At Mercer, we are seeing significant evolution in investment governance arrangements and how investment programs are being implemented to keep pace with these developments. In this paper, we provide a high-level outline of the main governance models that have emerged over the last five to 10 years to help institutional investors ascertain which model(s) may best meet their needs both today and in the future.
TASKS FACING INSTITUTIONAL INVESTORS
Institutional investors face a long list of “to do’s” when developing and implementing appropriate investment arrangements — this extensive list requires a significant investment governance budget to ensure sufficient resources are deployed to complete all tasks on a timely, quality and error-free basis. The most impactful decisions should receive the most attention and diligence to improve the odds of success. Investors may be able to devote more attention to the most critical factors through an evolution of their governance model. We compare the various governance models by broadly grouping tasks into the following categories.
DIFFERENT MODELS FOR INVESTMENT GOVERNANCE HAVE EMERGED
As a result of the long and growing list of tasks to be undertaken, institutional investors have evolved their governance models in different ways to meet their obligations as fiduciaries in overseeing the management of assets. This has included investing to expand their internal resources or expanding the use of external resources in different ways.
We’ve seen five investment governance models emerge as institutional investors seek to expand their governance resources:
- Expanding the in-house team with greater use of third-party research and tools but full in-house implementation and ongoing evaluation
- Greater use of traditional investment consultants for advice on strategy and research but full in-house implementation
- Use of third-party manager selection platforms for operational implementation but retaining all investment decisions, including manager selection
- Partial outsourcing to provider for operational implementation as well as selective investment decisions such as manager selection, dynamic asset allocation and liability-driven investment design and implementation
- Full outsourcing to provider for all operational implementation as well as investment decisions following strategy and risk budget setting, sometimes called OCIO or Delegated Manager
Each of these governance models has benefits, but ultimately it is about having choices so that institutional investors can select the model (or models) that works best for them.
Investment services providers such as Mercer have adapted their business models to better meet the needs of institutional investors by providing them with options as to how Mercer can work with them. Mercer works with clients using any of the five investment governance models featured in this paper. In this way, we ensure that clients can always design an appropriate and optimal governance framework to pursue their aims and objectives.
Download our article, Evolving Investment Governance Models – Driving Better Outcomes to learn more about evolving your governance model.