduciary cycle in detail

PLAN

IMPLEMENT

REVIEW

Asset Class Strategy

Governance

Objective Setting

Asset Allocation

Portfolio Structure

Manager Selection/

Monitoring

Performance Measurement

& Evaluation

Execution

Biggest Potential

for Sponsor

Slippage


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Planning the cornerstonefor best results

PLANI Decision making authority, policy

and proceduresGovernance

I Clear and realistic investment

expectations

Objective Setting

I Asset allocation policyAsset Allocation


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Roles of the three types of fiduciaries

Governing

Managing

Operating

Communication and

reporting are critical

elements


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Roles and responsibilities

10

Governing

Board of Directors

Managing

Investment

(Sub) Committees

Operating

Investment Staff

Operating

Investment

Managers

Policy Strategy

Asset ClassStrategies &

Structure

Management

ManagerMeetings and

Implementation

Plan

Execution

SecuritySelection

Control

Review forCompliance

vs Objectives

Fiduciary

Level

Recommends Recommends Oversees

Review

InvestmentCommittee

Decisions

Review

Staff

Decisions

Review

Manager

Decisions

Compliance

vs.

Guidelines

Implement and Review

Oversees

Decides Decides

Oversees

Oversees Oversees

OverseesOversees

Implements

Decides

ConsultedConsulted

Fund ObjectivesAsset Allocation

Internal/External


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Objectives lay the groundwork

Focus on key priorities

Minimize ad-hoc revisions

Provides continuity

and discipline through

difficult periods Demonstrates clear

thinking and planning

Communicates to

all fiduciaries

Review annually


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Clarifying objectives isa valuable journey

Meaningful Focus on key relationships

Measurable Allows success to be measured

Achievable Ensures expectations areappropriate

Reflect the Too short - sights may be setright time too lowhorizon

Too long - strategy may not bemaintained

Asset allocation the chief expression of risk tolerance!


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Effective implementation critical

IMPLEMENT

I Specific investment

manager strategiesPortfolio Structure

I Best available candidatesfor fund

Manager Selection/Monitoring

I Efficient implementation

avoids slippageExecution


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Asset class selection specificto objectives

Equity Large CapSmall Cap

Private Equity

Developed Non-US Equity

Emerging Markets

Currency

Fixed Income US Fixed IncomeNon-US Fixed Income

High-Yield Fixed Income

Emerging-Market Debt

Real Estate Public

Private

Other Strategies Hedge Funds, Commodities,

Resource based, Market Neutral

Managed futures

Primary Asset Classes Sub-Asset Classes


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Understand and managebroad market bets

This is a hypothetical example meant for illustrative purposes only.

Manager B

Manager A

Manager CComposite

Value Growth

Small

Large

1.0

1.0Index

New Weights

Value Growth

Small

Large

1.0

1.0

Manager B

Manager A

Manager C

Index

Manager B

Manager A

Manager C

Index

Composite


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Checklist for asset class

strategy/structure

Affirm intended structure/strategy

Document objectives and tilts and biases, if any

Monitor and manage undesired structural bets

Establish review procedures


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Checklist for manager

selection/monitoring

Hire/Retain only high confidence firms

Document expectations

Monitor for compliance

Develop formal process forunderperforming strategies


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Checklist for execution/trading

Document fund and manager guidelines

Define rebalancing policy

Develop effective transition strategies(portfolio changes and rebalancing)

Establish compliance procedures for trading

Managing Slippage


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Review strategies relative to objectives

REVIEW Evaluating results vs.objectives and benchmarks

Performance Measurement

& Evaluation


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Reporting should target

fiduciarys needs

20

Top Line Summary

Compliance to standards and objectives

Reality check on oversight

Results versus objectives

Governing

Fiduciary

Managing

Fiduciary

Decision-Making Summary

Confirm or modify plan policies and guidelines Reality check on operations

Performance - asset class and strategies

Investment manager review and analysis

Operating

Fiduciary

Implementation Summary

Agent oversight

Due diligence of implementation procedures

Performance - manager based


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Integrating policy and

investment program

Clearly written statement

Asset allocation policy mix consistentwith objectives

Rebalancing ranges

Acceptable asset classes

Effective benchmarks

Accountability


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Investment policies are dynamic tools...

The named fiduciary owns the investment policyof the fund, written and implemented

therefore, part of the process is to change themas necessary

New spending obligations

Different risk tolerance or funding objectives

New Board Members/Fiduciaries

Evolving capital markets


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1936 Tacoma, Headquarters

1969 New York 1979 London 1984 Sydney 1984 Toronto 1986 Tokyo 1991 Auckland 1994 Paris 1999 Singapore

1999 Amsterdam

1936 Tacoma, Headquarters

1969 New York 1979 London 1984 Sydney 1984 Toronto 1986 Tokyo 1991 Auckland 1994 Paris 1999 Singapore

1999 Amsterdam

www.russell.comwww.russell.com

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