Most foundations and other nonprofits rely on an investment committee to oversee their investment portfolios, while individual wealth is commonly held in trust with investment decisions often made by two or more trustees. These oversight groups can have a big impact on real long-term wealth preservation and having the resources available to realize organizational or individual aspirations.
In our 20 year history, Federal Street Advisors has participated in hundreds of investment committee meetings and has witnessed an array of committee structures and approaches. This short white paper distills our perspective on the 10 practices that are common among the most effective investment committees.
1. Embrace the "Commit" in Committee
The long-term effectiveness of an investment committee depends on the energy and dedication contributed by its members. Effective committee members take the time to learn about the unique history, mission, and resources of the organization, with special emphasis on the background on the investment portfolio. Beyond that initial orientation, they participate in meetings on a regular basis, come prepared, and bring a curious, attentive and positive attitude to any discussion. If they have concerns or want to see specific items on a future agenda, they raise the issues well in advance to ensure that they are adequately addressed.
2. Ensure Diversity and Experience in Committee Composition
Investment committees can differ markedly from institution to institution. In fact, no two are identical. They differ in size, meeting format and frequency, communication style, and how they work with outside advisors, among other factors.
There are benefits to blending investment and non-investment professionals on the committee, and the more successful ones usually consist of members with diverse experience and perspectives. Whatever the composition, continuity in committee membership is ideal. Frequent turnover erodes the overall knowledge of the investment program and often a group's cohesiveness and productivity.
3. Build Strong Committee Leadership
There is a famous quote that a committee is a "group that keeps minutes and wastes hours." Strong committee leadership can prove a strong antidote to this frequent malady. Investment committee chairs must be adept at running meetings, display strong communication skills as well as an understanding of investments, and be able to draw out the priorities and perspectives of the different members. With these characteristics, they keep meetings productive and on schedule, and drive decision making. Further, they play an important intermediary role, ensuring that the work of an investment consultant meets the needs and preferences of the committee.
4. Develop and Refresh the Investment Policy Statement
Most established businesses operate with a written business plan. Likewise, investment committees of non-profits should prepare an Investment Policy Statement (or IPS) -- and revisit that IPS periodically to evaluate whether it remains fully relevant to the operation.
The IPS should be a set of guidelines rather than a detailed rule book. It should define return and risk expectations, spell out any key investment policies, provide an asset allocation framework and describe generally how performance will be evaluated. The IPS can list the basic responsibilities of the committee, the board, and investment advisors. However, it should allow sufficient flexibility to address changing circumstances and not handcuff the portfolio's money managers.
5. Run Well Structured, But Not Overly Formalized, Meetings
Whether an investment committee has three or a dozen members, it should have a calendar of meetings for each year. We suggest an in-person meeting once per quarter, but some committees simply cannot meet four times a year. Instead, they communicate and make decisions in other ways.
A common problem with committee meetings is that the agenda is too ambitious. The agenda should be limited to a few key items; ideally, it should also include a manager presentation and executive session. There can be limited discussion about broad economic and market trends, but the bulk of the investment discussion should relate to the portfolio and decisions that need to be reached on asset allocation and manager selection. Continued dialogue and exchange of ideas can, and should, take place outside of scheduled meetings.
6. Communicate, Communicate, Communicate
Good communication, both during and between meetings, is essential in fostering the investment committee's productivity. Committee members should feel comfortable raising questions and concerns promptly and directly, and they should be willing to tackle developments that may arise between scheduled meetings. Circulating clear and concise meeting minutes also furthers good communication. These minutes should be more than a simple synopsis of the meeting; they should summarize decisions and next steps.
7. Be Strategic in Manager Selection and Evaluation
The selection and ongoing evaluation of investments is an important and challenging responsibility for an investment committee. When evaluating potential new investments, it is important to understand what managers do (and what they don't do), what role each investment plays in the portfolio, and how the portfolio as a whole is positioned to react under varying market conditions. Good investment committees understand the factors that drive manager performance. They evaluate results in that context, and do not become overly enamored or concerned with short-term results, either above or below expectations. They take a long-term view and are not afraid to invest against consensus. When looking at individual strategies in the portfolio, they carefully evaluate any changes in the manager's organization, approach and assets under management.
8. Focus on Implementation
A well-organized investment committee has a clear action plan and is adequately staffed or otherwise supported to implement portfolio changes in a timely, economic and accurate manner. Working with a responsive and capable custody platform in the implementation of portfolio changes can minimize the chance of serious delays or errors in executing investment decisions.
9. Do Not Forget the Foundation Staff!
An involved foundation staff is a valuable asset to any investment committee. The executive director or chief operating officer should play an active rolein coordinating meeting agendas, providing updates on grant making activities and other cash needs, and facilitating communication among the investment committee, board and the foundation's various outside professionals. Foundation staff can also help coordinate and distribute meeting material to ensure that participants receive an integrated package of materials, in a manner they like, well in advance of meetings.
Investment committees that do not fully engage the staff can miss important information and function inefficiently.
10. Conduct Regular Reviews of Professional Advisors
Effective investment committees clearly spell out expectations for their advisor and provide them with feedback on a regular basis. They provide concrete examples when delivering feedback, so consultants can improve or enhance their service. They should also strongly encourage the consultant to share ideas for improving the investment committee process.
The Five Essential "C"s
Federal Street Advisors' 10 Best Practices can be boiled down to five C's: Commitment, Coordination, Communication, Continuity and Completion. While investment committees can operate successfully with a variety of structures and approaches, our 10 Best Practices can make any investment committee more efficient and effective. This should lead to improved long-term portfolio operation - to the ultimate benefit of grantees and beneficiaries.
To learn more about effective investment committees, or to discuss how Federal Street Advisors works with both nonprofit and high-net-worth clients, please contact Dan Gross, Principal, at [email protected].