Most institutional investors are likely to monitor and understand gross returns. To achieve optimal returns, they should also focus on the following three objectives:

1. Investment efficiency: Understanding revenues and costs associated with investment operations and implementation and whether these are in line with market best practice.
    
2. Operational risks: Evaluating how controls are being applied within operating environments, e.g. within your custodians or your investment managers, as well as what controls exist where various intermediaries interact.
    
3. Value for money: Benchmarking your costs, income and service levels to determine whether these are in line with market best practice and market standards.

Investment operations and implementation can be separated into daily and event-driven activities. Daily operations cover regular activities and functions within and interactions between various service providers and agents. By contrast, event-driven operations, such as manager replacements, are not part of an investor's regular routine. By measuring, monitoring and managing critical procedures throughout daily and event-driven investment operations, funds can better manage costs and risks and identify opportunities for generating additional income. 

Establishing a framework

An operations monitoring framework should encompass the points at which investment managers, in-house teams (operations or investments), custodian(s), administrator(s) and other third parties interact to invest, administer, account for and report on assets. The framework should be customised to your staffing levels, service requirements, operating complexity and governance needs. 

Evaluation and reporting

After we develop a framework, we collect data and conduct our analysis. The frequency and format is determined by client needs. The key objective is to ensure investors can meet their operating objectives and governance goals on a consistent, comprehensive basis. Mercer Sentinel will work with you to identify the most appropriate analytical approach and reporting levels. 

Evaluating sources of revenue and costs

To fully evaluate and understand sources of revenue and cost within their investment operations investors must review both their explicit and implicit revenues and costs. Explicit revenues and costs are typically transparent and are usually agreed before payment/receipt. Implicit revenues and costs are embedded within the investor's investment operations are not immediately apparent.

Evaluating and understanding these revenues and costs is only half the solution, investors should be seeking to maximise returns by optimising these revenues and costs. In Mercer Sentinel's experience "what gets measured gets managed". Periodic review of revenues and costs to set a baseline scenario and regularly evaluating performance and costs against this baseline allows an assessment whether the assets are being managed most efficiently and in the best interests of the investor. 

Capabilities and controls benchmarking

Both daily and event-driven activities introduce a significant level of operational risk to investors. By measuring, monitoring and managing critical controls throughout all aspects of investment operations, investors can better manage both costs and risks. A capabilities and control benchmark review will enhance transparency and identify key risks in the control environment at your custodian, investment managers, transition managers and other third parties' operating and control environment. Mercer Sentinel benchmarks and assesses all the intermediaries listed above. 

Operational & implementation performance

The first two evaluations reflect the financial impact of investment operations and implementation and consider non-financial issues, such as internal controls. The third area of evaluation aims to benchmark each investor's operations and client service experience with their custodian(s), investment managers and other third parties against market standards and customised "Key Performance Indicators" (KPIs ).

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Not investment advice
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.