Why it matters that a Board of Trustees has an Investment Philosophy

Increasing regulation in the financial services industry, particularly retirement reform proposals, has highlighted the importance of the role that a board of trustees plays. Every board should have a clear investment philosophy – a set of core beliefs an

In formulating its principles, the board may take into consideration issues such as the importance of diversification in reducing risk, the importance of time spent in the market that is required to enjoy the benefits of compound interest, or even the importance of minimising costs.

After such consideration, the investment philosophy and principles adopted by the board should subsequently inform the Fund’s investment strategy and provide a useful reference for assessing the merits of investment opportunities that present themselves to the board.

The board’s investment philosophy and principles are an essential point of departure for the design of the Fund’s investment strategy. An investment strategy refers to the manner in which the board implements its philosophy and principles.

For example, if the board believes that markets are inefficient, market participants are irrational (the emotions of greed and fear drive sentiment in the short term resulting in over- and under-reaction to news) and that diversification is an important consideration in the portfolio construction process, a reasonable investment strategy which logically follows from this could involve an actively-managed global multi-asset portfolio.

Although the board’s investment philosophy and principles are an important consideration in the design of the Fund’s investment strategy, equally as important are considerations of the Fund’s investment objective, risk appetite and constraints, which include legal and regulatory considerations, time horizons and liquidity requirements, amongst others.

By having a clearly articulated investment philosophy, it becomes easier to assess the relevance of opportunities that arise. Just because a particular stock, asset class or asset manager is performing well, is not necessarily a sole reason to include it in the Fund’s investment portfolio. Any investment decision should always be based on whether opportunities fit in with the Fund’s broader investment philosophy, principles and strategy.

Of course, the board’s investment philosophy and principles may evolve over time as the board adopts a different view on the behaviour of markets and market participants, for example. In reality, however, if trustee boards take the time and effort to think critically about their investment philosophy and principles at the outset, in essence, the core beliefs that underline their investment decisions should remain consistent over time.