BETTER INVESTMENT DECISION-MAKING

1. In your experience, what are the factors that lead to good decision-making by Trustees? What are the problems that impede effective Trustee decision-making? How could these problems be addressed?

She contends that a strong governance framework should be established for each board of trustees. The framework should clearly define the roles, responsibilities and accountabilities of each trustee, and establish measurement metrics that are appropriate for the fund. New trustees should also receive adequate training following their appointment.

“In our experience, the most effective boards include a sufficient number of independent trustees who have the required expertise and knowledge. This also allows for greater continuity in the decision-making process. Specific roles and responsibilities can be delegated to experienced service providers,” says Totaram.

Shaun Levitan, executive director and co-founder of COLOURFIELD,

says good decision-making starts with identifying the goals of the retirement fund. After all, a retirement fund exists to provide for a good retirement. The challenge that impedes effective decisions is when the roadmap to a good retirement has not been properly defined and too much focus is placed on the wrong decisions.

“We ask our clients, what good is beating the benchmark if you don’t reach your goals? Therefore, Trustees should make sure that the targets they set their managers are appropriate and goal orientated,” says Levitan.

Janina Slawski, director of marketing and distribution at OLD MUTUAL INVESTMENT GROUP

says trustees make good decisions when they are informed, have the right information in front of them and are guided by trusted advisers who can guide and inform their decision making. Trustees need to be asking questions and challenging information presented to them, rather than treating decision making as a “tick box” exercise where they all go along with the majority or blindly accept proposals put in front of them.

Trustees should always be presented with sufficient background information, in an accessible and understandable format, that will enable them to understand the issues and be able to express an opinion on them.

In term of the problems that impede effective Trustee decision-making, Trustees often do not come from backgrounds that give them deep understanding of retirement fund issues – they have their day jobs to do and being on a trustee board is a part-time job that they take on in addition to their full time jobs. They may be voted onto the board as a member trustee and take on the role only for a three year period before they stand down and another set of member trustees takes over. Getting familiar with retirement fund issues takes time, especially since there will often only be 4 or less trustee meetings in a year. New trustees may just be starting to get on top of issues and being able to challenge and add value to discussions as they reach the end of their term with a new set of trustees potentially about to join.

To address these challenges, it is critical that new trustees go through an on-boarding exercise that introduces them to retirement fund legislation, their responsibilities, and their fund’s details. This will give them the background to be able to make good decisions. They should also have training on more technical aspects, such as investments, if their background means they are not familiar with these concepts.

Independent Trustees who do have background on these issues, and who are familiar with retirement fund issues specifically, can be invaluable in providing insight and challenge beyond what can be brought by a “part time” Trustee. Extending the period that Trustees remain on the board, encouraging Trustees to stand for re-elections and staggering the term of office of member Trustees can all assist in creating a constant representation of Trustees with sufficient background and experience on the We consider the factors that make for effective decisionmaking and the effective implementation of investment ideas, by retirement fund Trustees as well as by professional investment managers. The questions that we put to the fund managers focus mainly on the latter, whereas the written material by Willis Towers Watson will focus mainly on Trustee decision-making.

Questions for fund managers:

board to add to decision making.

Natalie Phillips, head of SA institutional at INVESTEC ASSET MANAGEMENT

says the starting point for good decision-making by trustees is to ensure that they have a proper governance structure in place. A professional trustee board, with a number of independent representatives who have proven industry skills, can add value where specialist skills are required for certain decision making. This is especially important in a defined contribution environment, where funds have up to half of the trustee board comprise of member representatives who don’t necessarily have investment, actuarial or administration skills given their day jobs, and who are therefore not necessarily as well equipped to make effective decisions relating to their retirement funds.

Also, high turnover on trustee boards can delay decision-making on important strategic matters, which can result in a significant opportunity cost for a Fund and ultimately its members. The appointment of independent, specialist investment advisors and administrators who follow global, best-ofbreed practice, can also allow for more informed and balanced outcomes.

Monei Pudumo-Roos, executive director & head of institutional sales at PRESCIENT INVESTMENT MANAGEMENT

says the main factor that will lead to good decision making by Trustees is when there is a clear understanding by the trustees that they represent the members of the fund and no one else. Good decisions are made on behalf of the fund when trustees act in the best interest of the members. The fund can only be successful if members’ needs are well understood and catered for.

“Trustees tend to make better decisions when they are sufficiently informed. This can be achieved by on-going trustee training and be aware of the constant regulation changes and the environment.

“We are all aware that it is the norm for most South African Funds, especially Retirement Funds, to rely on outsourced advice. It is therefore highly important that advisors assist the Trustees to reach reasonably and sufficiently informed and non-conflicted decisions.

“It is important that Trustees can master the art of being able to allocate capital to sustainable returns and at the same time be mindful of impactful investing. Impactful investing takes many shapes and forms such as shareholder activism at board level and allocating capital to developing the infrastructure and social needs of South Africa. Key areas of the market where trustees could consider investing are green and clean energy projects as well as infrastructure assets.

“Regulation 28 certainly makes room for these types of asset classes which can provide long-term inflation-linked returns to their members with low volatility. Members will benefit from uncorrelated inflation-linked returns and at the same time will make a positive contribution to society and our country.

“Finally, we believe that a good Board of Trustees takes account of all relevant factors and manages conflicts of interest. Effective governance is essential, as this factor will assist the Board in archiving efficiency and gain trust from the members. It is important that decisions are taken collectively and again, in the best interest of the members. In this environment, members’ assets are well looked after, preserved and grown over time. Personal or individual satisfaction of the Trustees is a by-product of a well-run Fund.

“A Board of Trustees becomes successful when there is not only good but also effective communication between the Board and members. These can differ in many ways depending on the various dynamics. In this way, there is transparency and trust is built between the Board of Trustees and members as they will also feel empowered,” says Roos.

Charles Booth, portfolio at TRUFFLE

says trustees must understand managers processes well and ensue that the different styles are well diversified by appointing complimentary managers.

Trustees must have a good understanding of the asset management business particularly relating to different manager styles. Training and experience are essential for effective manager selection.

Nick Curtin, investor relationship manager: institutional at FOORD ASSET MANAGEMENT

says the most important factor is how the usually limited governance budget is allocated. The Board’s focus should be on key long-term strategic decisions with underlying operational decision-making delegated to those in the value chain best placed to make them. Continuity of board composition and service providers is also key to maintaining the long-term perspective that is so crucial to achieving desirable long-term investment outcomes. Lastly, an over-reliance on the various agents in the value chain can also lead to decisions that are often not in the members’ best interests. Trustees should be ever mindful of the lurking agent-principal problem. In our experience, investors with uncluttered governance structures have achieved the best long-term results. Keep it simple.

Tamryn Lamb, joint manager head of

at says factors that lead to good decision-making by trustees include taking a long-term approach to manager selection and asset allocation decisions, having the right blend of skills and experience on the trustee board and establishing a framework to evaluate the effectiveness of the decision-making process.

Typical problems that can impede effective trustee decision-making are turnover among the trustee board and volatility in markets. A high level of turnover can be an impediment, particularly if the rationale for key decisions isn’t clearly documented. For example, if an asset manager underperforms, it can be hard for the trustees to recall all the reasons why that manager was appointed. If key decisions or changes are documented clearly, however, it can be easier for successive generations of decision makers to assess whether these are panning out as expected or were incorrect – thus improving the quality of the overall decision making process.

institutional client ALLAN GRAY services

says one key contributor to sound decision-making is realistic return expectations. Over time, equities generally return about 13% a year or 6-7% above inflation. Expecting more, especially at a time when valuations are already high, carries the risk that trustees could make some poor choices.

Distinguishing between an episode and an event is also helpful. Episodes refer to periods of expensiveness or cheapness which may last for months or years while sudden events affect short-term valuations. Nenegate and Brexit were events with immediate market impact. Selling shares in the immediate aftermath ensured a loss. When an event occurs, it is in the interest of members that you stay calm and ride it out.

Understanding of valuation methods is also beneficial; for example, a rudimentary grasp of P/E ratios for shares and yields for fixed-interest products.

Trustee scepticism is another asset. Hero worship of a rock-star asset manager rarely translates into heroic fund performance.

Brad Preston, CIO: Listed Investments at MERGENCE INVESTMENT MANAGERS

says a well-balanced board with a strong commitment to look after the best interests of members and pensioners is a good foundation. This fiduciary commitment and focus is vital as is:.

Ensuring that decision making is supported by good and unbiased research and information.

The use of reputable independent advisors / consultants with no conflicts of interests is advisable.

Trustees should not be compromised by their other affiliations, be it workers’ union and/or employer interests as the case may be. Furthermore, using their positions to influence industry players for some or other benefit could be conflicting and compromising. If trustees act thus, decisions will be sub-optimal, biased, serve certain interests, and may not always be in the best interests of members and pensioners.

Shalin Bhagwan, head of fixed income at ASHBURTON INVESTMENTS

says in many instances, trustee decisions are arrived at after guidance from an appointed investment advisory firm who, in turn, tend to base their advice around a ‘’house view’’.

“Larger pension funds have the resources to seek out multiple viewpoints from different advisory firms as well as to research new investment trends and implementation approaches. This means that these funds benefit from diverse viewpoints. When coupled with a governance model (e.g. a dedicated investment sub-committee) that affords the trustees time to dig deeper into the pros and cons of important asset allocation and manager selection decisions, then decision making can be greatly enhanced. Resources aside, it is good practice for trustees to seek out alternate viewpoints.

“This could be done every three years, say, as part of the normal review of an adviser’s appointment by asking alternate providers to present how and why their advice to the pension fund may differ. Importantly these alternate proposals should not be generic but rather they should be based on the fund’s specific asset allocation and manager structure.

“In addition, advisers could be asked to present a list of alternate managers for each incumbent asset manager and the trustees could engage with the alternate manager, at no cost, to understand the pros and cons of using their incumbent manager. At the very least, such an exercise could be used to ensure that manager fees remain competitive,” says Bhagwan.

Anet Ahern, CEO at PSG ASSET MANAGEMENT

says trustee decision making is not very different from investment team decision making. In essence, goals need to be clear, the philosophy of managing the portfolio has to be clear, time horizons have to be strongly emphasized, the decision making framework has to be a valid one (there has to be evidence that it works over time) and it must be consistently applied.

A big danger for trustees is to react to shorter-term events or relative performance, often despite the overall portfolio performance still being well on track. In short, define the goal, figure out how to get there and then keep all eyes on the goal. Most retirement funds have a long time horizon and often trustee behaviour can be inconsistent with that, especially if the process is not clear.

Samantha Pauwels, portfolio manager at CANNON ASSET MANAGERS

says having knowledgeable and educated trustees certainly helps in generating good decision making. A board with experienced and financially literate trustees who are held accountable is equally important to ensure good decision making. It is important to have independent trustees, in order to ensure some form of impartiality in the decisions taken. Lack of experience or knowledge, misaligned incentives, inertia, peer or industry influence, as well as behavioural biases such as anchoring and familiarity are all potential problems that impede effective trustee decision making.

These issues should be addressed through continuous education and research, a regular review of past decisions, regular voting of trustees and independent assessment of the group of trustees.

Reena Joseph, institutional business development at AEON INVESTMENT MANAGEMENT

says many trustees make decisions based on the information provided to them by their consultants, good decision-making by trustees can be achieved if consultants are transparent and provide factual information in an unbiased manner. Experienced trustees will be able to critically assess and evaluate the information provided to them and be able to make good decisions for their funds.

Among the problems facing trustees are biases and prejudices of consultants, time constraints to fulfil trustee duties, and difficulty understanding investment jargon. The default and easy decision is for trustees and consultants to go for the safe decision of “big is best” and “big is safe”.

These biases and prejudices can be addressed by trustees being aware of conflicts of interests of all service providers, learning directly from predecessors and by being at the forefront of investment industry developments. Often institutional memory and processes are lost when new trustees join.

Asset consultants should be obliged to publically disclose every six months the historical composition, returns and relevant peer group rank of each fund manager that is held by a retirement fund that they consult to.