Why would a family office appoint an investment committee?

 

"An experienced, well-resourced investment committee adds value by strengthening governance to protect and enhance a family’s wealth "

” – designing thoughtful strategic objectives, policies and guidelines and by independent challenge and oversight of strategy implementation. With knowledgeable and insightful members, an investment committee exercises independent judgement to ensure the family’s goals are aligned with the agreed objectives and strategic asset allocation.

“Creating a transparent governance structure removes any ambiguities around responsibilities and the degree of discretion delegated to investment managers.  This can sometimes extend to family members themselves – to stop them promoting and investing in ‘pet’ projects without appropriate analysis and scrutiny.

“Families want comfort that the strategic asset allocation adopted will not lead to excessive drawdowns and permanent capital loss.  An investment committee can challenge managers and ‘keep them honest’ to give a family additional confidence that their spending and liquidity needs will be met alongside returns that are growing in real terms.

“A well-informed investment committee should also ensure consistency with other areas of family wealth – for example, the family’s business or philanthropic interests. Such alignment can often be facilitated by a family member being in attendance or a member of an investment committee.”

What are the key responsibilities for an investment committee?
"First and foremost, an investment committee must understand the family’s needs and aspirations.

“They can then, agree on the investment objectives, followed by policies and guidelines.

“To set effective objectives requires a careful understanding and interpretation, followed by grounded strategic asset allocation (‘SAA’) modelling – some committees may appoint an investment consultant to assist here. Questions to explore include:

  • What is the purpose of the assets?
  • What is the time horizon; is it in perpetuity or shorter to cater for the current generations only?
  • What are the likely distribution requirements and potential inflows over time?”

“An investment committee sets the guidelines and risk parameters needed to compound returns to achieve long-term objectives. They oversee the implementation of the SAA and either select or recommend managers, depending on the brief.  Ongoing performance monitoring and evaluation is also important; were returns achieved through good luck or by exercising judgement? “

In your experience, what are the key challenges and what makes for a successful investment committee?
"The transition from the traditional ‘60-40’ equity and bond investment model towards greater asset diversification is a key challenge for investment committees.

“They need deeper and broader skills to achieve a successful outcome. Many investment committees now allocate to alternatives, structured credit, high yield, infrastructure, insurance-linked securities, private debt and equity, infrastructure and hedge funds, alongside more traditional assets.

Another challenge is the family’s investment structure; a complex structure will influence the investment committee’s responsibilities.  There are broadly three approaches:

First, all decisions may be outsourced, for example to a single multi-asset manager. This makes a committee’s life easier, provided investment returns are not compromised

An out-sourced CIO or investment consultant advises on strategic asset allocation and manager selection. Or,

For larger funds, an in-house CIO may drive investment decisions, including manager selection, with challenge and ratification from the investment committee. Using multiple specialist managers can add value within defined investment universes. However, this approach usually places a greater burden on an investment committee, particularly if they deploy asset allocation in a tactical way

“With allocations to private markets increasing, a successful investment committee will focus not just on the expected return enhancement but also on the liquidity profile of the portfolio and management of cashflows and commitment ratios.

“A sharp eye on costs is also important;– compounding high fees and hidden charges is toxic. The best committees use active managers with high fees only in areas where added value is likely. Elsewhere, a passive approach is usually more cost-effective.

“Finally, a successful investment committee will gain confidence in a thoughtfully structured portfolio to avoid making short-term decisions during market downturns that may unnecessarily lead to permanent capital loss.”

What constitutes a good investment committee member?

“A good investment committee appoints members with current investment knowledge or varied industry experience which creates a complementary balance of expertise among members.”

“A good committee member has an open yet questioning mind to assess fresh opportunities as well as challenge conventional norms and strategies that seem ‘too good to be true’.

“How the team works together is important. If an investment practitioner is appointed, consider where their skill set lies – a PE specialist may not be as appropriate as a fund of fund specialist in making asset allocation decisions. It depends on the need and blend of skills.

“Do not underestimate the need for patience – to explain concepts, nor the ability to communicate without complexity.  Skilful chairing supports transparent, informed discussions where members are not afraid to speak up. Often the simplest questions asked are the most pertinent.”

We have witnessed a greater focus towards sustainable investment. Are investment committees under increasing scrutiny and facing greater responsibility to the family?

“Sustainable investment has shot up the agenda of many investment committees. For wealthy families, investing responsibly following an ESG or impact approach has become important to beneficiaries, particularly the next generation, and also to trustees who face the prospect of wider fiduciary responsibilities.

“Committee members also have to be cogniscent of external impressions. Reputational damage from ignoring sustainable risks can be immense for families, trustees and committee members personally. While we see many more investment committees adopting an ESG approach, whether active or passive, we urge investment committees not to skimp on due diligence around funds and managers –many are ‘green-washing’ to ride the ESG wave.”

 

Diane Seymour-Williams

Diane Seymour-Williams Partner at Acorn Capital Advisors,

Diane is a founding partner of Acorn Capital Advisers. She has broad experience across the investment management industry as a leader and practitioner, initially as a portfolio manager and CIO and, subsequently as a CEO and in client focused roles. Diane has chaired Investment, Risk and ESG committees. Diane has considerable international experience across Asia Pacific, Europe, and North America, including global boutique and start-up businesses. She is a non executive director of Mercia Asset Management Plc, SEI Investments (Europe) Ltd, PraxisIFM Group Limited and Standard Life Private Equity Trust Plc. Diane also sits on the Investment Committees of Newnham College Cambridge and the Canal & River Trust. She holds a degree in Economics from the University of Cambridge.