Key Take Aways

Implementation puts plans and strategies in action in order to reach goals. Without implementation, a plan will sit forgotten; implementation means making the pension fund's plans happen.¹ Implementation follows after drafting the investment policy, where objectives for changes in asset categories, investment styles, managers, and the manner of oversight are further specified. This involves a budget that covers the operating time horizon, which is often between one and three years. How implementation takes place is critical to a fund's success, addressing the “who,” “where,” “when,” and “how” of operating in order to reach the desired goals and objectives. Implementing the investment strategy is a matter of assessing resources, quantifying objectives and then combining them into a flexible plan.

ORGANIZING THE IMPLEMENTATION

For a board of trustees, implementation is a key area of policymaking and its importance is obvious: if the board has a clear idea of what needs to be done but the organization charged with implementing the investment plan lacks the will or capacity to actually do it, little will be accomplished. In order to assess progress towards achieving your goals, you need to be clear about what you are trying to achieve and how you are trying to achieve it; that is, your objectives and the activities planned for attaining these. It is helpful to start by clarifying the aims and objectives in the investment policy statement, and to then plan the activities that the board and other actors will carry out to achieve them.

The implementation gap is the difference between the policy laid out in the investment policy statement and how the activities are carried out in practice.

A board's ambition should therefore be to minimize the implementation gap. The board has three resources at its disposal: ownership rights, cost budget, and governance budget.

Ownership rights. The pension fund has the ownership of the assets, but delegates their management to specialized parties, or asset managers. The fund divides the assets up into larger and smaller parcels and assigns mandates to asset managers for each of these parcels. In essence, these mandates are decision rights: the asset manager does not own the assets but can initiate transactions as he or she sees fit—within the framework of the mandate, of course. The board must ensure that all the necessary mandates are awarded, and nothing is left out. The mandates should be MECE—Mutually Exclusive and Collectively Exhaustive. In practice, this is not easy and may lead to coordination problems. For example, in two mandates the managers may operate within their risk limits, but added together, their positions lead to a concentration of risk. In addition, the board has to decide whom to delegate implementation to, a matter that affects the investment portfolio as a whole. For example, with regard to tactical asset allocation, rebalancing or hedging decisions, should this be the investment management organization, the executive staff, or the investment committee? The board should also be clear about how the implementation process should evolve: which choices should the board make, and what elements are best left to the pension fund's other bodies? Boards clarify these fiduciary responsibilities by developing detailed reviews of their decision rights framework, with a focus on investment and risk management decisions. A formal approach, such as the RACI framework (Responsible, Accountable, Consult, and Inform) is very helpful, not only in clarifying roles and responsibilities, but also in allowing for a debate on and review of these decision rights.² Exhibit 7.1 presents a RACI framework.

Managing costs. Successful implementation requires effective management of costs from the outset. The Swedish AP3 Fund demonstrates this by pointing out that the fund's annual management fees amount to 0.03% of the fund, or 1% of the fresh pension premium. In other words, pensioners retain 99% of the value of their pensions after all costs have been subtracted. This can be compared to a cost of 0.3%, which reduces the pension premium by 9%; the pensioner would retain only 91% of his or her pension assets after fees. Were a pension saver to buy a pension in a fund where a management fee of 1% a year was charged, his or her pot would fall to 72% of its full value. In this case, costs would eat up more than a quarter of the capital. These figures from AP3 reflect the importance of low asset management and administration costs in the implementation.³ These examples make clear that adding cost to the investment solution should be done carefully and on the basis of a strong conviction that the higher cost will actually result in higher net returns.

Trustees and administrators have an important role to play in the management of investment costs. In evaluating public pension practices, five approaches that assist in managing costs during implementation⁴ can be identified. First, trustees can specify cost management as a high priority in their investment policy. The board can include statements on limiting transaction costs (e.g. brokerage costs or formal measures of manager performance net of fees), and make sure that limiting transaction costs is an integral component of the selection of mandates.

Second, passive management provides important cost advantages, particularly for smaller pension systems that cannot achieve the economies of scale available to larger pensions. Passive management gains a cost advantage stemming from lower investment research costs and less frequent securities trading, among other factors. We will discuss the active versus passive cost considerations in more detail later in this chapter.

Third, the board can also decide to carry out investment management activities internally. For larger pension funds, this can have real cost advantages. However, the cost differential between external and internal management has fallen over the years, especially for the liquid investment categories such as equities and fixed income. For illiquid investments, a reason to continue insourcing could be to improve alignment and to get closer to the fund's assets, thereby improving risk management standards and avoiding opportunity costs.

Fourth, because internal staff usually negotiate contracts with third parties and then administer them on a day-to-day basis, these staff can play a key oversight role in ensuring costs are held in check. Staff can negotiate contracts that reduce investment costs (expressed in basis points) along a sliding scale with investment managers, so that these costs (in basis points) decrease as assets under management increase.

For all of these cost measures, one way for the board to make an informed decision on whether the cost measures are being effectively implemented is to carry out studies to benchmark these costs relative to similar “peer” pension funds.

The governance budget of the board is decisive for the implementation that the fund will choose to pursue. The governance budget represents the combination of time, expertise, and organizational effectiveness of the decision makers. For most funds this includes the board as well as the staff. It is up to the board to decide how it wants to spend its governance budget. One approach could be to “set” this budget as compatible with the lowest possible governance resources, and as a set of arrangements that “manages down” all costs and focus on easily attainable investment returns. What does this mean in effect? For implementation, the board could, for instance, agree on as few as possible different assets as necessary to diversify effectively; only one investment style per asset, preferably passive; and a static, rules-based approach to rebalancing. This set-up would require an extremely low level of governance budget for implementation, an efficient starting point. Reasoning from this starting point, boards could ask themselves: if we added to the governance budget, what would be the expected contribution to the objectives of the fund? Would it be worthwhile?

THE RATIONALE FOR MANAGING COSTS

Where implementation is concerned, the question of costs warrants a more extended discussion. Many pension funds worldwide are regulated in one way or another, and large pension funds are occupationally based or sector-wide. It is then mandatory for participants to join, giving them no real alternative for investing. This mandatory approach has many benefits. The downside, however, is that boards are exposed to market discipline only to a limited extent—or not at all. If they provide pensions at a higher cost, participants have no option to switch to a pension fund with lower costs. Higher costs eat into future pension income and can also be a sign that the board is running the pension fund inefficiently. While relatively little is known about the investment costs of pension funds, there is a large body of literature on the costs incurred by mutual funds. The investment operations of pension funds are similar to those of mutual funds, and many pension funds invest part of their funds through mutual funds. Therefore, this literature can also provide useful insights on the investment operations of pension funds. Empirical evidence suggests substantial economies of scale related to costs in the mutual fund industry.⁵ However, these scale economies turn out to decrease as the fund size increases further, and become zero as soon as the optimal size has been reached.⁶

Of course, mutual funds may incur higher costs because they are hunting for higher returns. However, a growing body of studies shows that higher costs are not correlated to a superior performance in terms of the risk-adjusted rate of return.⁷ Thus, the evidence suggests that, in general, higher costs incurred by mutual funds do not lead to higher returns. Since the investment operations of pension funds and mutual funds are similar, it seems reasonable to expect that this result would also hold for pension funds. In other words, participants are likely to be best served by pension funds with low investment costs, and boards should use this as their guideline for decision-making.

There are of course some counterarguments voiced by the investment industry. Costs are important, but lowering or focusing on them should not be taken too far. One could argue that it might come back to hit the trustees like a boomerang; they would miss out on important investment opportunities. An alternative argument is that “if you pay peanuts, you get monkeys”: the focus on costs means that overall quality deteriorates, and a decreasing amount can be spent on the research that forms the basis and ensures the quality of many investment strategies. In other words, pension funds are cutting into their own flesh. You should be aware that a permanent focus on costs drives out the best managers, and deprives your pension fund of real alpha potential. After all, according to the investment industry, it's not the costs that matter, but the net return.

If we aggregate the research on active management, ex-post results are mostly disappointing, something we'll discuss in depth further on in this chapter. An idea that may seem good on paper is not necessarily a good idea in practice. Costs and implementation issues can be hindrances.

Is it possible to contain costs through performance-related fees? To answer, we can once again quote what was mentioned previously: “After all, what really matters is the net return.” What participant would be concerned about the costs being 5% if the manager was delivering 15%? In other words, if managers could be incentivized to earn more than they cost, then things would balance out. This is a great idea, but in practice it is flawed, for three reasons. First, research⁸ suggests that a modest performance fee might work, but that a large one certainly does not. And in the investment industry, most contracts are not modest. Second, the investment manager, when considering the potential rewards, could try to take on more risk so as to earn their performance fee. We pay the investment managers for their “skill” in equities, to select the best performing ones; but the manager may at times think, “Do I feel lucky?” and simply increase the number of equities without being too concerned about the quality of the underlying equities. Trustees can combat this by asking for elaborate quantitative reports to help them decide whether managers have earned their performance fee through skill, or whether they should be denied it because they simply took on more risk. The truth here is sobering: we have no way of distinguishing between skill and luck, except over a very long period. This reaffirms our earlier conclusion, namely that participants are likely to be best served by pension funds with low investment costs, and boards should use this as their guideline for decision-making.

SELECTION OF MANAGERS

Hiring and firing managers is part of the implementation process for pension funds. A whole investment consultancy industry has developed to assist funds in this process, providing a selection process, databases to keep track of the investment management organization and style, and assisting in the negotiation of the contracts. A standard selection process is organized as follows:

1. Setting goals and objectives
2. Drawing up a long list
3. Sending out a Request for Information
4. Drawing up a short list and sending out a Request for Proposal
5. Selection of the Mandate
6. Contracting the Mandate

From a trustee's perspective, getting the first step right is important for an execution that lives up to the board's expectation as well as providing a clear framework for monitoring and evaluation at later stages the process. Selecting and monitoring active management mandates generates a substantial amount of work for investment consultants and staff. Over the past decades, the turnover rate in mandates has increased and the holding period of mandates has decreased. Switching managers is a costly affair, creating sizeable opportunity costs for a fund.

Selecting investment managers is an important responsibility for trustees. Trustees can be involved in several steps of the selection process, preparing the selection in consultation with an advisor mandate search, or deciding on the selection criteria. This involvement depends on the time and resources that a trustee has to dedicate to the process. At the very minimum, trustees set the goals and objectives for the selection process and leave the other steps to the advisor and the pension staff. The goals and objectives are in line with the investment beliefs that the fund sets. For example, if one of the investment beliefs of the fund is that active management pays off, it makes sense to translate this to setting up a selection process that revolves around selecting the best-in-class managers available. The managers who are going through the selection process will stress their ability to beat the benchmark; trustees can then communicate to their participants that the manager with the highest potential for beating the benchmark has been selected.

If selection is considered to be a core implementation function of pension funds for mandates, surprisingly little empirical evidence has been built up to demonstrate its effectiveness. Institutional investors increasingly shorten the period for evaluating external managers, which in turn steps up the pressure to produce good short-term results. At the end of the chain, this puts pressure on the fund to focus on short-term results as well. As stated, the duration of external mandates tends to shorten, while the number of mandates within the same asset category increases. This results in managers being selected and fired more often, which lends support to the view that investment managers are under more pressure to perform. A large study analyzed⁹ the selection and monitoring processes for 3,400 institutional investors between 1994 and 2003. The study found that managers for new external mandates were hired after a period during which they had realized substantial outperformance compared with the incumbent manager. However, when the manager was hired, this outperformance dwindled. Instead, the fired manager produced a 1% outperformance on average. If we combine the costs of the search and selection, of switching managers, and the opportunity costs due to differences in performance, the authors estimate a loss in performance of 5–10%. When institutional investors base their hiring and firing decisions primarily on past performance, the lost performance gap increases further. This research raises the question of whether the current selection and monitoring process has introduced incentives for mandates that are actually counterproductive for the clients' goals. Guyatt and Lukomnik¹⁰ interviewed consultants who indicated they were aware that excessive turnover was potentially harmful to their clients, but were reluctant to change things. Among the main reasons for their actions, they cited factors outside their control, such as volatile markets, hedge fund activity, signals from clients, and short-term incentives. Thus, it seems that trying to agree on mandates with a longer horizon in combination with agreeing on caps for transaction turnover might be a sensible approach here.

The selection and monitoring of mandates is more heavily influenced by behavioral aspects than trustees would like to believe, negatively affecting implementation if ignored. Consider, for example, the situation where the assets are managed outside of the pension fund, which is the case for many funds. The incentive for the manager of the external mandate is outperformance relative to the benchmark, and they can choose between securities A and B. Security A has an expected return in line with the market, and a relatively lower risk than the market. Security B, on the other hand, has a higher expected return than the market, but with considerably more risk. Chances are that the external manager opts for B, as it increases the chance of outperformance and a performance fee, even though the fund would actually be better off with Security A. As a result, all the mandates combined might not add up to the total return/risk goals of the fund. Therefore, this interplay between mandates needs to be designed and monitored carefully.

Similarly to individual investors, the pension fund's attitudes towards risk concerning gains may be quite different from their attitudes towards risk concerning losses.¹¹ When choosing between several profit opportunities, people tend to be risk averse. On the other hand, when confronted with loss-making alternatives, people often choose the risky alternative, a kind of “double or nothing.” Although prospect theory already is a few decades old, a lot of ground still remains to be covered regarding pension fund and institutional investors. We suggest some hypotheses that are based on prospect theory that need to be explored:

• An active manager with positive alpha will become risk averse, locking in their profits, while the opposite is true with negative alpha.¹² In the selection and monitoring of active management, this should be a key element to bear in mind.
• In a similar manner, pension fund trustees, when confronted with underfunding, will increase their risk instead of downscaling it. It would therefore make sense to make the risk budget for a pension fund board rule-based, with an inverse relationship between cover ratio and risk budget. This, however, is still the exception, rather than the rule.
• In some cases, selecting active mandates might even have a less reputable ulterior motive. By selecting active mandates, investment committees have the opportunity to shift the blame to external managers when results disappoint, diverting attention from the choices that are primarily the remit of the investment committees, such as the strategic asset allocation. Conversely, the investment committee can attribute positive results of external managers to the committee's wise selection skills.¹³

ACTIVE vs. PASSIVE MANAGEMENT

Trustees often depend heavily on external managers for the implementation of their investment plans and are by far the most important principals in the investment industry, awarding active managed mandates worldwide. Moreover, pension funds support the income model of asset managers to a large extent. For the implementation of the investment plan, the choice of active vs. passive management matters for several reasons. First, higher costs of active management potentially are a drawdown from the net return of the fund; in addition, the net returns of active management are difficult to predict, and have disappointed in recent decades; and, finally, high costs suggest a different problem in the implementation: the pension fund does not have the skill or bargaining power to reduce the cost to a level that properly reflects the added value. That is why the active versus passive management decision for implementation is a board decision and should be written down in advance in the investment plan.

The purpose of active management is to generate returns that would exceed those of the reference framework or benchmark, on a risk-adjusted basis. Within the context of implementation, this actually makes the idea of active management fascinating. Most service providers would be content if they delivered what they had promised. In contrast, active managers start out by promising that they will over-deliver.

Trustees have increasingly recognized that, overall, active investment managers are failing to deliver on their oft-repeated “mission” of “beating the market.”¹⁴ Basically, most studies confirm that managers have a difficult time beating benchmarks consistently, raising questions about the value of active management for a pension fund. The reasons for this suboptimal performance can be summed up as follows:

1. Fees have a high impact, both in absolute and in relative terms;
2. There are too many smart investment managers who are chasing the same strategy, thus collectively lowering returns;
3. Managers fluctuate in consistency of investment style and performance, but it is not realistically possible to predict when these fluctuations occur.

We will now expand on the aforementioned reasons on the underperformance of active managers.

• Reason (a) Trustees are increasingly taking a fresh look at the one variable most have long assumed was too small to matter: fees. The logic is brutal; higher costs lower any form of returns, and for the better part of the 1990s and 2000s, costs have been rising, either directly or indirectly. Fees for active management are usually described as “only,” as in “only 1%,” for example. But this really means 1% of the assets that the investor already has. So, what the manager offers to deliver is a return on those assets. If equity returns average 7% going forward, that 1% fee is really—if correctly calculated—much higher: roughly 15% of returns. But since index funds deliver the market return at no more than the market level of risk, any economist would say that the true fee for active management is really the incremental fee over and above the very low fee for indexing as a percentage of the incremental risk-adjusted returns.¹⁵ Defined in this rational way, fees for active management are in reality not low. They are actually very high and, surprisingly, until examined closely, average over 100% of the potential additional active returns. The combination of repeatedly disappointing results and the gradual recognition of the very high incremental cost of active management is causing an increasing number of investors to shift larger proportions of their assets to low-cost index funds and exchange-traded funds (ETFs).
• Reason (b) The number of players is increasing dramatically. According to the renowned investment author Charles Ellis, active management is not failing because of bad managers, but because too many good managers enter the market. These managers are trained similarly, are searching for similar strategies and, therefore, in aggregate, are reducing the chances of realizing consistent and positive outperformance relative to a benchmark.
• Reason (c) There is evidence indicating that managers are mean-reverting over a longer period. This is investment jargon for saying that no investment manager can be good all the time, and that they tend to have ups and downs.

So, is it all bad news for active management? We think not. There are studies that find potential for outperformance. For example, recent studies suggest that highly concentrated portfolios where the investor chooses a limited number of stocks deliver better results as compared to a strategy where the investor invests in all the benchmark stock but slightly changes its weighting. However, it must be kept in mind that these are academically driven studies, in the sense that they identify solutions that require a very specific breed of investors. Either the investment horizon must be very long, or the type of securities needs to have a specific characteristic that requires some stamina (strongly undervalued securities for example).

So, overall, this still does not explain why the choice for active management persists. However, there is a strong movement towards passive investing, which is estimated to constitute 15–20% of investments in the S&P500 and expected to rise significantly in the years ahead. At the same time, the demand for active managers and active investment strategies will clearly not disappear any time soon, nor will the active versus passive debate. This is strange, considering the academic evidence piling up against the former. If active management were a medicine, the federal agency responsible for health and safety would have withdrawn it from the market at an early stage, or at the very least would have asked some very tough questions to the producers of this medicine. Why has this not been done for active management and why is it still a prevalent management choice? We can think of the following reasons:

• Trustees may simply be unaware of this debate. Compared with the investment manager, they lag behind in the buildup of knowledge. When trustees seek training, active management is a standard part of the curriculum, which easily gives the impression that it should be part of the investment process in order to satisfy concepts like prudent investing.
• Willful ignorance. While active management might not produce the required results for other pension funds, the staff and external advisors feel that for their specific fund, all the conditions are met to make it a success. This can be compared to the case of car drivers—surveyed drivers consider themselves to be better than the average driver.¹⁶
• It's not part of the sales pitch employed on trustees. Investment managers and consultants advising pension funds are reluctant to put forward passive strategies for the simple reason that active strategies allow them to display the full breadth of their knowledge, suggesting that they are on top of things, which in turn comforts trustees. On the other hand, passive strategies are covertly framed as a poor man's choice; “beating the index” is presented as an impossibility, so only trustees with “no vision” would succumb to this option. And the stream of fees towards active management of investments is of course a lot bigger than to passive management.
• Human nature. Maybe trustees are knowledgeable about the whole active management debate, but they still just cannot help themselves. This leans on economic psychology, in which we find the following explanation: investors who try to reduce uncertainty about the decisions they have to make tend to prefer more transactions, increasing the feeling of control. This is a behavioral bias that favors active management.
• Fun and entertainment. Passive investing is considered to be boring; trustees might even consider it detrimental for further steps in their trustee careers. After all, active management is intuitively associated with proactive, intelligible, savvy investors, while it is quite the opposite for passive management investors.

INTERNAL vs. EXTERNAL MANAGEMENT

Smaller pension funds outsource a substantial part of their activities out of necessity, namely, costs, scale, and scope advantages. When a large part of the implementation takes place outside of the pension fund, this involves a key decision for trustees—which parts should be managed externally to the fund, and how does a board make this decision? Given that external investment managers are likely to bring superior professional experience and skills to the pension plan investment decisions, outsourcing asset management should improve investment returns. Moreover, outsourcing offers flexibility by allowing pension funds to change their investment managers more easily in response to poor performance, reducing the chances of an implementation gap. A pension fund is likely to find it more difficult to oust internal managers who produced weak results than to dismiss an external firm for similar shortcomings. Finally, external managers are likely to be better shielded against political pressures to pick state and local companies for investment. A comparison of internally managed pension funds with mutual funds during the late 1970s and early 1980s revealed lower risk-adjusted returns among the former, suggesting that external management has yielded superior results in the past.¹⁷

Pension funds can outsource their investments while still maintaining control of strategic policymaking by directing the staff of the pension fund. The main advantage of this approach is that the board stays close to the development, monitoring and evaluation of the strategy; the implementation is coordinated by the staff, and delegated to individual asset management. If strategic policymaking also is outsourced, the term fiduciary management is used. The asset manager takes over implementation, including at a strategic level, leaving only the underlying policymaking to trustees. While this may seem like a good outsourcing bargain, it is not taking off as spectacularly as asset managers had hoped. This is partly due to the fact that trustees fear that they will be unable to maintain control over the pension fund. Moreover, given that a second layer that needs to be paid is created between the investment manager and the board fees tend to increase. On top of these issues, principal–agent problems can arise, and the formulation of investment beliefs matters more than ever for the governance process. For instance, it is crucial to question whether the external manager can implement the investment beliefs that the trustees hold but are unable to execute internally. Another question could be whether the manager may hold investment beliefs that are in stark contrast with the ones held by the fund.

Larger pension funds tend to internalize investment strategies and build proprietary teams. Their scale often makes this a cost-efficient decision. Scale leads to a governance budget, which makes it possible to effectively build up and control the internal teams, so that hiring and firing can be partially replaced by a continuous improvement process, and that strategies that are more tailor-made to the pension fund's goals can be developed. Research indicates that funds with a higher percentage of assets managed internally do better on an after-cost basis. The cost reduction is the predominant driver of this improvement, more important than the improvement of value added before cost. However, pension funds with large internal organizations suffer other potential drawdowns. They might hold on to failing strategies longer because the board is aware of what the repercussions for employees are when the strategy is terminated. In addition, if the internal investment management organization becomes too large, the board eventually runs the risk of being managed by the investment management organization instead of the other way around.

RELATIONSHIP WITH SUPPLIERS

An often overlooked factor that is important for success in implementing the portfolio is what a board expects from the investment manager beyond merely implementing the investment strategy. Is the board inclined to develop strategic partnerships, or is the board leaning more towards a customer-supplier model? In a strategic partnership model (as shown in Exhibit 7.2), the board holds the view that for the specific mandate, the specifications cannot be determined definitively at the beginning, and that shaping the mandate calls for a collaboration process that is beneficial for the outcome. This means that the objectives and restrictions for the mandates are more open-ended, and the selection process is less standardized. When a pension fund ventures into innovative investment or long-term illiquid strategies, or has an investment solution in mind but concludes that it can see no optimal implementable strategy, these are typical incentives for opting for a partnership model.

The customer–supplier relationship lies at the other extreme. There, the pension fund views the investment strategy as a commodity. Its characteristics are known, the implementation form is easy to achieve, and the market for these strategies is mature, keeping down the fees. Equally important, according to this point of view asset managers are interchangeable, themselves almost becoming a form of commodity. Pension funds that focus their investment beliefs on the strategic asset allocation rather than the execution, or that adopt the view that harvesting risk premiums is done best in a cheap and efficient way, tend to favor a customer-supplier model: a clear defined set of goals and restrictions, with a uniform selection process. Deciding if the outsourcing relationship is a partnership or a contract is an evolving process. Boards of pension funds that are small in size, or have a relatively easy to manage investment process, will gravitate towards the customer-supplier relationship (choice A in Exhibit 7.3). This is the most effective utilization of their governance budget. Funds with more assets, or a more extended investment chain, will spend more time deliberating on which parts of the investment process should be outsourced, and why. Which choices add value, and can this value be increased if the step is internalized (choice B in Exhibit 7.3)? Finally, funds that have the size and horizon to consider and tune into developments in the investment industry can take the view that certain developments will lead to new asset classes or strategies, for example regarding climate change or impact investing. Because these strategies have to be developed, the board sets the parameters for this development, and sources partners with whom it can work on their development (choice C in Exhibit 7.3).

BRIDGING THE IMPLEMENTATION GAP

Brilliant investment policies may be plentiful, but getting the good ones implemented can be difficult. Why are some pension funds able to achieve this task better than others? Here, we offer some explanations as to why some funds fare better than others.

• There is a plan. This point is obvious, yet crucial. Implementation often has a clear map, which identifies and maps out the key ingredients that will direct performance. Such ingredients include finances, markets, work environment, operations, people, and partners. The plan has clear deliverables, which the board needs to track implementation.
• There is commitment. A successful implementation plan will have a very visible leader, such as the Chief Executive Officer (CEO), given that they communicate the vision, excitement and behaviors that are necessary for achievement. Everyone in the organization should be engaged in the plan. Performance measurement tools are helpful in providing motivation and allow for follow-up.
• There are resources. To successfully implement a strategy, the right people must be ready to assist with their unique skills and abilities. The structure of management must be communicative and open, with scheduled meetings for updates. Management and technology systems must be in place to track the implementation, and the environment in the workplace must be such that everyone feels comfortable and motivated.
• There is learning from and benchmarking against peers. The board is aware of the best practice for comparable funds, and reviews on a regular basis what it could do to improve its own implementation.
• Pitfalls that occur regularly are addressed in advance. The role and management of costs and internal vs. external management should be discussed in advance by a board, preferably at as high a level as investment beliefs. This should be part of the fund's policy. If these issues have to be discussed at a lower level, it will drain resources and lead to unsatisfying discussion outcomes.
• The board takes, or delegates, clear ownership of the implementation process. Often, a strategic implementation plan is too fuzzy, with little concrete meaning and potential. Boards will often only address the implementation annually, allowing management and employees to become caught up in day-to-day operations and neglect the long-term goals. Another pitfall is not making employees accountable for various aspects of the plan, or powerful enough to make changes authoritatively when necessary.
• Resource-draining activities are minimized, avoided or simply outsourced. The selection of mandates is important, but they can involve huge expenses for the staff; potential investment managers are time-consuming and exhausting to judge. Investment consultants specialize in this process. For any fund, the process is rather agonizing. The hurdle for firing managers should, therefore, be more than just one case of underperformance.