As well as monitoring the performance of the various funds that the clients are invested in, the committee should satisfy itself that the fund manager is sticking to their brief. For example, if a ‘value’ manager is being used, are they maintaining a value style at all times, rather than drifting away from value investing during times when value investing is out of favour?
In addition, the investment committee should have in place, and continually review, a list of ‘substitute’ funds that could be used instead, should any of the current managers need replacing to balance a portfolio.
Then there is ongoing monitoring. Data for short, medium and long-term performance of each fund, together with the corresponding returns of the appropriate benchmark or sector average, should be issued by the relevant fund management firm to investment committee members a few days before each meeting, to give the committee enough time to review the data and prepare any questions they may have.
Other output will normally include risk (volatility) statistics and the analysis of the holdings of the funds – for example stock, sector and region over/under-weights of the fund, versus those of the benchmark. Some economic background and market views will also be useful for the committee to have before or in the meeting.
The responsibility for the monitoring of each funds under management or advice should be allocated to an individual committee member who should ideally have experience in that area.
It is important not to over-react to any short-term underperformance. It is a consequence of active fund management that there will be odd quarters (or even two or three consecutive quarters) where the fund underperforms its benchmark if that manager’s method or style is currently out of favour, or their buy decisions take longer to come to fruition than expected.
If the manager has stuck to the process they originally stated and the committee bought into, with no changes in key personnel, then it normally makes sense to recommend holding onto that fund rather than going through the process of changing, which costs time and money.
If, however, more serious issues are identified with the fund then, after discussion within the investment committee – which may take place over more than one quarter as the fund is ‘put on watch’ – the decision may be made to sell that fund and replace it with one of the substitute funds.
Examples of such issues include the investment team or star manager leaving the firm, the process changing, the style drifting, or when a problem is identified within the organisation.