ARTICLE: JULIUS PURSAILL
THE ROLE OF BELIEFS IN GOOD INVESTMENT G
by Julius Pursaill | Independent Pension and Inves
There are a number of important components of effective governance that have been extensively discussed, documented and agreed upon; independence, effective conflict identification and management, the importance of strategy setting and constructive challenge. In this article I identify and argue for a core component of effective investment governance that, in my experience, has been less widely discussed or agreed upon: The explicit articulation of investment beliefs and assumptions and the regular testing of these against empirical evidence. Investment beliefs are called beliefs (and are important) precisely because, notwithstanding very extensive research and analysis, there is no single universally agreed account of how markets and asset classes behave. Indeed, some would argue that any such attempt to codify market behaviour is doomed to failure. Nonetheless, it’s impossible to design a DC default strategy or agree changes to the
Strategic Asset Allocation (SAA) of a with profits fund without relying on a series of interconnected assumptions about asset class returns, their stability over time, correlation, diversification and risk.
unless we are clear that the assumptions underpinning it still remain valid.
All too often these assumptions are implicit or at least partially implicit, rather than explicit. This matters, because those of us charged with investment governance can’t be confident our approach remains fit for purpose in a changing world,
What assumptions have been made about the stability or otherwise of asset class returns and volatility?
Where have any existing assumptions about future asset class returns and correlations come from?
What empirical evidence exists to test those assumptions? There is, for example, a great deal of empirical evidence available about long term asset class returns and correlations. There is less empirical evidence available about how we might progress from current extreme interest rates toward more normal levels, or even what a new
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The Transparency Times | www.transparencytaskforce.org | January 2017 | Edition #9