One of the continual challenges in running an investment committee is ensuring that it operates effectively and facilitates sound decision making. There are several ingredients that can assist in this process, but the most fundamental are the governance structures you have in place. At a minimum your investment committee should be governed by a charter outlining things such as the role of the committee, its membership, record-keeping, quorum requirements, and the voting structure for determining investment decisions.
But governance is just the foundation of an effective investment committee. One critical element is of course to ensure that you have the right people on your committee (we’ve discussed this in more detail). Another is to establish among your members an appropriate structure for your discussions so that they stay relevant and focused on the issues at hand. Many of us have sat on investment committees where the conversation moves off track or thought processes shoot off on tangents. This can be unavoidable at times given the breadth of the subject matter, and it’s important not to end a discussion prematurely because the person speaking is presenting a different view. Getting the most out of your investment committee means balancing the diversity of voices with the need to have a structured discussion and agenda that facilities disciplined and controlled decision making.
To help achieve this, we believe having a clear model as a starting point to facilitate discussion is important. For example, if you’re operating an investment committee focused on asset allocation, then it’s important to clearly identify the time horizon that the investment decision is based on, as well as the relevant metrics that contribute to asset allocation decisions, whether they include asset valuations, business cycle and economic inputs, or sentiment indicators. Ideally, there will be a reference model capturing the various inputs your committee considers to be relevant.
Having a starting reference point such as a model ensures that any discussion can be framed against what the committee is trying to achieve and the information it considers important in making decisions. This ensures that discussions are focused and not skewed by the latest headlines or anecdotes, and that members can reach a clear resolution before moving on to the next agenda item. As part of such a process, all committee members should understand how their model works, what it says (and doesn’t say), and what its key inputs and sensitivities are.
Lonsec continually reviews its own internal investment committee process to ensure that it operates efficiently, captures all relevant information, and reflects our core beliefs about managing money. We also work with clients to assist them in structuring their investment committee as well as being an external member on their investment committees, bringing not only our research knowledge and portfolio expertise, but understanding of the intricacies of investment committees.