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.

In light of the new KiwiSaver contribution rate changes, which came into effect on 1 April 2019, SuperRatings utilised their Net Benefit model to quantify the actual impact on a member’s KiwiSaver balance.

The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill introduced contribution rates of 6% and 10%, in addition to the 3%, 4% and 8% rates previously offered, providing members with greater flexibility and allowing more tailored financial plans. The 6% rate also bridges the gap for members currently contributing the minimum who don’t have the means of contributing 8%.

SuperRatings analysed the difference in outcomes using their Net Benefit methodology, which aims to show the dollar amount credited to a member’s account. SuperRatings’ Net Benefit methodology models investment returns achieved by each scheme over a seven-year period, as well as the fees charged. The analysis uses a scenario of a member that has a salary of $50,000 and a starting balance of $20,000 and a tax rate of 17.5%.

SuperRatings’ analysis shown in the chart below, indicates that a member contributing 3% into the median Conservative Fund would have generated a balance of $38,261 over the 7 years to 30 June 2018, whereas a member contributing 6% would have a balance of $49,272, a difference of over $11,000.

Source: SuperRatings

Evidently, additional contributions coupled with the benefit of compounding can have a significant impact on members’ account balances over the long term. In addition to supporting members to select an appropriate contribution rate, helping members to choose a suitable fund type continues to be an important determinant of member outcomes.

Thankfully my kids have moved on from their ‘Frozen’ phase and the tunes of ‘Let it go’ are well and truly buried away in the back of the DVD cabinet. As professional investors, one of the biggest challenges we face is when to ‘let it go’. When we make an investment into a stock or managed fund the investment rationale is clear, attractive valuations, positive earnings growth, solid investment team, appropriate investment style. However, what happens when our investments don’t follow the course we anticipated and perform poorly? An even more difficult decision is when to let go of a ‘winner’?

Behavioural factors play a big role in terms of how people react to events and the subsequent decisions they make. The belief that things will turnaround, the comfort of the pack (we all go down together), ‘falling in love’ with an investment. Such emotions impact all of us even the most experienced investor. The main line of defense to minimise the impact of behavioural factors in a decision making process is to always point back to your investment philosophy and the underlying process which underpins that philosophy. If your overall philosophy is one of generating returns with lower downside risk than the market do the underlying investment align to this philosophy? have they provided downside protection? if not, why? (are there cyclical reason for this or is there something structural impact the return profile). If an investment has provided this type of return profile what have been the factors contributing to this e.g. certain sector or country exposures, and do you expect these factors to work in the future? If we use a managed fund as an example it is important to look out for any changes to how the manager is managing money which may be reflected in a change in the risk and return profile of a fund. Is there a change in how the manager positions their investment approach to what they communicated a few years ago?

The main forum for our manager and stock decisions for our managed portfolio are our Manager and Security Selection Investment Committees.  The committees are made up of senior members of our Research and Investment Consulting teams, our CIO as well as our external experts. Decisions to ‘let an investment go’ are made via the committee process. Investment recommendations are supported by qualitative and quantitative analysis. If we use managed funds for example this would include meeting with the manager (outside of the formal annual review process) focusing in on the issues at hand and targeted quantitative analysis which may provide a clue as to where the problem rests, an example being where a manager has taken stock-specific risk which is uncharacteristic of the manager.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.