Good governance could strengthen your portfolio 

High angle shot of a young businesswoman explaining work related stuff during a presentation to work colleagues in a boardroom
January 1, 2023

We believe that having a strong governance framework is crucial to long-term success and resilience through adversity.

Governance is a topic that is often overlooked by busy investors as it can seem less exciting than asset allocation or manager selection exercises. However, we believe it is crucial to help meet some of the biggest challenges your organization faces.

Challenges facing institutional investors

  • Lower returns and uncertainty

  • Operational inefficiencies

  • Increasing complexity and regulation

  • Manager and strategy oversight

  • Liquidity management

  • Cost transparency and management

What is good portfolio governance?

Optimizing your investment portfolio to access opportunities and mitigate risks is only one part of achieving your long-term objectives. Ensuring you have a robust operational structure and processes in place is essential to your organization’s ability to navigate good times and bad.

Having a strong governance framework can help streamline your decision-making and potentially give you an important advantage when investing. This means delegating tasks to experienced, specialist teams either internally or externally, whilst maintaining clear reporting lines, forming the base from which you can build out your strategy and portfolio.

Good governance should help you:

  • Set an optimal investment strategy that takes into account the unique factors affecting your organization.
  • Stay on top of market movements that affect portfolio allocations and react accordingly.
  • Monitor interest rate and inflation risks that can erode long-term investment returns.
  • Identify operational dangers, such as trade errors and liquidity traps, with the aim of reducing these risks.

What we call a “governance advantage” helps you remain confident about how your investment portfolio will behave, even in the toughest market conditions.

A governance advantage helps our clients’ access timely information, respond quickly, and make effective decisions. This allows them to manage risk and pursue emerging opportunities. Good governance underpins everything we do.
Michael Dempsey

President, Investments and Retirement

Taking control of your portfolio

Over the past 15 years we have seen how strong investment governance can improve outcomes and keep you focused on your objectives, no matter the market conditions.

Global events such as the financial crisis of 2007-09, or the COVID-19 pandemic, offer great examples of how a robust governance framework can help you navigate the most difficult periods. Knowing how to react before things happen gives confidence in the long-term resilience of your portfolio.

Better governance is about giving you control over your investment portfolio and strategy. We have identified some key factors that can influence the strength of your investment governance.

Key steps for a good governance investment process 

The first step is to be clear on what you are trying to achieve. Expressing this clearly will help you build a governance structure that steers in this direction.

Once you know your desired end destination, you can begin planning the journey. Your investment strategy should reflect your objective(s) with appropriate levels of diversification and complexity.

You may want to ask yourself questions such as “how much will you do in house and how much will you outsource?”, “will you liaise directly with asset managers or will you employ third party specialists?” and “how will you maintain effective oversight of your providers?”.

Understanding how different strategies, asset classes and markets interact with each other will help you construct an effective and diversified portfolio.

Asset allocation is one of the most important decisions an investor makes. A thorough assessment of risks is critical to constructing a portfolio that seeks to meet your objectives, while also being positioned to capitalize on opportunities and mitigate unforeseen risks in a timely manner. 

Researching and selecting asset managers is a specialist skillset requiring significant resources. Even the world’s largest sovereign wealth funds rely wholly or partly on specialist research providers. Operational due diligence is also a specialist skillset which again almost all institutional investors tend to outsource to specialist providers.

Setting clear policies on rebalancing your portfolio to a set asset allocation plan will help manage inflows and outflows, and help you to keep a disciplined, long-term approach through difficult times.

Having a clear plan, established processes and reliable reporting lines will help meet any regulatory requirements, ensuring transparency and accountability.

Efficient and effective oversight requires clear reporting lines and regular, clear and direct communications with asset managers and other providers. This will help you identify, understand and manage risks as and when they emerge.

Perhaps the most resource intensive activities in the investment process are monitoring of portfolios and managers and reporting to all stakeholders on all activities. It's critical to have the appropriate resources and infrastructure to do this effectively, otherwise stakeholders will not feel confidence in the investment process.

A blueprint for resilience

Ensuring a strong governance structure helps build a strong base that enables you to stay on top of what is happening today and be ready to face whatever the future holds.

The "Governance Advantage" in practice

The pandemic reminded us all that financial markets are very much out of our control. If you had already addressed the question of governance within your organization, you had one less thing to worry about. We cannot control what global markets do, but we can control our reactions and the decisions we make. This is the essence of the “Governance Advantage”. Investors who were well prepared for the pandemic had:

  • Adopted diversified strategies
  • Established operational structures that clearly defined and allocated tasks
  • Effective risk management policies and processes in place
  • In some cases, employed dynamic asset allocation strategies to capture opportunities and mitigate risks.

By addressing these and the other areas outlined in this article, you can access timely information, make effective decisions, and respond more quickly than peers who may not have as robust structures in place. 

In good times and in bad 

Having a "Governance Advantage" in more conventional times is useful too. A robust framework assigns important operational tasks, such as rebalancing, to professionals who are best placed to execute them.

It can also smooth out changes at an asset class or manager level and help manage costs more effectively across a portfolio. This gives you more time to identify new opportunities and innovate to make progress towards your objectives, through executing new investment strategies and ideas through high-quality asset managers that have been researched by experienced professionals.

All of this is critical in helping you prepare for what the future may bring.

Strengthening your processes 

By splitting governance tasks into strategic priorities and ongoing activities, you can clearly see and decide where time is most usefully spent – and how best to execute your fiduciary duty. You may want to employ or enhance internal teams or outsource functions to external providers to help you focus on other areas.

There is no single answer on how to create a robust governance framework, nor should you feel pushed into an off-the-shelf solution. Depending on your organization’s size, scale, maturity and internal expertise, you will need a specific structure to reflect your needs.

No one can predict the future path of global markets or economies, or what external factors may influence them. This means it's essential for you to have the right structures and processes in place to manage risk, make better decisions, keep your objectives on track and optimize your outcomes. 

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