At various times over the last twenty years, I’ve had the opportunity to work alongside Investment Committee (IC) members and related professionals on their respective pools of long-term capital. Needless to say, there have been many differences among the fiduciaries: namely in terms of investment experience, adherence to a governance framework and process, personalities, and thoughtful decision-making. With that in mind, I’ll highlight below some principles of a well-functioning IC (besides simply reverting to a custom Investment Policy Statement) – whether a pension, family office, endowment, sovereign wealth fund, insurance company, or foundation.
Variations in Time Horizons: Some committee members possess a strong desire to dodge negative results during their tenure. It’s simply human nature to want to be associated with positive results, especially if the IC meetings / minutes are normally scrutinized in the public domain (i.e., local and state pension plans, higher-education endowments, etc.). One of the keys to avoiding this bias, is to recruit members that truly understand the perpetual time horizon of long-term assets, versus overlaying the inherent short-termism of their personal investment schemes.
Avoiding Groupthink: This can be one of the greatest threats to long-term performance, as most successful investing requires a contrarian approach. When looking back over time, a majority of fruitful investments have actually been the hardest to implement at the time, as they opposed current fads or prevailing wisdom. If an IC seeks cohesion instead of challenging or disagreeing with another member’s idea (not just for the sake of argument of course), average or sub-par performance will typically result. Moreover, by keeping the IC membership small (usually 5 to 6 members vs. a mega-committee), and delegating actual policy implementation to a Chief Investment Officer, the groupthink syndrome can be greatly minimized or avoided entirely.
Retain a Seasoned CIO: Many IC’s have been enormously successful as a result of the leadership provided at the helm by a competent and forward-thinking CIO. Names that come to mind include: Adele Gorrilla, Randy Kim, Mansco Perry III, Kristina Keever-Smith, and Michael Brakebill to list a few I’ve come across. Boards that maintain an effective CIO – generally through allowing a significant delegation of authority, a thought-provoking work environment, and performance driven compensation – can provide a significant competitive advantage to their respective institutions.
Navigating Risk: As we know, risk is inherent in any portfolio and demands the IC’s ongoing concern, especially beyond what is delineated in their respective IPS. Successfully analyzing risk goes beyond considering an investment in isolation but rather in context of the Fund’s overall investment strategy. Far too often, committee’s look to see what other peers are doing and then strive to do likewise under the false assumption this must be the way to go. As a fiduciary, an IC can definitely compare best practices with other IC’s, but should always do it’s own objective thinking, apply its own good sense of judgment, and stay within its own realistic capabilities, as no two funds are exactly alike.
Overall, a well-run IC can make a substantial difference with the assets of their respective organization, company, or family institutions. While each IC is different in terms of their level of sophistication, asset size, and overall resources, abiding by the focused points above (and others) can help to augment risk-adjusted performance over the intermediate and long-term; ultimately benefiting the organization, company, or family institution for some time to come.