The document summarizes the fiduciary responsibilities of investment committees and discusses challenges they face, oversight structures, and best practices. It notes that committees must balance manager proliferation, market complexity, selection processes, and their own dynamics. Effective oversight requires understanding different fiduciary levels and allocating decision rights. Best practices include strong leadership, decision-making frameworks, ongoing education, and avoiding blame.

1. November 7, 2011
Brian T. Gray
Vice President – Institutional Client Development
F I D U C I A R Y R E S P O N S I B I L I T Y
O F C O M M I T T E E S

2. Confidential – Not for Redistribution1©2011Fund Evaluation Group, LLC
I. Summarize the Challenges Facing Governing Fiduciaries
II. Discuss Oversight Structures
III. Provide Thoughts on Best Practices
AGENDA

3. Confidential – Not for Redistribution2©2011Fund Evaluation Group, LLC
• Trustees / Investment Committee Members / Investment
Advisors / Money Managers
• Varying Degrees / No Full Delegation
• Stewards – Bound by Loyalty and Good Faith
– Legal responsibility to act in best interest
• Responsible for Prudent Investment Decisions
– “Process is Prudence”
– Not defined by desirable outcomes
WHAT IS A FIDUCIARY?

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• Manager Proliferation
• Market Complexity
• Manager Selection
• Committee Dynamics
• Process Deficiencies
• Summary of Ineffective Committees
CHALLENGES FACING FIDUCIARIES

5. Confidential – Not for Redistribution4©2011Fund Evaluation Group, LLC
Source: Investment Company Institute
Note: Data for funds that invest primarily in other mutual funds were excluded from the series.
The data contain a series break beginning in 1984. All funds were reclassified in 1984 and a separate category was created for
hybrid funds.
PRODUCT PROLIFERATION – U.S. MUTUAL FUNDS
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Number of Funds of the U.S. Mutual Fund Industry 1970-2009

6. Confidential – Not for Redistribution5©2011Fund Evaluation Group, LLC
Source: PerTrac Financial Solutions. Numbers of new funds have not been adjusted to account for survivor bias.
PRODUCT PROLIFERATION – HEDGE FUND LAUNCHES

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• Number of managers per fund/plan
– Diversification
– Alternative investments
– Global mandates
• Increased use of derivatives
– Substitution
– Hedging
MARKET COMPLEXITY

8. Confidential – Not for Redistribution7©2011Fund Evaluation Group, LLC
• Typically base decisions on “finals” presentation
• Based on claim – “we are better than others”
• Cannot prove claim
• Committees have limited time and information
• Performance is not persistent
• Presentation skills ≠ investment skills
• Yet, Committees rely on presentations and performance
MANAGER SELECTION

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HIRING / FIRING MANAGERS IS DIFFICULT
Source: The Selection and Termination of Investment Managers by Plan Sponsors, Goizeuta Business School, Emory
University, 2004 & Why Do Institutional Plan Sponsors Fire Their Investment Managers?, Heisler, Knittel, Neumann,
Stewart, 2004
PercentagePoints
3 Year Excess Return Before and After Manager
Termination

10. Confidential – Not for Redistribution9©2011Fund Evaluation Group, LLC
CREATES
INVESTMENT
SLIPPAGE
• Delays
• Inappropriate decisions
• No accountability
COMMITTEE DYNAMICS
VOLUNTEERS/
NOT FULL TIME
VARYING DEGREES OF
INVESTMENT KNOWLEDGE
SEEK CONSENSUSQUARTERLY
MEETINGS
DECISIONS BASED
ON COMFORT /
REPUTATION

11. Confidential – Not for Redistribution10©2011Fund Evaluation Group, LLC
PROCESS DEFICIENCIES
Barriers to Excellence 1
1 Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra
98%
48%
43%
35% 35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Poor Process Inadequate
Resources
Lack of focus
on Mission
Conservatism Insufficient
Skills

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INEFFECTIVE COMMITTEES 1
1 Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra, and
Investment Committees: Vanguard’s View of Best Practices, Catherine D. Gordon, June 2004
S t r u c t u r a l
Confer membership
as a reward
Don’t take time to
understand what
they don’t know
Evaluate using wrong benchmarks
Rely too heavily on
one person
Don’t
consider
conflicts of
interest
Act as portfolio
managers, not
fiduciaries
Confuse opinions
with facts
Support compensation
system fails to align interests
Crave certainty

13. Confidential – Not for Redistribution12©2011Fund Evaluation Group, LLC
INEFFECTIVE COMMITTEES 1
1 Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra, and
Investment Committees: Vanguard’s View of Best Practices, Catherine D. Gordon, June 2004
B e h a vi o r a l
Confuse opinions with facts
Fail to
recognize
investment
theory
React
rather
than lead
Postpone
decisions
Crave certainty
Take
credit for
good
things
Assign blame
for bad
things
Gravitate to those who
promise it

14. Confidential – Not for Redistribution13©2011Fund Evaluation Group, LLC
I. Summarize the Challenges Facing Governing Fiduciaries
II. Discuss Oversight Structures
III. Provide Thoughts on Best Practices
AGENDA

15. Confidential – Not for Redistribution14©2011Fund Evaluation Group, LLC
Three levels of fiduciary responsibility 1
• Governing
• Managing
• Operating
FIDUCIARY RESPONSIBILITY
1 Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra

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THE OVERSIGHT STRUCTURE
InvestmentCommittee
Chief Investment Officer
and Staff
Investment Managers
Custodian
Actuaries
Other Vendors
GOVERNING FIDUCIARIES
MANAGING FIDUCIARY
OPERATING FIDUCIARIES
Source: Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra
 Asset Allocation
 Manager Selection
 Risk Management
 Day-to-day Supervision
 Performance Analysis
 Top Down Strategy
HIGH
 Security Selection
 Trading
 Data Management
 Strategy Research
 Accounting
 Reporting
LOW TO MODERATE
 Mission/Objectives
 Investment Policies
 Asset Allocation
 Spending
 Overall Compliance
 Defining Liquidity &
Risk Tolerances
Accountability Impact on Portfolio
HIGH

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3-TIER
CAPTIVE
Investment
Committee
CIO and Staff
Investment Managers
Custodian
Actuaries
Other Vendors
THE OVERSIGHT STRUCTURES EMPLOYED
Adapted from: Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra
2-TIER
COMMITTEE DRIVEN
Governing
Fiduciaries Investment Committee,
Staff, and
Consultant – Supporting
Fiduciary
Managing
Fiduciary
Operating
Fiduciaries
Investment Managers
Custodian
Actuaries
Other Vendors
3-TIER
OUTSOURCED
Investment
Committee
Staff and Outsourced
CIO
Investment Managers
Custodian
Actuaries
Other Vendors

18. Confidential – Not for Redistribution17©2011Fund Evaluation Group, LLC
I. Summarize the Challenges Facing Governing Fiduciaries
II. Discuss Oversight Structures
III. Provide Thoughts on Best Practices
AGENDA

19. Confidential – Not for Redistribution18©2011Fund Evaluation Group, LLC
COMMITTEE STRUCTURE AND PERFORMANCE
EFFECTIVE INEFFECTIVE
Cognitive Diversity Correlated Judgments
6-8 People 10+ People (Ringelmann Effect)
Focus on Process / Big Picture Lack Process Enables Distractions
Strong Leadership:
• Reinforces Process / Objectives
• Focus and Time Allocated Effectively
• Extracts Unshared Information and Options
• Decision Method (quorum/majority/consensus)
Weak Leadership:
• Social Conformity / Groupthink
• Distractions and Wanderers
• Suppresses Discovery
• Weak Decision Methods
Identify & Classify Problems Effectively Trouble Indentifying Problems
Document/Journal Decisions No Decision Journal
Seek Feedback Weak Feedback Loop
Buy Low, Sell High Buy High, Sell Low
Adapted from Sources: Michael J. Mauboussin – Mauboussin on Strategy: Investment Committees. Sept 1, 2009 and Think
Twice – Harnessing the Power of Couterintuition.

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• Investment policy statement
• Asset allocation approach
• Manager team
• Implementation shortfall (slippage)
• Define risk (unique to institution) vs. measuring risk of portfolio
• Define liquidity parameters
• Other sensitivities (debt covenants, funded status, etc.)
DECISION MAKING FRAMEWORK

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SELF ASSESS
• Have your past decisions contributed or detracted from results?
• Do you have a plan for responding to extreme events?
• Do you chase performance?
• How long does it take to implement a decision you make?
DECISION MAKING FRAMEWORK

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GOVERNANCE (Structural)
• Select appropriate oversight structure
• Define “decision rights” and delegate appropriately within structure
• Maintain strong investment process and focus – “Process is Prudence”
• Understand risk in context of institution
• Understand investment horizons required to achieve results
COMMITTEE (Behavioral)
• Leadership fosters open communication and alternative opinion sharing
• Focus on high impact items
• Avoid blame-seeking activities
• Identify and avoid conflicts of interest
• Seek ongoing education
BEST PRACTICES – EFFECTIVE GOVERNANCE

23. Confidential – Not for Redistribution22©2011Fund Evaluation Group, LLC
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DISCLOSURE

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