Strong investment beliefs that command institution-wide support, are aligned with objectives and inform all investment decision-making, are agreed and documented.
Investment is essentially about making judgements and decisions in the present, typically with reference to the past, to cope with or exploit an uncertain future. Investors do this by using their underlying beliefs about how the world works. The quality of those underlying beliefs is a major determinant of success in investment.
Beliefs are working assumptions about the investment world that underlie investment practices and decisions which, when developed and shared, help make goal setting and decision-making more effective. The most helpful beliefs accurately describe future outcomes, secure organization-wide support and are detailed. All investment decisions are based on beliefs; however, all too often these beliefs are implicit, undocumented or unstructured. Investment beliefs should reflect views on the overall investment goal of the fund and governance areas as well as beliefs on alpha and beta which will drive the investment approach and strategy.
- The board, management and investment committee should have a clear understanding of the impact of theory on practice, and formulate beliefs supported by evidence and research.
- High-level investment beliefs should be articulated by the board, management and investment committee about:
- Asset class and security pricing including the “fair” prices of investment opportunities, the reasons why mis-pricing can occur and the degree to which mis-pricing is a systematic fact of life;
- The investing institution’s ability to exploit its comparative advantage in such identified opportunities;
- How the investing institution might develop and integrate these beliefs into its investment strategy;
- What these (alpha and beta) strategies can produce in terms of value added and risk, both individually and together across the whole portfolio.
- A layered or “nested” investment belief system should be articulated from the board through management and the investment committee to the investment unit(s) to guide ongoing management of the investments.
- A well-thought-through set of investment beliefs should be clearly articulated, documented and agreed at all levels of the decision-making process. In order to assist the investment committee to order priorities, the different beliefs – some of which may be contradictory – need to be ordered according to the importance or conviction placed on each one.
- The investment beliefs should be consistently applied in all relevant areas of the decision-making process.
- The investment philosophy and process should be framed by reference to the institution’s skills, resources and processes.