Achieving Investment Excellence

CHAPTER 5Designing the Investment Management Process

Key Take Aways

The investment management process is the process by which the pension fund intends to achieve its investment objectives, which follow from the fund's mission. Over the longer term, pension funds aim to generate at least the net returns needed to realize the pension's promise, often within a certain risk budget. Often, there is a distinction between a hard, nominal liability and an often less hard ambition to index the liability with price- or wage-inflation. Four key ingredients tend to drive investment decision-making¹: matching assets and liabilities, generating investment returns over and above the matching return, risk management through portfolio diversification, and cost management. The way in which these ingredients are combined can be called the investment process.

This process varies greatly in shape and size. Two funds that seem similar from the outside might generate different investments returns from the inside. However, despite investment processes differing widely, they all have a number of specific building blocks in common. The process can be viewed as an implementation of the objectives, the investment beliefs, and the governance budget of the fund. There will almost always be constraints, for example on the maximum amount of risk or regarding unacceptable outcomes.

For a trustee, it is important ...