Outsourced investing should be a principles-based approach

 In the wake National Treasury’s discussion document on retirement savings, which aims to address issues in the retirement industry at a national level, institutional investors need to prepare for potential reforms by following strict investment principles.

This is according to Vuyolwethu Nogantshi, Senior Institutional Consultant at Nedgroup Investments, who says that as the popularity of outsourced investing continues to grow; good governance among institutional investors is critical to ensure that investment decisions made are in the best interests of stakeholders.

As such, Nogantshi urges investors to adopt a principles-based approach to investment decisions.

Principle 1: Activism

According to Nogantshi, the recently released Code for Responsible Investing (CRISA) seeks to promote good governance and in line with this, it’s important that the institutional investor acknowledges and understands the activism policy of the appointed investment managers.

“Activism is when investors play an active role in how the executives of the firms in their portfolio invest and manage investor capital. Understanding the activism policy of a manager means knowing the circumstances for intervention in a company where the manager holds securities, the approach for the intervention and how the effectiveness of the approach is measured,” said Nogantshi.

Principle 2: Asset Allocations

Secondly, Nogantshi stresses that institutional investors need to concentrate on asset allocation. He believes it is crucial to spend sufficient time on the asset allocation decision as this typically has more impact on the investment result than individual stock selection.

“It’s easy to get distracted with stock picking. However, in order to ensure that the chosen asset allocation is compatible with the liability profile and risk appetite of stakeholders, one should rather first consider the full universe of major asset classes,” he says.

Principle 3: Appropriate Benchmarks

Nogantshi stresses that benchmarks must be appropriate to liabilities.

“Institutional investors should apply sufficient thought to each asset class in whether an active or passive approach is valid. If one has select an active approach, it’s necessary to set appropriate targets and risk controls to ensure investment managers are able to follow a genuinely active approach.”

Principle 4: Clear Objectives

According to Nogantshi, in line with the National Treasury’s discussion paper, institutional investors must ensure that objectives are set to represent liabilities most accurately.

“Avoid setting objectives such as performance relative to peers or a market index, that have no relationship to the liabilities,” he says.

Principle 5: Effective Decision Making

“Delegate the investment decision-making responsibility to those with the necessary skill, time and resources to make those decisions effectively,” says Nogantshi.

Principle 6: Expert Advice

Nogantshi urges institutional investors to seek expert advice where appropriate – however he says the ultimate responsibility for decision making rests with them.

Principle 7: Mandates According to Nogantshi, mandates should set out objectives, benchmarks and risk parameters that are realistic in terms of the overall investment objectives.

“This means ensuring that the investment manager’s approach is appropriate to meet the objectives and time scales for measurement and evaluation. Any exclusion of asset classes or instruments should be justified in light of individual circumstances in order to ensure that the mandate can be met,” he says.

Principle 8: Transparency

Nogantshi says institutional investors should strive to maintain a statement of investment principles that highlights all the critical areas of the investment decision-making process.

“This includes stipulating who makes decisions and why; clarifying investment objectives; explaining the investment strategy, what mandates are in place, the nature of fees per advisor and why; and any ethical considerations,” he says.

Principle 9: Regular Reporting & Performance Measurement

Finally, Nogantshi says, a commitment to performance reporting is crucial.

“All participants in the investment decision-making process should be subject to measurement. This should include all service providers as well as those who have been “awarded” the decision-making responsibilities,” he says.


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