In my last post I discussed the dysfunctional nature of so many investment committees and offered some observations about why this might be such a widespread phenomenon. In this post I examine some of the more widespread attempts to control – reign in? – investment committees, in the hope that they might offer better stewardship of the assets under their care.
Attempt #1 – Asset allocation guidelines and investment policy statements. The usual approach to controlling investment committee behavior is for the full governing board or family to adopt asset allocation guidelines and a written investment policy statement, within whose parameters the investment committee is expected to act. Asset allocation guidelines and policy statements are essential tools in the management of capital, but as instruments for the control of investment committee behavior they are woefully inadequate.
The reason is simple: whenever an investment committee wants to act outside the constraining bounds of a written guideline or policy the committee simply changes them – or, worse, ignores them. And who is to enforce compliance with these strictures? If the committee simply ignores the restraints, who will know about it? If the committee asks the board to change guidelines or policies, who on the board is going to argue with the investment committee, who are, after all, the anointed experts on such things?
In 2008 virtually every large investor’s equity allocation fell far below whatever the lower band was supposed to be according to the investor’s asset allocation guidelines. How many of those investors moved capital out of bonds and into stocks in 2008?
Using outside experts to populate the investment committee. Some large endowed institutions and some wealthy families have given up on the in-house investment committee in favor of an outside investment committee or board of advisors populated by experts selected for their skill and experience in the management of large pools of capital. At Yale University, for example, Chief Investment Officer David Swensen has recruited a sizeable group of experts who serve on what is called the Yale Corporation Investment Committee. Only three of the Investment Committee members need be Fellows of the Yale Corporation, Yale’s governing board. Last I looked there were eleven members of the Investment Committee. In other words, instead of accepting full responsibility – and the associated time commitments – of board membership, these experts focus exclusively on the management of the Yale endowment.
Clearly, Yale and the other institutions and families who use boards composed of outside experts believe that this approach is superior to the more traditional investment committee approach. Unfortunately, experts on the caliber of those used by Yale(1) are few and far between (and typically expensive), making it extremely difficult for smaller institutions and families to mimic the Yale approach.
Establishing a separate investment management corporation. Some very large investors – Harvard University, Princeton University, the University of Texas – have abandoned the investment committee approach altogether. Instead, they have established separately incorporated management companies charged with the responsibility of managing the institutions’ endowments. These management companies employ many – sometimes, hundreds – of highly compensated investment professionals, and they have typically produced results that are far superior to those achieved by part-time, in-house investment committees. Unhappily for smaller investors, the investment management corporation is extremely expensive and not a serious option for anyone managing less than about $5 billion.(2)
Given the limitations of these strategies – some don’t work and others are prohibitively expensive for most investors – in my next post I will outline a very different approach to helping investment committees better discharge their responsibilities.
(1) Note that Yale doesn’t limit the expertise on its Investment Committee to pure investment skill. Fareed Zakaria serves on the Committee, for example, presumably for his influential, if conventional, views on evolving global issues.
(2) In effect, families and institutions that hire “outsourced CIO” firms are attempting to achieve many of the advantages of both the “outside expert” and “separate management corp.” approaches. (Full disclosure: my firm, Greycourt, often acts as an outsourced CIO.)
Next up: The ICOM, Part 3
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
