Across the world, the question is asked how to optimally support the responsible pension fund trustees with the knowledge and tools required for making optimal investment decisions. This is not as strange as it may seem. Often these board members come from a different area of expertise and must familiarise themselves with the investment issues in practice. They are thrown in at the deep end and have to learn how to swim all by themselves.
The consensus is that this on average could easily result in missing out on 0.5% return per year. On a global scale this would equal missed investment returns of approximately 200 billion dollars annually - the national income of New Zealand.
To offer managers a quick overview and a steep learning curve Prof. Kees Koedijk, Prof. Alfred Slager and I have written a book to help pension fund managers all over the world in their complex duty; i.e. the realisation of the best possible investment result in the long term.
Achieving Investment Excellence is a handbook that, based as far as possible on academic research, assists trustees in their everyday practices. The book contains a number of practical cases taken from all over the world. What sets our book apart from many other books on investment is that we are convinced that long-term investment success requires a combination of hard knowledge and softer skills. This combination is needed both within the board and between board and the pension fund management organisation.
Success starts at the board. The role of the board in realising ‘investment excellence’ is significant. And investment excellence requires maintenance: circumstances change and new trustees regularly join the board for example, and this must be managed to remain successful.
The book distinguishes five activities that are needed to realise sustainable long-term success. These activities are dealt with in separate sections of the book. The activities run from formulating a mission, vision and strategy, via designing the investment process and organisation through to the implementation and evaluation of the investments.
It is crucial that the board and the investment committee choose the right distance, altitude and time horizon in their approach to the investments: if an investment committee is too distant, it will be hard to offer a sufficient counterforce against the fund managers, who are after all engaged in investing fulltime. If the investment committee is too close, then there is a risk that it will sit on the investors’ chair and no longer see the wood for the trees and demonstrate short-term behaviour.
The last two sections of the book address the behavioural aspects of investment success. The following aspects play a role here: How do you become an effective board? How do you make an investment committee successful? How do you achieve a successful relationship with the investment management organisation? The book concludes with a practical chapter that helps pension funds develop, step-by-step, towards investment excellence by systematically paying attention to the five activities.
We hope that our book will be used by managers as a manual for separating main and side issues and that it will provide guidance for the effective use of scarce board time.