Investment Governance Practical and cost-effective steps for pension schemes
Summit Global Investor Services July 2010
Investment governance ▲
Governance – Current Status
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Rationale
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Elements of governance
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Governance cycle
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Practicality
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Beyond governance
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Summary
Governance Current status ▲ Governance is an industry hot topic and pressure is building on investors to enhance oversight of their funds ▲ There are no industry standards, nor clear definitions of what governance is or how to implement it ▲ Comparison can be made between the concepts of governance and transparency where different investors benefit from varied levels of transparency depending on their internal policies, resources and relationships with providers ▲ There is no single magic bullet – an element of pro-activity is required on the part of investors
The good news ▲ There are pragmatic and cost-effective steps that every investor can take to achieve better governance
Why improve governance? Three key reasons: return, responsibility, regulation Return – the number one priority of any investor ▲ Better analysis = improved reporting = clearer information = enhanced understanding = superior decisions = greater return ▲ Transparent costs => potential reduction = greater return Responsibility ▲ Data capture = verification = monitoring = notification = compliance ▲ Visibility = transparency = tighter controls = risk minimisation
Regulation – like it or not, more regulation is coming ▲ Individuals will be required to heighten their risk awareness and demonstrate effective compliance controls ▲ Systems will need to record and allow access to the factors that influenced decisions – storage of historical information (similar in nature to the MiFID stipulations)
Elements of governance There are three key elements of governance: Process ▲ Managing processes and data ▲ Monitoring and checking ▲ Measuring and comparing Oversight ▲ Access ▲ Visibility ▲ Understanding Communication ▲ Expediting information delivery ▲ Enhancing reporting ▲ Dialogue
Investment governance Measuring & comparing
Process Managing data
Monitoring & checking
Understanding
Understanding Understanding
Dialogue
Oversight
Communication
Improve reporting
Expedite delivery
Access
Visibility
Process… Managing data ▲
Systemise the process of collecting, consolidating, verifying, reconciling and reporting transactional data
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Automation is key to casting a wider net without using more resources (let the computers do the work!)
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Leverage the information you already have – remember that this will rarely be a feasible option with hard copy reports
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Consolidate internal and external communication (with managers and custodians) through an information portal that can be accessed by the whole team – online and available 24/7
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Prepare for future regulation by storing all documents and recording the factors that influence decision making
Process… Monitoring and checking ▲
Who is providing impartial oversight?
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Verify your transactions – use independent pricing, FX, dividend and corporate action suppliers to reconcile transactions with fund managers and custodians (three-way reconciliation)
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Implement a compliance monitoring process that will notify the appropriate people when things go wrong – ensure this is structured around management by exception
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Follow a process of monitoring: ▲
Style > Tactical allocations > Strategic allocation > Industry allocation > Credit ratings > Disclosure > Stock restrictions and SRI/ESG
* A ‘due diligence dashboard’ will facilitate oversight and adhere to the principle of management by exception by notifying you only when an issue arises
Process… Measuring and comparing ▲
Factors that are accurately measured can be more effectively managed
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Set custom benchmarks and peer groups with lowest possible covariance
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Analysis, analysis, analysis – widen this beyond traditional return vs. index comparisons
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Follow a process that measures: ▲
Return -> Risk -> Risk v Return -> Attribution -> Transaction costs -> Net return -> Buy and hold -> Fund manager delta (return net of costs and natural market activity)
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Customised reporting will dramatically decrease the amount of information to be reviewed, e.g. one page report for each area
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Online systems can create customised dashboards that facilitate ‘at a glance’ reporting and saving management time
Oversight… Access ▲
Ensure that you receive ALL the necessary information
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Widen the information covered beyond traditional accounts and performance
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Work with your providers to have information delivered directly to all the relevant individuals (trustees, committees, compliance teams)
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Share information with external teams – investment consultants, fund managers and advisors
Oversight… Visibility ▲
Collect and store ALL transactional information and underlying details including: ▲ Prices ▲ Brokerage commissions ▲ FX rates ▲ Corresponding market data (i.e. high, low, open, close…) ▲ Market volumes
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Pension schemes need to know exactly what they are paying for. Demand full disclosure from external suppliers of all spreads, both direct and indirect, applied to your assets. Monitor these factors on a regular basis. Investors should be able to scrutinise every last detail when required
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Oversight… Understanding ▲
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Use multiple methods when testing for value. Review results from transaction costs, risk, attribution, scenario analysis and manager delta scores in conjunction with performance to create a more complete picture, leading to better understanding. Be aware of risk – measure exposure and tolerances on a regular basis Understand the impact of trading costs – perform regular detailed transaction cost analysis Ask the question: is my manager efficient compared to their peers? Measure the value the fund manager adds after costs and market activity are taken into consideration – then compare against other investors and managers Asset modeling – run ‘what if’ scenarios which allow the investor to add and remove assets to gain a better perspective of the impact on return and risk Work with a professional if internal resources are not available – their fees will be justified!
Communication… Expedite delivery ▲
Decrease traditional timing gaps of 15 days after month or quarter end (some investors are working from information that arrives 40 days after quarter end!)
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Online systems allow trustees and committee members to access appropriate information in advance of meetings, in order to arrive fully prepared and ready to ask pertinent questions. ▲
This is a much more efficient process than handing out hardcopy reports that are 90 days out of date
Communication… Enhance reporting ▲
Speak to your providers and customise reports to fit the needs of your team
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Generate bespoke reports for different team members
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Ensure the appropriate level of detail is delivered to the right people ▲
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Too much data is counterproductive – paralysis by analysis
Use summary data as much as possible and only go into details when issues arise – let the system do the checking and verification
Communication… Dialogue ▲
Conduct concise dialogue with internal and external teams more frequently
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Share access to systems
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Scrutinise contracts and negotiate with suppliers at the time of take-up or renewal to ensure there is a process for communication that is governance friendly (including disclosure) – e.g. IMA or custody SLA
* “The pension schemes who monitor and call us regularly get the best rates.” A quote from an FX trader … name withheld for obvious reasons
Is this really practical? ▲
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Recent innovations have greatly increased the level of automation possible throughout the investment process ▲ Improving the flow of data (same day collection, overnight reconciliation, next day reports) ▲ Closing any timing gaps ▲ Reducing impact on investor resources New online systems can act as a one-stop solution: gathering, reconciling, calculating, reporting, and providing a 24/7 information portal There are independent suppliers who are surpassing the services of the big multinational companies while remaining totally impartial The cost of achieving effective governance is lower than you imaging In some cases, this process is being adapted without exceeding current budgets ▲ Investors are getting much more for their current level of spend
Beyond governance Governance is not an end to itself. This process will: ▲
Tackle industry bugbears, such as: ▲ Lack of independence ▲ Insufficient transparency
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Address the biggest issues with traditional client reporting: ▲ Timing ▲ Flexibility ▲ Accuracy
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Achieve better operational efficiency
Summary ▲
Most investors have 80% of the information they need but, due to inefficient use of that information, they are only obtaining 50% of the governance levels they should be achieving
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A few small changes will make a big difference: ▲ Automating information collection ▲ Automating checks and balances ▲ Broadening the analytical process ▲ Eliminating paper documents as a primary source of information ▲ Customising reports to get the right balance ▲ Using online tools for communication
Contact details Summit Global Investors Services Andrew Caird, Managing Director 7th Floor Tower 42, 25 Old Broad Street London EC2N 1HN United Kingdom andrew.caird@summit-gis.com T: +44 (0) 207 877 0012
UK Des Hogan, Director of Institutional Clients 7th Floor Tower 42, 25 Old Broad Street London EC2N 1HN United Kingdom Des.hogan@summit-gis.com +44 (0) 207 877 0012
Canada & Caribbean
Benelux
Mathew Price, Regional Manager 25th Floor 1 Dundas Street West Toronto Ontario M5G 1Z3 Canada maprice@penad.ca T: +1 416 260 4717
Sander Boelen, Regional Manager Atlas Complex, Hoogoorddreef 9 Amsterdam 1101 BA Netherlands Sander.boelen@summit-bis.nl T: +31 (0) 203 120 697
www.summit-gis.com
Corporate info ▲
Summit Global Investor Services provides monitoring and reporting services for institutional investors. Combining industry knowledge and technical expertise, we help investors replace traditional analytics with more comprehensive and modern solutions that facilitate demonstrable governance.
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Summit’s innovative technology manages all the back-office procedures necessary to collect, consolidate, verify and reconcile transactional information and provide timely, accurate and flexible reports.
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For more information visit www.summit-gis.com