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