Achieving Investment Excellence

CHAPTER 8Building the Investment Portfolio

Key Take Aways

This chapter will guide the reader through the process of building an investment portfolio. The investment portfolio represents the translation of the pension fund's financial objectives into an investable solution for the coming period that can realistically be implemented. While investment managers and strategists may present this process as highly sophisticated, complicated, and requiring unique expertise, from the viewpoint of a trustee the process can be broken down into a limited number of steps, allowing the board to focus on the questions that matter.

This chapter discusses the nature of a good investment portfolio, what the roles of the stakeholders are in determining the portfolio, how to choose a portfolio that achieves the fund's goals, and the main assumptions to be aware of.

Creating the investment portfolio involves seven steps, the starting point being: (i) the investment objective itself, and ensuring it is clearly formulated and realizable. Next, determining the investable universe and how it is implemented and evaluated, namely: (ii) the allocation to a number of asset classes, (iii) a description of the way the asset classes should be implemented (subcategories and investment styles are determined here), and (iv) a set of benchmarks to guide implementation and provide a basis for evaluation. The ...