Gale and Phillipson, like many financial advisers and investment managers, has an Investment Committee. We wanted to outline why we think our committee works well for us and also what makes a good investment committee in general.
What are you trying to achieve?
The most important question to ask yourself when you consider how to operate an Investment Committee is why.
Why do you wish to have an investment committee? The answer to this should shape every decision from here on. The rationale will be different for each firm and as such so will the final shape of the committee itself.
The key reasons we have the committee are:
- Oversight that the investment team is working in line with the investment strategy, and that the team is working to suitably high standards.
- This involves the approval of high-level process documents, review of client documentation. It also monitors key performance indicators from the team and management information from our services.
- Making tactical decisions on our asset allocation for clients in our discretionary services.
- This involved the review of market data, economic indicators and performance to inform a discussion on key asset classes. These discussions result in us choosing actions to take from an agreed list of tactical views we can take for our clients.
Each firm’s reason will be different and could vary from high-level strategy calls through to regular fund manager selections. The responsibilities you wish to be held should influence how you structure the committee in terms of both membership and decision-making process.
Governance – clear rules and responsibility
In this context, we refer to the size of the committee, the frequency of meeting and the level of responsibility the committee has. All of this should be formally documented so that prospective members can be sure what they are signing up to.
If the committee is making decisions which will directly impact client portfolios it is crucial that this is outlined in documentation and that clear oversight of the committee is evidenced. Who chairs each meeting, who decides on the agenda for discussion and how are outcomes recorded, communicated and implemented?
Decision making – understanding how to operate
A key part of the governance of the committee will be how decisions are made and the scope of them.
If you are willing to give the committee the ability to move clients’ money from one asset class to another you should be sure it is clear how they must decide this and also any limitations on decisions they can make.
For the Gale and Phillipson committee we have studied the impact of behavioural finance and are conscious of the fact that humans are susceptible to knee jerk reactions, among other biases. In order to combat this we have analysed the relationships of different asset classes and drawn up a wide ranging list of actions we can take which we believe are academically sound.
We also feel strongly that short term market timing is not an area where we (or anyone) can consistently succeed. As such our tactical views are to be based on high conviction views with a six-month time horizon or longer. This also means we will make material changes to portfolios when we take a view rather than tinker around the edges. For example, if we believe a specific equity market is noticeably over priced and we expect a correction relative to other markets we will move between 50 and 100% of our holding there elsewhere. If we do not have conviction in our view we will not try to dabble around the edges with tiny shifts in allocation. This view on investment strategy has led to the way our committee makes decisions.
We also have a specified system for voting at each meeting to try and limit the extent to which people can vote with the crowd and which aims to give us with an outcome as close to consensus as possible. In addition to our regular meetings we have constructed a framework to allow us to react to major news stories or market events without waiting for a formal face to face meeting.
All of our possible tactical views and the means of voting on them is documented and clear for all in the firm to see.
The final piece of the puzzle, and a crucial one is who to have sitting on the committee.
For us it was very important to create a group with a range of viewpoints, roles and ideally areas of expertise. If you gather together purely a group of advisers from the same firm, who work with the same kind of clients there is a real risk of ‘group think’ and important developments being missed. Equally, if all of the committee is formed from employees and the chair is their line manager there is a risk that they may not speak up at times when you want them to.
As such we have formed a committee made up of members of management, the investment team, advisers and some external consultant members. All of whom are experienced investors, well qualified investment professionals or in many cases both.
We are fortunate to have outstanding external committee members who are experts in their own areas and offer a genuinely different field of experience to our internal members.
The committee gives us a forum for people with a range of views, experience and focuses to discuss complex matters and vote to give us a view on the overall consensus. We believe that this range of skill sets and outlooks, combined with well thought out decision making processes gives us the best opportunity to make good decisions for our clients’ investments.
What makes a good investment committee is entirely dependent on what the committee is designed to achieve. A committee aiming to undertake manager research and fund selection is likely to need a different range of skills than one making decisions on global asset allocations.
Whatever the function, however, the importance of governance and documenting the process is of utmost importance.
Ensuring the membership of the committee is diverse and sufficiently knowledgeable to make the decisions required is the final challenge.
If you would like to know more about what our Investment Analysts do on a day-to-day basis then read our blog, written by Dominic Williams
Reference – BL006 – Aug – 18