GLOBAL - Institutional investors linked superior performance with strong governance according to research by Watson Wyatt and Oxford University.
The study identified five main areas where the funds excelled: risk management; time-horizon focus on the long term; innovative capabilities; clarity of mission; and effective management of external fund managers and other agents.
Roger Urwin, global head of investment consulting at Watson Wyatt, said: “While strong governance is hugely important in institutional investment, it is a very difficult area to get right with only the most conscientious and gifted succeeding.”
The research involved case studies on ten funds larger than US$5bn including six pension funds, two endowments and two sovereign funds, located in North America (5 funds), Europe (3 funds) and Asia-Pacific (2 funds).
However Urwin said that even these funds with exceptionally strong governance capabilities could find it difficult to overcome certain constraints, most commonly these were inherited regulations or systems of control and the competing claims of multiple stakeholders.
In addition, the survey showed there was a lack of preparation in the industry to consider in-house resources as anything other than highly visible ‘costs’ whereas external spending on managers and transactions costs tend to be seen as ‘performance benefits’.
The central finding of the research was in isolating twelve best-practice factors. Six of these were assessed as being within the reach of most institutional funds and were called core attributes whereas the others required significant resources including an executive team.
Professor Gordon Clark of Oxford University added: “Institutional investment has huge significance for a society with aging demographics, because literally billions of individuals have large stakes in these funds and the consequences of their investment programmes.
He conlcuded: "The governance of these funds should be a first order priority and poses a terrific opportunity for wealth creation.”
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