2020 vision - four things to focus on when investing

I’m 50 and, oddly, slightly proud of the fact that I still don’t have to wear glasses or contact lenses. That said, it’s getting tougher. I’ve upped the font size on my phone, I struggle when the light is weak, and books are starting to be held slightly further from my face.

2020 vision is taken for granted by those who have it. We should cherish and preserve our blessings.

2020 vision is important when it comes to pension investment. We should use it to penetrate the areas where we can do good. We shouldn’t waste it where it’s less helpful, or not needed at all.

Here are four things you should focus on:

1. Appointing the right advisors

Your advisors are the key to optimising your investment outcome. Their process and intellectual rigour, not to mention their creativity and willingness to work hard are essential. If you don’t have these things you will end up with a suboptimal outcome.

As a consequence, you should, as a start, focus on appointing the right advisors. What is their culture, what resources do they have, who are their people, can you work with their people, what track record do they have? All of these questions, and others, are important to ask.

2. Asset allocation

Once you have a good advisor, you need to focus on asset allocation – whether you have a defined benefit (DB) or defined contribution (DC) scheme. The asset allocation needs to be appropriate for your objectives, whatever they may be. Get it wrong and the outcome will be suboptimal. Get it very wrong and they will be very suboptimal.

3. Costs and charges

Once we’ve appointed a manager, we cannot do much to influence their performance. We can, however, control costs and charges. Focus on understanding the explicit costs, stress test them and look for possible perverse outcomes. For example, if the market jumps or drops 20%, do your fees double? Focus on the quantum and incidence of implicit costs. Ask questions about the controls in place to optimise implicit costs.

4. Legals

There is no such thing as a standard investment management agreement (IMA). Most IMAs are based on long-standing precedents, tweaked over time, but originating from the investment managers themselves. Naturally, and consequently, they will have a bias in favour of the investment manager. Focus on this, particularly before you appoint the manager. They will be under competitive pressure, and you will be able to improve the terms. Make sure there is a clear and prosecutable chain of liability.

There are also some things you don’t particularly need to focus on:

Selecting an investment manager

This is relatively unimportant. The four items above can add or detract, say, x%. The choice of manager will add or detract 1/10th of x%. Let your consultant select the manager, challenge their methodology and due diligence process. Meet them to make sure you can work with them, then move on.

Beauty parades

These look good and feel good but rarely add value. If anything they can detract from value: there is time and cost in putting them together and attending them, and you increase the risk of selecting on an arbitrary and irrelevant factor (maybe, whether you “like” the person presenting to you).

Out performance

Too many trustees get hung up on this. We want managers to produce the return we need. If they produce more it may hint they are approaching investment in a manner inconsistent with our objectives (for example, taking too much risk). Also, outperformance relative to what? Our aim is to produce the return we need. Why does it matter how this compares to some one else?

Deploying 2020 vision in the investment process is massively sensible. If you don’t, hindsight may show you’ve made the wrong decisions.

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