Reading 1.4 Flashcards
LTIs and who is considered
Long term investors: pension funds, superannuation fund, sovereign wealth fund, endowments, foundations, family offices, insurance companies
Superannuation fund
Australian employer sponsored retirement account
Innovative investment activities of LTIs
Reducing fees to external managers, reducing principal-agent cost, improving alignment of interests with managers
Measurement & metric definition and their relationship
1) Measurement - data
Metric - information
2) Metrics rely on measurements
3 main advantages of LTIs relative to other investors
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
insourcing
Make option approach = production of RRR using internal expertise = buy option approach
re-intermediation
Reintroducing a middle man in the investment process
5 golden rules for designing and applying metrics in investment management
- Effective metrics consistent across an organization = entire organization’s performance can be understood through the sum of its parts.
- Effective metrics are function- and/or task-relevant (everyone knows what to do)
- Effective metrics focus on simplicity and clarity
- Effective metrics are mutually exclusive and collectively exhaustive (MECE), focused on key activities and resources so that overlaps are minimized and responsibilities reinforced.
- Effective metrics are flexible and/ or adaptive given market risk and uncertainty; i.e., they are adapted and revised in relation to investment experience.
Endowment model - definition and other names
1) High allocation to alternative investments and low allocation to traditional investment
2) Yale model
3 environmental enablers (intangible advantages) of LTIs
1) Governance - processes that organizations use to manage themselves
2) Culture - beliefs, assumptions, values and models operating
3) Technology
Canadian investment model
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.
4 key production inputs
1) Capital (its size and return requirements)
2) People
3) Process - investment decision making process
4) Information
Why is measuring performance of LTIs in terms of rates of return over given time period is flawed?
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
“Intermediate” Outputs that indicate successful organizational performance
1) Commitment - from the team
2) Alignment - of the compensation of the team with the invest goals
3) Knowledge management
Investment organization long terms performance is the product of?
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
How is the investment journey kept on track?
By ensuring transparency (e.g., on commitment and alignment of interests) and assessing short-term performance towards long-term goals.
How LTIs measure environmental enablers?
1) Board Engagement - best boards focus on strategic issues (not tactical or deal specific)
2) Culture
3) Technology
How is board engagement and effectiveness measured? Theory and formula
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.
How is culture measured?
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
How is Technology (as an environmental factor) measured?
1) Percentage of budget spend on tech
2) team’s satisfaction of Technology.
How can team’s satisfaction of Technology be measured?
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?
How LTIs measure production inputs?
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
How can the utilization (capital creativity) of capital be measured?
- Is the capital allocation a competitive advantage for the fund (LTI)?
- Is investment size a critical issue when deciding to commit to an investment?
- Is capital allocation to investment opportunities established to deliver higher performance?
- Does the capital allocation and its associated constraints (e.g., liabilities and governance rules) allow for creative, long-term investments?
- Has the capital base been augmented (e.g. by consolidating internal funds, partnering with peers, or by managing third-party assets)?
How can People’s as a production input be measured?
1) how much they miss work
2) work output
How can process (governance) be measured
How much time is spent on analyzing & scrutinizing investment in relation to their risk level
How can Information governance be measured
- Is there a data governance policy?
- Is a data sub-committee on the board and/ or investment committee?
- Is a dedicated team focused on data management?
- Is there an ethics policy for data use (yours and others)?
- Is there a cost-benefit framework for judging the value of additional data and whether it is mission critical?
How intermediate outputs are measured by LTIs
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
How LTIs measure investment results
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
Time serving
Doing as little as possible at the job waiting for the time to retire
Funding ratio
Assets divided by liabilities
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?
How many opportunities have been considered relative to the number that was reviewed
