Writing Sample 1
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The document discusses the challenges facing investment committees in navigating volatile market conditions. It describes three oversight models - committee-centric, staff-centric, and advisor-centric - that vary in their reliance on the committee, staff, or external advisors. It notes that the committee-centric model, relying heavily on volunteers, can lead to "fiduciary fatigue" as responsibilities increase. Outsourcing some functions to advisors may help, but committees still retain fiduciary duties and must find the right balance of involvement. Selecting the appropriate oversight model is crucial given complex modern portfolios.
Writing Sample 1
- 1. V o l u m e 4 , I s s u e 2 Fa l l 2 0 0 9 Investment Committees Face Fiduciary Fatigue Bruce Myers Weighs Oversight Models By John Maden HAving MAnAged porTfolioS through the Time is the biggest challenge for investment committees, market peak, investment committees face a much different many of which meet only two or four times a year. To set of challenges as they continue to navigate through a maximize this time, committee members must have period of severe market stress and an ongoing credit crisis. investment expertise and an understanding of governance for some, maintaining current spending in the face of issues to effectively set and implement investment sharp declines is a challenge in itself. The magnitude of objectives and policies. As an endowment grows, it often the endowment management effort is compounded by becomes more complex, requiring more time to manage fast-changing tax and accounting rules and regulations on a daily basis, and consequently, one pattern Myers sees that affect committees’ decisions. further, an increasing emerging is that certain responsibilities that formerly fell number of committees are realizing that they simply under the supervision of the investment committee are cannot meet often enough to position their portfolios in migrating to the internal staff and/or to outside advisors. a high volatility environment. Bruce Myers, managing director at Cambridge Associates, calls this overwhelmed “Some committees like to touch all of a portfolio’s moving and exhausted condition “fiduciary fatigue.” parts, but some are getting their fingers pinched in the wheels because the parts are moving a whole lot faster,” in light of current conditions, investment committees, says Myers. Additionally, as a former bond trader and typically comprising volunteers receiving no, or sometimes institutional portfolio manager himself, Myers thinks that modest, compensation for their time and talent, are overseeing increasingly sophisticated portfolios requires re-evaluating their oversight models. The three different resources many institutions do not have and probably oversight models—the “committee-centric” model, cannot develop. An obvious example of such a resource, the “staff-centric” model, and the “advisor-centric” or Myers notes, is a team of skilled investment officers who “outsourced” model—vary in the extent to which they rely will stay with the institution for the long term. on the board or investment committee, investment staff, and external advisors or consultants. With portfolio growth comes complexity, which may lead endowments to consider the staff-centric oversight model. fiduciary fatigue typically occurs in the committee-centric This model has a professional investment staff supporting model of endowment management. This model relies a committee that is less involved in implementation. Staff on committee members and boards to lead endowment members take over distinct functions like research, which oversight and implementation, from setting policy can be time intensive and require travel, and analyzing and determining asset allocation, to interviewing and performance, which calls for technical skills. The staff evaluating managers, to managing risk in the portfolio. model can put an endowment at a disadvantage if senior Copyright ©2009 Under this model, committees taking on the widest staff must regularly commit significant time and expense possible range of investment responsibilities are frequently Cambridge Associates LLC. to recruiting and retaining investment professionals, as is All rights reserved. supported by no more than two full-time staff. often the case.
- 2. in the advisor-centric, or outsourcing, model, an institution all or part of the investment oversight work, committees hires an outside consulting firm to take over the day-to- need to determine how much they want to remain day management of a portion or all of the portfolio, and involved in making decisions and directing third-party the advisor reports to the committee, which then focuses advisors or consultants. “investment committees have on setting policy and providing ongoing oversight. Most options, even within the outsourcing model,” says Myers. institutional governance structures use some combination He points out that outsourcing is not necessarily an all of the three models to ensure sound decision-making, and or nothing proposition. Within the outsourcing concept there is no single model that will work for all institutions. there is a range of continuing involvement for committee members and staff. At a minimum, investment 2 Casey, Quirk & Associates, a darien, Conn.–based committees must expect to retain fiduciary responsibility, i n v e S T M e n T C o M M i T T e e S fA C e f i d u C i A R y fAT i g u e consulting firm to investment managers, predicted in even if they choose to cede total control of the portfolio. its december 2008 report, “The new gatekeepers: “The key is to find the balance between managing Winning Business Models for investment outsourcing,” fiduciary fatigue and managing the portfolio,” Myers says. that spending constraints, onerous regulations, and greater market volatility would lead to greater outsourcing How important is selecting an appropriate model? by institutions. Specifically, “The market comprising “it’s impossible to overstate the importance of aligning institutional investors between $250 million and $750 a port-folio with an appropriate over-sight model,” says million will see the strongest adoption rates.” Myers. A complex portfolio demands sophisticated oversight. in this market, committees face According to Myers, “An investment committee new challenges and might not, at first, considering outsourcing investment functions recognize just how critical good should begin by asking, ‘What is the best use governance is. it is paramount to of our limited time?’” even when outsourcing successful investing. “This is our COMMITTEE most consistent advice to clients, CENTRIC regardless of asset size or relationship COMPONENTS OF INVESTMENT OVERSIGHT type. despite its ubiquity, it remains • There is no single right model for all institutions. our most valuable advice—because • Successful investment processes include a ignoring good governance will clear set of objectives and policies and sufficient cost you.” resources to effectively implement them. • As endowments grow and become more complex, more time and resources are required for oversight. • Most institutional governance structures use some STAFF combination of these three resources. CENTRIC • Responsibilities generally migrate from the board or investment committee to the internal staff and/or consultant as the endowment grows in size and complexity. • Staffs often have other significant responsibilities that diminish the time and resources they can dedicate to endowment issues. ADVISOR CENTRIC C A MBRI D G E A SSO CI AT E S L L C A RLING T ON Cambridge Associates is a privately held, independent consulting firm that provides investment consulting 703.526.8500 and advisory services. We strive to help global institutional investors and private clients meet or exceed their BO S TO N investment objectives by providing proactive, unbiased advice grounded in intensive and independent research. 617.457.7500 DA LLAS Widely recognized as a leading investment consulting firm, we place a special emphasis on avoiding conflicts 214.468.2800 of interest and maintaining complete independence from money management firms. our non-marketable LO NDON alternative assets benchmarks, Cambridge Associates U.S. Venture Capital Index® and Cambridge Associates 44 (0) 20 7592 2200 U.S. Private Equity Index®, are published in Barron’s and are widely considered to be the industry-standard MENLO PAR K benchmark statistics for these asset classes. 650.854.8400 S IN GA POR E founded 35 years ago, we serve an international clientele from offices in Arlington, virginia; Boston, 65.6224.8688 Massachusetts; dallas, Texas; london, england; Menlo park, California; Singapore; and Sydney, Australia. S YDNEY 61.2.9229.6500 www.cambridgeassociates.com