An inside look at portfolio governance and changes to investment strategies.
When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.
What is best-in-class portfolio governance? Most member companies have an investment policy that includes a high-level statement that can only be modified by the board, with underlying investment policies and procedures that may be changed by the treasurer or assistant treasurer; some require CFO approval.
- The most convenient practice is to have a policy that allows the treasurer or assistant treasurer approval of investment mandates with monthly or quarterly reporting to the CFO and yearly reporting to the board. But is most convenient also best in class? Yes, if responsiveness during the liquidity crisis could have been inhibited by waiting for board approval.
Reinventing an investment program. One member recently went through the process—thankfully before the global pandemic—of dusting off the cobwebs on her company’s investment policy and shared with peers the following advice for successful realignment.
- Consider your cash buckets (i.e.: operational cash versus cash reserves), establish a minimum cash framework and back test your operating buffers.
- Determine and maintain minimum operating cash balances.
- Ensure sufficient liquidity to meet ongoing operational & strategic business needs.
- Establish a new “cash culture” mindful of the cash impact from operational decisions.
- Secure buy-in from management.
- Align more frequently with FP&A.
- Host biweekly meeting with treasurer & finance heads.
- Improve treasury Cash Forecast by making departments accountable for forecast variances.
- Conduct an investment policy review annually (or more frequently as needed)
- Oversee risks, controls, managers and performance within treasury and accounting teams.
- Address manager violations. One member uses Clearwater to monitor managers’ decisions and performance, making the managers reimburse the company if they violate a policy and have to sell an asset at a loss; if the manager was out of compliance at time of purchase, the CFO is alerted.
Benchmark for success: This starts with monitoring the investment portfolio) daily and report at least monthly and quarterly. Also:
- Pay attention daily to market moves, fair market value changes, unrealized gains/losses.
- Compliance guidelines should be established via dashboards and baseline reporting.
- One member advocated that reporting is a way to confirm alignment with internal stakeholders.
- Although his 10-page policy is approved annually, every quarter his team reports portfolio performance to the board.
- Each month, his team sends the treasurer and CFO reports on permissible investments, holdings, performance, variances to prior years.
