In Callan’s 46 years as an institutional consulting firm, we have advised the fiduciaries and staffs of many hundreds of funds on their investment strategies and policies. We believe that the primary objective of these investment reviews is to develop a consensus on the fundamental investment beliefs of the fiduciaries driving the process. These beliefs can then inform an effective investment policy statement (IPS), which in turn can be used to determine the fund’s investment strategy, including its target asset allocation and investment manager structure. In addition, fiduciaries need to be confident in, and conversant with, their investment beliefs in order to explain and defend their chosen investment strategy, and stay the course in both good times and bad.
Callan strongly believes in the discipline of establishing tailored investment beliefs for each client. Callan documented our own investment beliefs as an institutional investment consultant decades ago, and we periodically review and reaffirm them. This process enables us to consistently guide clients as they evaluate the constantly evolving investment options to establish their own tailored investment approach. One of Callan’s core beliefs is that there are numerous “correct” investment strategies a client can reasonably select, and multiple ways to implement them.
However, to be successful a client must pick one investment strategy and structure that is most likely to be maintained by the fund over the long term, in spite of board or staff turnover. This can only be done if it can be demonstrated to successor fiduciaries that the strategy is compatible with the fund’s investment beliefs.
We believe the best start to documenting a client’s fundamental investment beliefs is to review the current asset allocation, investment policies, guidelines, and manager structure. (We also think it is valuable to review the ethical underpinnings of the organization during any strategic review; please see my paper “Ethics 101 for Investment Professionals” for additional information.) The fund can then derive its investment beliefs based on the policies and strategies it has already adopted.
Funds can also review investment beliefs from other organizations for ideas, since many are publicly available. Working with a consultant, fiduciaries can then discuss and debate the beliefs, and reconcile any inconsistencies. Callan believes this objective look at a client’s investment program, with the help of an independent professional organization, will provide fresh insights for decision makers on what their investment beliefs really have been, and what they should be. A fund’s investment beliefs should be completely consistent with the investment policies and strategies, or one should be revised. This exercise forms the basis for documenting a set of investment principles that will be very useful to fiduciaries in evaluating any strategic initiative or investment opportunity.
A consultant’s role is to be a facilitator for fiduciaries in distilling the complexities of the investment program into a strategic, principles-based set of beliefs. This provides fiduciaries an easy-to-understand document (one or two pages is ideal) to assist them in governing the plan and evaluating the impact of all future investment decisions, to give them the courage to defend their position at its weakest moment, and to share with successor fiduciaries.