Reading 1.4

Question 1

LTIs and who is considered

Answer 1

Long term investors: pension funds, superannuation fund, sovereign wealth fund, endowments, foundations, family offices, insurance companies

Question 2

Superannuation fund

Answer 2

Australian employer sponsored retirement account

Question 3

Innovative investment activities of LTIs

Answer 3

Reducing fees to external managers, reducing principal-agent cost, improving alignment of interests with managers

Question 4

Measurement & metric definition and their relationship

Answer 4

1) Measurement - data
Metric - information

2) Metrics rely on measurements

Question 5

3 main advantages of LTIs relative to other investors

Answer 5

1) Long term time horizon - metric should show that the direction of travel is correct, not that an objective has been achieved

2) Idiosyncratic (unique) advantages - insourcing and re-intermediation

3) Organizational Ambidexterity - organizations need to be adaptive

Question 6

insourcing

Answer 6

Make option approach = production of RRR using internal expertise = buy option approach

Question 7

re-intermediation

Answer 7

Reintroducing a middle man in the investment process

Question 8

5 golden rules for designing and applying metrics in investment management

Answer 8

1. Effective metrics consistent across an organization = entire organization’s performance can be understood through the sum of its parts.
2. Effective metrics are function- and/or task-relevant (everyone knows what to do)
3. Effective metrics focus on simplicity and clarity
4. Effective metrics are mutually exclusive and collectively exhaustive (MECE), focused on key activities and resources so that overlaps are minimized and responsibilities reinforced.
5. Effective metrics are flexible and/ or adaptive given market risk and uncertainty; i.e., they are adapted and revised in relation to investment experience.

Question 9

Endowment model - definition and other names

Answer 9

1) High allocation to alternative investments and low allocation to traditional investment

2) Yale model

Question 10

3 environmental enablers (intangible advantages) of LTIs

Answer 10

1) Governance - processes that organizations use to manage themselves

2) Culture - beliefs, assumptions, values and models operating

3) Technology

Question 11

Canadian investment model

Answer 11

Involves in-house investment management, which requires independent corporate governance, and advocates assets that hedge liability risks and inflation (e.g., real estate and infrastructure) and extensive diversification.

Question 12

4 key production inputs

Answer 12

1) Capital (its size and return requirements)

2) People

3) Process - investment decision making process

4) Information

Question 13

Why is measuring performance of LTIs in terms of rates of return over given time period is flawed?

Answer 13

1) This metric ignores the risks
2) Comparison to other funds can be difficult because different funds have different time horizons
3) Different Funds have unique benefits

Question 14

“Intermediate” Outputs that indicate successful organizational performance

Answer 14

1) Commitment - from the team

2) Alignment - of the compensation of the team with the invest goals

3) Knowledge management

Question 15

Investment organization long terms performance is the product of?

Answer 15

1) environmental enablers
2) production inputs
3) Investment professionals’ commitment
4) Ensuring alignment of interests
5) sharing of information and knowledge 6) using its comparative advantages and

Question 16

How is the investment journey kept on track?

Answer 16

By ensuring transparency (e.g., on commitment and alignment of interests) and assessing short-term performance towards long-term goals.

Question 17

How LTIs measure environmental enablers?

Answer 17

1) Board Engagement - best boards focus on strategic issues (not tactical or deal specific)

2) Culture

3) Technology

Question 18

How is board engagement and effectiveness measured? Theory and formula

Answer 18

1) Opportunities reviewed - percentage of opportunities the board receives for review and reviews.

Metric is calculated as (A + B)/B, where A is the number of investment opportunities considered by an LTI and B is the number of investments reviewed by its board.

2) Delegations used - how much the board delegates so that it can focus on strategy

The metric is calculated as the number of investments made by the organization in a given period divided by the number of delegations used in investment decision-making. The smaller the ratio, the more strategic (and less micro-managing) the board.

Question 19

How is culture measured?

Answer 19

1) Net promoter rankings - how many employees would recommend the company

2) Success focused - how have the employees internalized the organization’s goals

3) Investment Beliefs - how well is the investment approach understood by the team

Question 20

How is Technology (as an environmental factor) measured?

Answer 20

1) Percentage of budget spend on tech

2) team’s satisfaction of Technology.

Question 21

How can team’s satisfaction of Technology be measured?

Answer 21

i. Is the fund’s technology sufficiently good that it does not cause me problems in my job?

ii. Does the fund’s technology make my job easier?

ili. Is the fund’s technology better than average (compared to other LTIs)?

iv. Does the fund have a culture of innovation and experimentation around technology?

v. Does the fund have a team or resource focused on partnering with technology partners on new investment-related technologies?

Question 22

How LTIs measure production inputs?

Answer 22

1) Capital Leverage - how well the capital is used

2) how Healthy and Happy the employees are

3) Process - level of governance

4) Information - how well is information gathered and utilized

Question 23

How can the utilization (capital creativity) of capital be measured?

Answer 23

1. Is the capital allocation a competitive advantage for the fund (LTI)?
2. Is investment size a critical issue when deciding to commit to an investment?
3. Is capital allocation to investment opportunities established to deliver higher performance?
4. Does the capital allocation and its associated constraints (e.g., liabilities and governance rules) allow for creative, long-term investments?
5. Has the capital base been augmented (e.g. by consolidating internal funds, partnering with peers, or by managing third-party assets)?

Question 24

How can People’s as a production input be measured?

Answer 24

1) how much they miss work

2) work output

Question 25

How can process (governance) be measured

Answer 25

How much time is spent on analyzing & scrutinizing investment in relation to their risk level

Question 26

How can Information governance be measured

Answer 26

1. Is there a data governance policy?
2. Is a data sub-committee on the board and/ or investment committee?
3. Is a dedicated team focused on data management?
4. Is there an ethics policy for data use (yours and others)?
5. Is there a cost-benefit framework for judging the value of additional data and whether it is mission critical?

Question 27

How intermediate outputs are measured by LTIs

Answer 27

1) Commitment - how long are the labor contracts

2) Alignment - (how goal focused the department is how goals of the organization are consistent with personal goals)

3) Knowledge management - knowledge sharing throughout the organization & knowledge quality

Question 28

How LTIs measure investment results

Answer 28

1) Portfolio health - discount rate (the lower the better) & Funded Status (funding ratio divided by discount rate) - the higher the better

2) Cost efficiency - how cost efficient is the fund when compared to the expenses of outsourcing

Question 29

Time serving

Answer 29

Doing as little as possible at the job waiting for the time to retire

Question 30

Funding ratio

Answer 30

Assets divided by liabilities

Question 31

How does Clark and Monk’s paper on assessing long-term investor performance suggest calculating the metric for opportunities reviewed by a long-term investor’s board of directors?

Answer 31

How many opportunities have been considered relative to the number that was reviewed