LTIs in recent years have been trying to improve performance by:
1. reducing reliance on -
2. minimising -
3. reducing PA costs
4. adjusting
- reducing reliance on external agents e.g. consultants
- minimising return erosion due to external managers fees
- reducing principal-agent costs
- adjusting culture, governance, tech to improve performance
Two challenges when analysing the performance of LTIs?
- time horizon - typical risk-adjusted rate of return measures are not ideal for this category of investors due to longer time horizon
- differences between LTIs mean peer comparison difficult
Differences between ‘measurements’ and ‘metrics’?
Measurements: represent observable facts
Metrics: are measurements put into broader context
What are the three main advantages that LTIs have over for-profit asset managers and third-party service providers? (IA, TH, OA)
- idiosyncratic advantages - Individual LTIs are unique in that they have different origins, goals/objectives, and circumstances.
- time horizon - longer TH. Metrics focused on the movement toward (or away from) goals and objectives are more valuable for LTIs than those which signal that a goal or objective has been met
- Organizational ambidexterity - LTIs must be innovative and flexible
What are the five rules for developing effective investment management metrics for LTIs?
1. f/t r
2. f and a
3. c
4. t and p
5. mece
- function/task relevant - metrics are aligned with goals and objectives of the organization
- flexible and adaptive - revised based on investment experience, market risk, and market uncertainty
- consistent - performance of an organization can be assessed by viewing the metrics of its individual parts
- transparent and parsimonious - metrics should be simple to understand and apply
- mutually exclusive and collectively exhaustive - metrics should be available for key resources and activities while reinforcing responsibilities and motivating employees
What is meant by ‘environmental enablers’?
Environmental enablersare the intangible or untraded advantages derived from an organization’s given environment (e.g. culture, technology and governance)
What are three environmental enablers of LTIs?
Culture (e.g. member-first, knowledge sharing, and risk-taking/accountability), governance and technology.
What are the four keyproduction inputsrequired for investor production functions? (p, p, c, i)
- people - e.g. investment professionals. Contacts, networks, and locations all affect ability to attract talent.
- process - i.e. methodologies for making and implementing investment decisions (including risk management systems, systems of accountability, and delegation frameworks)
- capital - strategy is often driven by the size of a fund’s capital. Also influenced by time horizon, beneficiary of capital, ownership of capital.
- information - performance measurement and metrics are critical inputs for the production process
What are the four building blocks of the LTI applicable framework? (ee, pi, io, ir)
- environmental enablers
- production inputs
- intermediate outputs
- investment results (final outputs)
Why are metrics like rates of return and standardised performance measures not helpful in evaluating LTI performance?
- they ignore the associated risks taken to generate these returns
- they ignore the liabilities that are designed to be covered by the investment strategies chosen
- they ignore the differences between LTIs (environmental enablers and production inputs)
Intermediate outputsconnect environmental enablers and production inputs to results. What are the three IOs?
1. a
2. c
3. km
- alignment: long-term financial performance of LTIs should be aligned to the compensation and professional advancement of internal and external portfolio managers
- commitment: people should be committed to the long-term mission, beliefs, and goals of LTIs
- knowledge management: flow of information and knowledge is a key performance measure, as critical toward the achievement of goals
Environmental Enabler Metrics and Measures -
1. Metric: C (Measure: IB, SF, NPR)
2. BE (DU, OR)
3. T (PoB, TS)
- Culture.
a. Investment Beliefs. % of staff that can identify fund’s investment beliefs
b. Success Focused. Annual survey of staff, management, and the board to assess how they define success.
c. Net Promoter Rankings. How employees think of the organization - Board Engagement.
a. Delegations Utilized.Number of investments made in a year over the number of delegations utilized. The smaller the output, the more strategic the board.
b. Opportunities Reviewed (by the board) - Technology.
a. Percent of Budget
b. Technology Satisfaction.
Production Input Metrics and Measures:
1. Metric: P (Measure: WP, PM)
2. P (RG)
3. C (CoC)
4. I (DR)
- People
a. Work Product (how good it is)
b. Personnel Matters (missed workdays i.e. health and wellbeing) - Process
a. Risk Governance (looking at time spent assessing investment risks and opportunities to the total time devoted to other items on the agenda) - Capital
a. Capitalising on Capital. A higher capital base can positively impact investment strategies through more advantageous contractual terms, conditions, and fees - good to be creative with allocations, partnering with other LTIs etc. - Information
a. Data Ready. Determining the quality and quantity of information.
Intermediate Output Metrics and Measures:
1. Metric: A (Measure: GF, GC)
2. C (TH)
3. KM (KS, KQ)
- Alignment.
a. Goal Focused. Survey to see if employees can link goal of department to goal of organisation.
b. Goal Consistency. Survey to see if employees can link personal career goals to the overall organization’s goals. - Commitment.
a. Time Horizons. How long employees have been at the LTI. - Knowledge management.
a. Knowledge Sharing. Attendance at issue callout sessions and investment forum interactions.
b. Knowledge Quality. Assessing sources of investment insights (internal/external/public)
Investment Performance Metrics and Measures:
1. Metric: IP (Measure: PH, CE)
- Investment Performance
a. Portfolio Health. Using the example of a pension fund, the discount rate (target rate of return) can be used to assess the quality of the organization and the health of the pension plan. The lower the discount rate, the better the health. The funded status percentage divided by the discount rate is a valuable calculation, with a higher number being better.
b. Cost Efficiency. All of the costs associated with the investment department (i.e., infrastructure, space, staff, shared services, and outsourcing costs) relative to the performance of the fund.
