Whether your organization is considering a new investment manager, or you are hiring one for the first time, it is important to consider governance and oversight. Many investment committees focus on the investment process, but strong governance and oversight play a key role in helping institutional investment programs reach successful outcomes over the long-term. As you evaluate how you want your investment program to be managed, consider these three questions:
1. Does your investment committee have the time to manage your investment program successfully?
Investment committee members have other responsibilities outside of their commitment to your organization, most often, full-time jobs. Managing an investment program takes time, and there are only so many hours in a day.
Investment committees meet regularly, typically at least quarterly. And the day-to-day management of an organization’s investment portfolio is a significant time commitment. In today’s ever-changing markets, committees may need to meet more often to account for market shifts that can require swift attention.
So, has your organization taken the time to evaluate all the competing priorities your investment committee members have on their plate? Where on their priority list does managing your organization’s investment program fall? Evaluate the competing responsibilities with your investment committee members and make sure everyone can prioritize the role in a way that is most beneficial to both the committee and the organization.
2. Do you have the proper resources to manage your investment program?
Economic conditions, securities markets, people and philosophies tend to be in a perpetual state of flux. Constant change can undermine an organization’s commitment to a successful long-term investment plan. Developing a solid plan and ways to implement that plan are critical. To capitalize on market opportunities when they arise, a comprehensive Investment Policy Statement (IPS) can help an organization stay on track while managing through change. An organization’s IPS should set forth its long-term strategic direction, investment guidelines and accountability standards.
3. Do you have the capabilities and skills within your organization to manage the investment program effectively?
Today’s world is complex and requires expertise to successfully manage an investment program. These complexities and risks come from all angles – regulatory, economic pressures, politics and more. Your investment committee should be comfortable with topics that impact your investment program and be able to implement them when suitable. These topics may include risk management, governance considerations, and investment areas such as alternative asset strategies and hedge funds.
Organizations face numerous challenges and ongoing risks associated with meeting the goals and objectives of an investment program. These challenges create an opportunity for an enterprise financial risk profile to be incorporated into the strategic decision-making process.
More institutional investors are implementing a financial modeling framework that links the enterprise financial strategy with the investment strategy. This tends to occur in two ways:
- Analyzing the role of balance sheet investment assets and how they contribute to their financial wellbeing.
- Using the relationship between investment assets and financial results to help determine the best asset allocation for addressing liquidity and cash flow concerns.
Together, these two strategies form what we call Enterprise Financial Modeling. In this framework, the institution’s enterprise goals serve as a key component of the overall investment strategy for the asset pool(s).
With a focus on proper governance and oversight, organizations can increase the likelihood that financial assets are successful in supporting and driving overall success. Building a strong governance framework is one of the best ways you can support your organization’s investment goals. So, what is the best way for your organization to address these three essential components for managing a successful investment program? There is not one right answer, but there is a right answer for your organization given your time, resources, capabilities and skills.
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