Investment policy: Not just for pension funds

I recently came upon the newly revised statement of beliefs by CalPERS. Many of these beliefs form the basis for a sound investment policy, not just for the pension fund giant, but for anyone else. The most important for me was their first point:

1) Liabilities must influence the asset structure: I recently wrote (see Think investment policy first, not just NFP) that I was a big fan of using an asset-liability management framework for pension plans and foundations. After all, the liability framework defines your objectives. If you don't know your objectives, how can you know if you are succeeding?

Here are my comments on the others:

2) A long time horizon is a responsibility and an advantage: Pension funds have the luxury of being patient. The main determinant of returns is the asset mix (see belief #6). In a steady state where the fund isn't being liquidated, they can wait out the sub-par equity market returns, which can last for decades. Individuals, on the other hand, don't have the same luxury.

3) CalPERS investment decisions may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and beneficiaries. In my last post on this topic (Think investment policy first, not just NFP), I suggested that the investor deal with the soft issues of family dynamics surrounding his foundation. If expectations are not managed properly and agreed to, it can result in ugly family disputes and litigation between family members decades later.

4) Long term value creation requires effective management of three forms of capital: financial, physical and human. These kinds of governance structures are more appropriate to pension funds than for individuals.

5) CalPERS must articulate its investment goals and performance measures and ensure clear accountability for their execution. Agreed. See my comments on belief #1.

6) Strategic asset allocation is the dominant determinant of portfolio risk and return. Also see my previous comments on belief #1.

7) CalPERS will take risk only where we have a strong belief we will be rewarded for it. This is a variant on Richard Grinold's Fundamental Law of Active Management (see my previous comments on that topic here).

8) Costs matter and need to be effectively managed. This belief is another way of stating belief #7. The size of your bet should be related to your perceived edge. If you don't have an edge, but you feel that you need to be exposed to that asset class, then minimize your cost.

9) Risk to CalPERS is multi-faceted and not fully captured through measures such as volatility and tracking error. I have always thought that risk is multi-dimensional. Too many hedge funds forget that simple principle.

10) Strong processes and teamwork and deep resources are needed to achieve CalPERS goals and objectives. A bit of a motherhood and apple pie statement.

In summary, the CalPERS statement of beliefs is an illustration of why individuals need to have an investment policy and plan. The practice of investing isn't that hard, we just get overly caught up in the story of the day, such as what the Fed did or didn't do.

Once you have the plan, then the road forward becomes a lot easier.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.