CHAPTER 3Grasping the Investment Essentials

Key Take Aways

Chart summarizing the key points for grasping the investment essentials such as the investment policy, monitoring report, and evaluation of investments.

Trustees often use words such as “investing,” “risk” and “return” among themselves, or during conversations with asset managers; and these words are also used throughout the investment policy, monitoring report, and evaluation of investments. However, not having a shared definition of such words may lead to confusion. As we have noted, because in pension investing trustees are looking at many layers of the investment process, it is easy to confuse these levels. Are we, at one extreme, looking at portfolio design (effectiveness, or “Are we doing the right thing?”), or at the other extreme, are we looking at the quality of the implementation of the portfolio (efficiency, or “Are we doing things the right way?”)? Before any meaningful policy development of the investment goals or process can be initiated, we need to develop a shared understanding of the basic concepts of investing and risk management. In order to have a shared understanding of these basic concepts, it is very important to collectively understand the investment essentials and make sure that these are shared throughout the organization.

The aim of pension investments is to generate the returns (after cost) needed in the future to pay the promised pensions on a specified time horizon and with acceptable risk. It seeks to achieve this by constructing a robust ...

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