Setting Investment Policy and Guidelines
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Transcript of Setting Investment Policy and Guidelines
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This presentation was originallygiven by:
Kelley Fairbank
Sr. Portfolio StrategistRussell Investment Group
At the 2003 Investment Management for Institutional
Investors Conference
For questions about this material contact Kelley at:
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Setting Investment Policy and GuidelinesSetting Investment Policy and Guidelines
Kelley FairbankSr. Portfolio Strategist Russell Investment GroupKelley FairbankSr. Portfolio Strategist Russell Investment Group
Investment Management for Institutional Investors ConferenceNovember 2003
Investment Management for Institutional Investors Conference
November 2003
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Are actions consistent with policies?
Plan
Implement
Review
Investment
Policy
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Investment fund is asignificant operation
BusinessOperations
Organization
InvestmentOperations
Assets AssetsLiabilitiesLiabilities/
Obligations
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Basic elements of the investment policy
Who are we?
Key decision-makers
Roles and responsibilities
What do we believe?
Investment objectives Asset allocation framework
Asset class guidelines
What is acceptable?
Basic considerations regarding cash flow, spendingpolicy, liquidity and volatility of returns
Basic guidelines regarding acceptable investments andinvestment strategies
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Example of an investmentpolicy statement
Individual asset classes- equity
- fixed income
- real estate
- private equity
- currency- cash and other
Manager selection guidelines
Monitoring process
- reporting- auditing
Proxy voting
Scope of policyPurpose of assets
Investment philosophy
Investment objectives
Policy asset allocationand ranges
Performance benchmarks
and objectives
Diversification guidelines
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The fiduciary cycle in detail
PLAN
IMPLEMENT
REVIEW
Asset Class Strategy
Governance
Objective Setting
Asset Allocation
Portfolio Structure
Manager Selection/
Monitoring
Performance Measurement
& Evaluation
Execution
Biggest Potential
for Sponsor
Slippage
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Planning the cornerstonefor best results
PLANI Decision making authority, policy
and proceduresGovernance
I Clear and realistic investment
expectations
Objective Setting
I Asset allocation policyAsset Allocation
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Roles of the three types of fiduciaries
Governing
Managing
Operating
Communication and
reporting are critical
elements
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Roles and responsibilities
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Governing
Board of Directors
Managing
Investment
(Sub) Committees
Operating
Investment Staff
Operating
Investment
Managers
Policy Strategy
Asset ClassStrategies &
Structure
Management
ManagerMeetings and
Implementation
Plan
Execution
SecuritySelection
Control
Review forCompliance
vs Objectives
Fiduciary
Level
Recommends Recommends Oversees
Review
InvestmentCommittee
Decisions
Review
Staff
Decisions
Review
Manager
Decisions
Compliance
vs.
Guidelines
Implement and Review
Oversees
Decides Decides
Oversees
Oversees Oversees
OverseesOversees
Implements
Decides
ConsultedConsulted
Fund ObjectivesAsset Allocation
Internal/External
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Objectives lay the groundwork
Focus on key priorities
Minimize ad-hoc revisions
Provides continuity
and discipline through
difficult periods Demonstrates clear
thinking and planning
Communicates to
all fiduciaries
Review annually
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Clarifying objectives isa valuable journey
Meaningful Focus on key relationships
Measurable Allows success to be measured
Achievable Ensures expectations areappropriate
Reflect the Too short - sights may be setright time too lowhorizon
Too long - strategy may not bemaintained
Asset allocation the chief expression of risk tolerance!
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Effective implementation critical
IMPLEMENT
I Specific investment
manager strategiesPortfolio Structure
I Best available candidatesfor fund
Manager Selection/Monitoring
I Efficient implementation
avoids slippageExecution
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Asset class selection specificto objectives
Equity Large CapSmall Cap
Private Equity
Developed Non-US Equity
Emerging Markets
Currency
Fixed Income US Fixed IncomeNon-US Fixed Income
High-Yield Fixed Income
Emerging-Market Debt
Real Estate Public
Private
Other Strategies Hedge Funds, Commodities,
Resource based, Market Neutral
Managed futures
Primary Asset Classes Sub-Asset Classes
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Understand and managebroad market bets
This is a hypothetical example meant for illustrative purposes only.
Manager B
Manager A
Manager CComposite
Value Growth
Small
Large
1.0
1.0Index
New Weights
Value Growth
Small
Large
1.0
1.0
Manager B
Manager A
Manager C
Index
Manager B
Manager A
Manager C
Index
Composite
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Checklist for asset class
strategy/structure
Affirm intended structure/strategy
Document objectives and tilts and biases, if any
Monitor and manage undesired structural bets
Establish review procedures
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Checklist for manager
selection/monitoring
Hire/Retain only high confidence firms
Document expectations
Monitor for compliance
Develop formal process forunderperforming strategies
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Checklist for execution/trading
Document fund and manager guidelines
Define rebalancing policy
Develop effective transition strategies(portfolio changes and rebalancing)
Establish compliance procedures for trading
Managing Slippage
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Review strategies relative to objectives
REVIEW Evaluating results vs.objectives and benchmarks
Performance Measurement
& Evaluation
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Reporting should target
fiduciarys needs
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Top Line Summary
Compliance to standards and objectives
Reality check on oversight
Results versus objectives
Governing
Fiduciary
Managing
Fiduciary
Decision-Making Summary
Confirm or modify plan policies and guidelines Reality check on operations
Performance - asset class and strategies
Investment manager review and analysis
Operating
Fiduciary
Implementation Summary
Agent oversight
Due diligence of implementation procedures
Performance - manager based
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Integrating policy and
investment program
Clearly written statement
Asset allocation policy mix consistentwith objectives
Rebalancing ranges
Acceptable asset classes
Effective benchmarks
Accountability
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Investment policies are dynamic tools...
The named fiduciary owns the investment policyof the fund, written and implemented
therefore, part of the process is to change themas necessary
New spending obligations
Different risk tolerance or funding objectives
New Board Members/Fiduciaries
Evolving capital markets
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1936 Tacoma, Headquarters
1969 New York 1979 London 1984 Sydney 1984 Toronto 1986 Tokyo 1991 Auckland 1994 Paris 1999 Singapore
1999 Amsterdam
1936 Tacoma, Headquarters
1969 New York 1979 London 1984 Sydney 1984 Toronto 1986 Tokyo 1991 Auckland 1994 Paris 1999 Singapore
1999 Amsterdam
www.russell.comwww.russell.com