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How to create an investment committee for your firm


    On the rebalancing policy, the committee need to decide on whether they:

    • Want ongoing, quarterly, annual rebalancing or no rebalancing at all.

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    • Should they ‘insource’ or ‘outsource’ this process.

    The risk management policy includes:

    • How risk should be mitigated – an option here would be through volatility targeting or limits on asset class and fund sizes in the investment portfolios.

    • The consideration of other risks, such as liquidity and operational or reputational risk.

    • How attitude to risk and capacity for loss will be measured.

    In terms of performance measurement:

    • The time period(s) need to be defined.

    • A decision needs to be made on absolute versus relative, and if it’s the latter that the committee agrees on, will it be against a benchmark or sector average.

    • Will it be cumulative, year by year, or both.

    • Which metrics to use – the Sharpe, Sortino or Information ratio, or something else.

    • Finally, it’s monitoring, which is covered in more detail below.

    Composition of an investment committee

    To start at the top, an investment committee will have a chairman. The other committee members should all have backgrounds in investment management. Ideally, the experience and expertise of the members should be complementary. When, for example, one member’s strength is in fixed income, another member might be highly experienced in the area of alternative asset classes.

    Some firms, recognising the limitations of time and/or expertise within their ranks, will employ external members. The tenure of each committee member is often limited to a fixed length of time, after which the member must apply for re-election if they wish to continue their work.

    One advantage of new members coming in is that they bring fresh perspective and ideas. The disadvantage is that it may be difficult to keep a consistent focus, as it can take the new member a while to get up to speed with the funds they are monitoring plus the other related issues described above.

    How an investment committee should work

    Regular catch-ups are a must. An investment committee will normally meet quarterly, typically with a minimum number of members required for each meeting for the committee to be considered formed and able to act on any decisions made at that meeting. Physical presence isn’t always essential, as some committees allow their members to dial in through tele or video conference facilities.

    Finally, each meeting will be minuted and these minutes should be circulated to all committee members within days of the meeting and possibly published on the client part of the firm’s website.

    Aims and objectives of an investment committee

    In the majority of retail cases the investments a firm is managing on behalf of their clients, or has under their advice, will be in funds. They can either be several funds spread across various asset classes, or multi-asset funds which themselves invest in third-party fund managers.