There are seven areas of oversight that trustees of higher education institutions should consider as fiduciaries. Mistakes in any of these areas can negatively impact the expected growth and risk profile of the portfolio, and in turn, the institution’s financial well-being.
Mistake #1: Not Tracking Total Investment Portfolio Performance
To capture the performance results of the entire portfolio, details from each investment manager and custodian must be captured, reconciled for cash flows, analyzed using a single point in time and submitted to the client soon after the relevant reporting period. Timely, comprehensive reports provide relevant information in sufficient detail to allow for manager critique and actionable conclusions by the investment committee.
Mistake #2: Infrequent Investment Manager Review
Investment manager performance varies over time and should be evaluated frequently─at least quarterly. Trustees as fiduciaries are charged with the important task of oversight. Oversight does not mean to actively manage the investments, but to ensure that the policies are being followed by those hired to manage. Greater frequency of reporting provides additional insight into contributors of the actual return.
Mistake #3: Undisciplined Portfolio Rebalancing
Unless the risk profile of your institution changes, such as a change in the size or structure of the liabilities, the investment committee should develop and maintain a disciplined approach to addressing portfolio risk through rebalancing. At a minimum, fiduciaries should implement a policy that includes mandatory annual rebalancing of the investment portfolio, which can be done in conjunction with the annual review of the investment policy statement. An annual rebalancing policy will also lead to lower transaction costs versus a more frequent rebalancing policy.
Mistake #4: Focusing on Returns Without Considering Volatility
Focusing on returns without considering volatility can result in a misalignment of the investment portfolio’s goals. The first step is to properly define “the market.” For many organizations, the liabilities of a foundation or endowment are “the market.” In this case beating the market would mean mitigating portfolio volatility and generating more consistent year-to-year returns to satisfy those liabilities.
Mistake # 5: Not Fully Understanding the Risk of Alternative Investments
The most compelling argument for an allocation to alternative investments is past returns. This is ironically juxtaposed to the lack of transparency of most investments, as the ability to operate in secrecy ostensibly allows the fund manager to capitalize on opportunities before they become known to other investors. The lack of transparency also makes it more difficult for trustees to understand the strategic nature of the investment and the probability to continue the past performance. Realistically, the less we know about an investment, the less confident we can be of the result.
Mistake #6: Blindly Investing in an Advisor’s Proprietary Vehicles
It is not uncommon for portfolios to contain a mutual fund that is managed by the bank or brokerage firm that is also functioning as advisor to the client. Although there is nothing illegal about using proprietary mutual funds in a bank or broker portfolio, fiduciaries should be sensitive to the existence of proprietary mutual funds in portfolios under their watch, as they may pose conflicts of interest and self-dealing issues. Before any commitment to proprietary funds, fiduciaries should compare fees and other performance and risk measures of similar strategies and nonproprietary alternatives.
Mistake #7: The Advisor Is Not Independent
Independence is critical to an advisor’s ability to represent the interests of the client, free of potential conflicts. It is remarkable to see a policy that is written to address trustee conflicts, but does not consider vendor/provider conflicts. Further, many advisors use a standardized contract that is used for both individuals and institutions. Trustees must ensure that they do not inadvertently grant broad discretionary powers to the advisor which may supersede the restrictions found in the board-adopted investment policy statement.
It is more important than ever for college and university board members to be knowledgeable of their organization’s mission, policies, and investment risk as well as understanding their responsibilities as fiduciaries. In today’s uncertain investment environment, fiduciaries must apply these tenets to reduce organizational risk and maintain financial stability as they work to ensure the institution remains viable for years to come.
William M. Courson is the president of Lancaster Pollard Investment Advisory Group in Columbus. He may be reached at firstname.lastname@example.org.