Effective Governance Models Elements

Question 1

What is investment governance (CFA context)?

Answer 1

The structure expected to ensure assets are invested to achieve the asset owner’s objectives within risk tolerances/constraints and in compliance with laws/regulations

Question 2

What are the 6 common elements of effective governance models?

Answer 2

1. Articulate long/short-term objectives

2. Allocate decision rights/responsibilities

3 . Specify IPS development/approval process

4. Specify SAA development/approval process

5. Establish reporting framework

6. Periodically undertake governance audit

Question 3

What does “articulate long- and short-term objectives” typically include?

Answer 3

Usually a return objective, plus objectives like meeting future obligations, maintaining liquidity, and minimizing future required contributions.

Question 4

In this framework, how is risk tolerance commonly described?

Answer 4

Through exposures such as liquidity risk, volatility, and risk of loss.

Question 5

What is the core principle behind allocating decision rights and responsibilities?

Answer 5

Decision rights should vary with program size and internal staff capability (knowledge/skills/abilities), and delegation should go to those best qualified to make informed decisions.

Question 6

What sections should the IPS process specify (high level)?

Answer 6

Introduction, Statement of Investment Objectives, Investment Constraints, Duties & Responsibilities, Investment Guidelines, Reporting.

Question 7

What should the IPS Introduction do?

Answer 7

Describe the purpose and scope of the IPS document and describe the asset owner.

Question 8

In the IPS, who are typical parties listed under “Duties & Responsibilities”?

Answer 8

Investment committee, investment staff, and third-party providers (e.g., external managers/consultants).

Question 9

Who typically retains approval authority for the strategic asset allocation (SAA) decision, and what else should the process include?

Answer 9

The investment committee typically retains SAA approval; the process also includes information relevant to rebalancing.

Question 10

What are the key questions an effective reporting framework answers?

Answer 10

“Where are we now?” “Where are we relative to goals/objectives?” and “What value has been added/subtracted by management decisions?”

Question 11

What is a governance audit meant to do, and who should perform it?

Answer 11

Ensure established policies, procedures, and governance structures are effective; should be performed by an independent third party.

Question 12

IPS features

Answer 12

• Introduction
• Statement of the investment objectives
• Duties and responsibilities
• Investment guidelines
• Reporting

Question 13

Steps to selection in the SAA

Answer 13

1 : Quantify objectives

2 : Establish risk tolerance

3 : Determine investment horizon

4 : Determine other constraints and requirements

5 : Determine asset allocation approach

6: Specify asset classes + CME for them

7 : Develop a range of asset allocation choices for consideration

8 : Test/simulate potential stressor