Fo, cus on Asset Allocation – Asset Allocation should receive a level of attention that reflects the contributions it makes towards returns.
Explicit Mandates – Trustees should agree with external investment managers an explicit written mandate covering agreement on:
- The investment objective, benchmarks(s) and risk parameters.
- The Investment manager’s approach to achieve the objective.
- Clear timescale of measurement and evaluation.
Appropriate Benckmarks – Trustees should consider whether the benchmarks they have selected are suitable and whether active or passive management, or both, are appropriate. If active, targets and risk controls should be set that allow pursuit of genuinely active strategies.
Performance Measurement – Trustees should arrange for measurement of the performance of the portfolio. They should also arrange for a formal assessment (and a periodic review) of the performance and decision-making that they have delegated to Investment managers.
Transparency – A Statement of Investment Principles should be set out:
- Who is taking which decisions and why this structure has been selected.
- The portfolio’s investment objective.
- The portfolio’s planned asset allocation strategy, including projected investment returns on each asset class and how the strategy has been arrived at.
- The mandates given to all advisers and managers.
- The nature of the fee structures in place for all advisers and managers.
In Summary – How can VWM Investment Management assist Trustees meet their legal responsibilities?
Myners Conclusion |
VWM Investment Management Service |
1. Focus on Asset Allocation |
Tactical asset allocation decisions relating to global markets are taken monthly and monitored daily. Variables considered: macro-economic, geo-political, currency, sector and theme analysis. Disciplined “institutional” process enables quick reaction to short term threats and opportunities. |
2. Explicit Mandates |
Investment proposal written for the Trustees detailing overall investment objectives, risk profile and benchmarks. Stock selection outsourced to fund managers with regional expertise. Specific investment mandates agreed with each institutional manager responsible for the stock selection. These mandates detail performance targets, benchmarks and investment parameters which must be adhered to. Failure to comply with the mandate, or underperformance can result in the manager being replaced. |
3. Appropriate Benchmarks |
Overall performance of the portfolio is measured against a composite benchmark appropriate to the risk profile. |
4. Performance Measurement Review |
Six Monthly Reports show progress against agreed benchmarks – over previous six months. The portfolio can be viewed online – all holdings and valuations updated daily. Written six monthly reports include valuation, holdings, performance and Market Review and Preview. Qualified and experienced staff responsible for relationship management |
Getting the Right Asset Allocation
Asset Allocation essentially means ensuring that the mix of ‘assets’ you have within your portfolio is correct. As Trustees, you need to take into account how comfortable you are with taking risks with the investment capital (your ‘risk tolerance’), the objectives you have, the return you expect to see and your investment time horizon. By assets we mean cash property, fixed income or bonds (corporate bonds or Government bonds) and equities (shares). Research shows that increasing the number of asset classes within an investment portfolio can reduce the volatility (or risk) and increase long term returns.
Why is asset allocation so important? Despite what many people think about the importance of selecting the ‘right’ stocks and choosing the ‘right’ time to invest, research shows that the largest contributor (91%) to the variability of returns in a portfolio over time is the asset allocation. Myners emphasised the need for Trustees to focus on this aspect of the investment in particular.
Strategic Allocation (setting the strategy to achieve the Trustees’ objectives, taking into account all the information we know about you) comes first, as you might expect. The strategy is then discussed at the beginning of our relationship with the Trustees and reviewed on a regular basis, ensuring adherence to the Policy Statement which the Trustees will have drawn up. Tactical Asset Allocation comes next – the fine-tuning of the strategic allocation. This is the ongoing management of your portfolio to keep it up to date to reflect not only your aims but also the prevailing investment climate. This combines our expertise with that of the managers we use to choose stocks on your behalf. The VWM Investment Committee meets monthly to examine and analyse the impact of macroeconomic, geo-political, currency, sector and theme changes on our portfolios and make recommendations for asset allocation changes going forward.
Once we have the correct asset mix for the Trust’s/Charity’s investments, we can source the right managers for each of the asset classes and regions within it, to manage the portfolio.