With the complex and dynamic investment landscape in 2020, having robust investment committee best practices is crucial for institutional investors to make prudent decisions. An effective investment committee with proper structure, composition, and processes enables organizations to implement sound policies, evaluate opportunities thoroughly, manage risks properly, and meet return objectives. This article will discuss key best practices for optimizing investment committee effectiveness.
Ensure committee independence with diversified membership
To minimize conflicts of interest, the investment committee should comprise members with diversified backgrounds. The inclusion of independent members with varying expertise provides balanced perspectives when assessing investment risks and returns. The committee should also have adequate processes for disclosing and managing potential conflicts of interest.
Formalize investment objectives, guidelines and constraints
The investment committee needs to establish clear investment objectives, risk tolerances, and constraints for asset classes and strategies. These guidelines inform investment staffs on executing day-to-day investment activities and evaluating new opportunities. The documentation provides a basis for monitoring compliance and enhancing decision-making consistency.
Implement structured process for opportunity evaluation
Having a rigorous process for evaluating new investments enables thorough analysis from different angles. The evaluation procedure should encompass assessing return objectives, performing due diligence, evaluating risks, and considering potential impacts on the total portfolio. Establishing an evaluation checklist and requirements for investment memos facilitate comprehensive reviews.
Conduct regular reviews of portfolio and managers
To ensure proper oversight, the investment committee needs to frequently review the investment portfolio composition and performance. Comparing returns to benchmarks gauges the effectiveness of investment strategies and managers. Monitoring market risks and portfolio concentrations is also vital. More rigorous reviews may be warranted for poorly performing assets.
Provide continuing education and training
Committee members should receive training on current industry trends, regulations, investment instruments, and risk management practices. Knowledge development equips members to ask incisive questions and make prudent decisions amid increasing market uncertainties and complexities. External experts can also be invited to provide insights.
Adhering to robust investment committee practices improves governance oversight, guides strategy formulation, enhances risk management, and ultimately leads to better investment outcomes. As markets and regulations evolve, investment organizations must continuously review and refine committee policies, composition, processes, and capabilities.