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.
Once fundamentals are in place the need for documentation continues
When the beliefs, rules and structure of an investment committee have been agreed, the committee can then be clear in its governance role, but must always evidence its decisions on whether or not to recommend possible actions. If changes in any of the investments are needed, then the pros and cons of all the alternative options (including doing nothing) need to be clearly documented.
Patrick Norwood is insight analyst for funds at Defaqto
