In this long series of posts I’ve been discussing the limitations of the investment committee and the paucity of solutions. In my last post I mentioned another approach: the Investment Committee Operating Manual, or ICOM.(1) Since I’m unable to attach a sample of an ICOM (too many IT groups block posts with attachments), I’m putting the entire text in this post. It makes for a very long post, but it’s not meant to be read straight through. Instead, I hope it simply offers an example you may wish to consider for your own investment committee.

Investment Committee Operating Manual

I. Purpose of this Operating Manual

The purpose of this Investment Committee Operating Manual is to set forth policies and procedures to guide the deliberations of the Investment Committee of the Prudent family. The Operating Manual is not designed to replace the family’s investment policy statement (IPS), but to serve as a supplement to it. The IPS tells us where we want our portfolio to be, while the Operation Manual tells us what we need to do to get there and stay there.

Among other things, the Manual discusses the purposes of the Investment Committee and the relationship between the Committee and the family, the frequency of Committee meetings, and the general agenda for such meetings.

Long experience has shown that investment committees frequently make sub-optimal investment decisions. This outcome is an almost inevitable byproduct of the part-time nature of the committee’s work, the frequent turnover in personnel assigned to the committee, the tendency of all committees to act according to the “lowest common denominator,” and the unstructured nature of most investment committee deliberations.

It is the hope of the Prudent family that the existence of this Operating Manual and the Committee’s determination to be guided by its provisions will help improve the operation of the Committee and redound to the benefit of the Prudent family’s investment capital and ultimate wealth.

II. Purpose of the Investment Committee

The purpose of the Investment Committee is to evaluate and make recommendations to the Prudent family with regard to the investment policies and strategies to be followed by the family’s investment portfolio, as follows:

  1. The Committee will, via its own deliberations and through conversations with the family, determine an appropriate risk profile for the investment portfolio. It is understood that the degree of risk assumed will substantially determine the investment return available to the family.
  1. The Committee will recommend investment policies to be followed in the management of the investment portfolio. These policies shall include (a) a long-term goal for the performance of the funds, (b) an asset allocation strategy designed to achieve the long-term goal, and (c) asset classes and types of investments which may be used in the investment of the portfolios.
  1. The Committee will prepare and recommend to the family a written investment policy statement.
  1. The Committee will prepare and recommend to the family a written spending policy. It is understood that spending by taxable families in excess of __% will have an important negative effect on the ability of the family to maintain and grow its wealth.
  1. The Committee will prepare and recommend to the family written conflict of interest policies.
  1. The Committee will recommend a management structure for the investment management and oversight of the family’s investment portfolio. In other words, the Committee will recommend whether the family should engage an investment consultant, should utilize the services of a master custodian, should employ independent managers, should manage the funds in-house, or follow some combination of both.
  1. The Committee will monitor the level of expenses incurred in the management of the investment portfolio, including management fees, commissions and other transaction costs, and soft dollar arrangements, if any.
  1. If necessary, the Committee will recommend a proxy voting procedure to the family.

In carrying out these important responsibilities the Committee will be guided by the operating procedures set forth in this Operating Manual.

III. Meetings of the Investment Committee

Unless otherwise determined by the Chair of the Committee, the Committee will meet three times per year, and at dates and times so established as to ensure that the Committee has access to the most recent performance results for the portfolio. Ideally, meetings will not be convened shortly after a quarter-end, as quarterly results are virtually irrelevant to the family’s long-term investment performance and the family does not wish the Committee to focus on short-term events.

In an effort to avoid ad hoc decision-making and/or short-term thinking, the Committee will follow a seasonal schedule of meetings which will be conducted according to the agendas set forth below. Minutes will be taken of the decisions made at each meeting of the Committee.

1st Triannual Meeting. The first meeting of the Committee in each year will be convened after performance data is available for the prior calendar year. Ideally, this meeting will be scheduled before the end of the first quarter of the year. At the first meeting, the Committee will:

  1. Review and approve the Minutes of the prior meeting of the Committee.
  1. Review the performance for the prior year of the overall portfolio against the custom benchmark(s) established for the portfolio and, when possible, against the performance of similar investors.
  1. Review the performance for the prior year of each manager engaged by the family against the benchmark established for that manager and, when possible, against the performance of similar managers.
  1. Review the compliance of the family’s investments with all guidelines set forth in the investment policy statement.
  1. Review the compliance of each of the family’s investment managers with the specific guidelines created for that manager.
  1. Identify any performance issues with regard to any of the family’s managers, such issues to be attended to before the next meeting of the Committee.

2nd Triannual Meeting. The second quarterly meeting of the Committee will be convened during mid-summer. The main purpose of the second meeting of the year is to ensure that the members of the Investment Committee continue to learn about the investment process and become ever more skillful at overseeing the family’s portfolio. Thus, the agenda for the second meeting will be as follows:

  1. Review and approve the Minutes of the prior meeting of the Committee.
  1. Review (briefly) the year-to-date performance of the overall portfolio and the performance of individual managers, it being understood that partial year performance is far too short a period of time for meaningful data to be generated.
  1. In the event that the Committee had identified concerns about the performance of any manager or managers at the first yearly meeting, that manager or those managers will be invited to attend the second quarterly meeting to discuss the issues with the Committee.
  1. In the event that no manager performance issues were identified at the first yearly meeting, the purpose of the second meeting of the year (in addition to conducting a brief review of first quarter performance) will be to select an area of the investment process or the capital markets to examine in depth, generally with the assistance of an invited expert in the field. For example, the Committee may wish to examine a particular asset class, developments in portfolio design and asset allocation procedures, particular investment styles, the details of performance reporting and monitoring, macro-economic issues, and so on.

3rd Triannual Meeting. The third quarterly meeting of the Committee will be convened in late fall or early winter. The main purpose of the third meeting of the year is to hear from managers who are active in a sector of the markets that is of interest to the family, but where the family is not currently invested. Thus, at each third meeting of the year the Committee will:

  1. Review and approve the Minutes of the prior meeting of the Committee.
  1. Briefly review the year-to-date performance of the overall portfolio and the performance of individual managers.
  1. Review the long-term (strategic) asset allocation strategy of the portfolio to determine whether or not changes in that strategy may be merited. Typically, such changes will be appropriate only if (a) there has been a substantial change in the objectives, risk tolerance, or makeup of the family, or (b) the Committee wishes to add or delete approved asset classes, usually as a result of studies undertaken at the third quarterly meeting.
  1. Review the tactical asset allocation strategy of the portfolio to determine whether, in light of market conditions and, especially, pricing and valuation considerations, it may be in the family’s interest to adjust its asset allocation posture tactically in the direction of assets that appear to be underpriced or where there otherwise appears to be relatively short-term opportunity in the markets. Except in rare circumstances, such tactical moves should not exceed the pre-set maximum or minimum exposures already established for each asset class.
  1. Consider meeting with a manager or managers who are active in a sector of the markets that is of interest to the family but where the family is not currently invested.

(1) Several readers have pointed out that the link to the original Greycourt white paper on the ICOM wasn’t working. Try this one: http://www.greycourt.com/wp-content/uploads/2012/05/White-Paper031-Investment-Committee-GDC.pdf.

Next up: On Demographics

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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.