After failing to find an answer from the regulators, or the “gatekeepers”, on what an investment committee should look like, Annika Bradley took the question back to first principles and figured it out on her own.
Speaking in a session at the Professional Planner Research Forum, Bradley said she thought the logical first step to getting a definitive answer would be to check with the Australian Securities and Investment Commission.
“What did ASIC say an investment committee should look like? A lot less than I expected,” she said.
Bradley joined Tim Murphy, Morningstar Australia’s director of manager research; Jerome Lander, founder and managing director of ProCapital; and Julie Scurfield from Vanguard Australia on the Researcher Forum panel.
A Certified Investment Management Analyst and director of financial services firm Lodrino, Bradley says RG 179 – the regulatory guide to managed accounts – mentions that having an independent investment committee in place and having a compliance officer approve all investment decisions before implementation helps control conflicts of interest.
“So that tells you that there should be an investment committee in place and perhaps you need some compliance guidance, but not really anything more prescriptive than that,” said Bradley in her session, ‘Dream teams – what should an investment committee look like?’
Bradley sits on the CIMA Society of Australia board and is a member of several investment committees. She has previously called for ASIC to get more interested in investment committees and suggested the corporate regulator is “playing catch-up” on the issue.
“I gave up on ASIC and extended my regulator shopping to APRA,” Bradley said.
There, Bradley found several relevant references in prudential guide 530 – but only if you substitute the term “sub-committee” with “investment committee”.
“They say, ‘Where an RSE licensee adopts a dynamic allocation approach, the RSE licensee would establish a formal policy that governs the asset allocation targets and ranges to the board and relevant sub-committee’,” Bradley explained.
“So perhaps I can infer that my investment committee – in the event that I’m doing dynamic asset allocation – needs someone with asset allocation expertise, so that these reported changes to the asset allocation can be appropriately reviewed and analysed,” she continued.
Bradley noted the guide said regular investment risk reporting, stress testing, liquidity and cash flow management must also to be reported to the investment committee, so there would need to be an appropriate person on the committee to perform that role.
“And I also might infer here that some of these could be considered… investment operations-like requirements,” Bradley continued. “So your dream team may seek someone with that particular skillset, not just pure investment management.”
After moving on from the regulators, Bradley contacted some who she calls the “gatekeepers”; managed account providers that fulfil the Responsible Entity function.
The advice she received was that members must have the appropriate skills such as “asset allocation, manager selection and portfolio construction” to sit on an investment committee.
“Some are saying that you must have an independent chairperson, or a minimum number of independent members, on an investment committee,” Bradley said. “One of the managed account providers explicitly said that advisers are not able to participate in the investment committee in a voting capacity.”
Bradley felt that what the regulators and gatekeepers had given her amounted to “pretty loose guidance”.
“So in the absence of prescriptive guidance I stepped back and said, ‘Well, let’s just start from first principles’.”
“First principles” was introduced by Greek philosopher Aristotles, who theorised that every systematic inquiry should go back to its root “causes, or elements”.
“Before you ask who [should be] on the investment committee, ask what the purpose of the investment committee is,” she suggested.
Bradley said that while the purpose could vary, “perhaps we can generally agree that investment committees are in place to provide monitoring, oversight and construction of investment decisions and investment portfolios”.
“Basically, it provides a decision-making framework or body,” she continued. “Therefore, clear governance needs to be in place.”
Bradley said governance is the key issue and quoted research stating that the difference between good and bad governance is between 100 and 200 basis points.
“If that’s the context and we start with the governance framework, [we should] ask what the objectives and the principles of the investment committee are and who’s charged to do what,” Bradley said.
“Once you answer these questions, what the investment committee should look like and the accompanying skillset should basically come from there.”