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Practice Management

Investment Committees and Delegation: Factors to Consider

Investment committees and outsourced chief investment officers (OCIOs) have unique roles in pursuing and implementing strategies for the investment of plan assets. A recent blog entry discusses the basics of how their roles are delineated, the importance of how they themselves delegate duties and their importance in effectively following an investment strategy.
 
In “Governance Checklist for Today's Fiduciaries: Delegation to Investment Staff or OCIO Partner,” Russell Investments argues that defined benefit plans, defined contribution plans, foundations and endowments have increased their delegation of asset management duties, but that little has been written about what should be changed in governance after functions have been delegated.
 
The blog explains that an investment committee is vital to: (1) ensuring that the objectives of the investment strategy, constraints and risk tolerance are well defined; (2) a sound process had been followed in arriving at the investment strategy; and (3) the results are monitored against clearly defined measures of success. Still, it posits that the committee “is rarely in the best position to evaluate specific investment opportunities” and that investment staff or an OCIO should perform such a function.
 
The blog suggests that an investment committee should remain responsible for documenting objectives, constraints and risk tolerance, defining how success will be measured and monitoring results. What does change, says the blog, concerns design and implementation of the investment strategy. They suggest that those with expertise be responsible; for instance, investment staff or an OCIO, rather than the committee, could secure the services of a sub-advisor to perform such functions. In such an instance, they suggest, the committee’s focus changes from directly exercising diligence to making such that it is exercised and that standards have been met concerning investment policy, investment thesis, risk, trust and process.
 
The blog argues that oversight by the investment committee is different depending on whether the investment committee delegates to investment staff or to an OCIO.
 
 
Factor/Measure Investment Staff OCIO
Investment Policy Affirm that proposed investments are consistent with the Investment Policy Statement.
Make sure the OCIO has a clear understanding of objectives, constraints, risk tolerance and time horizon.

Investment Thesis
Affirm that the underlying investment thesis is sound. Watch alignment of overall investment philosophy.
Risk Affirm that the risk associated with the investment is reasonably well understood and consistent with the stakeholders’ risk tolerance. Make sure that the OCIO has a comprehensive process for managing total portfolio risk.
Trust Affirm that the counterparties to the transaction are trustworthy. Consider whether you are confident in the team assigned.
Process Affirm that investment staff followed an appropriate process. Make sure that the OCIO follows a process appropriate to the portfolio’s complexity.

 
If an investment committee takes such an approach, suggests the blog, it can better delegate decisions and be more confident that it has done so the right parties.