Part III concerns the implementation of the investment cycle. Parts I and II have laid the groundwork, defining the purpose, mission and strategy of a pension plan and how this leads to a risk and return framework to achieve the strategy. This part focuses firmly on the implementation of the strategy, which goes through a regular cycle for trustees. The investment plan is created on a yearly basis, and includes the asset allocation, investment styles and benchmarks. The plan is also reviewed—“Are we doing the right thing?” During the year, implementation of the investment plan is monitored on a quarterly, monthly or even weekly basis, as part of continuous execution-and-monitoring, focusing on “Are we doing things right?”
The design of Part III follows the implementation of the investment cycle, and as with the other chapters, stays true to the trustee's perspective: what do you need to do to set out the strategy, to be in control, and to focus on what really matters in order to achieve the fund's goals? As in the earlier parts of the book, we distinguish between the limited choices that produce 80% of the returns, and potential add-ons that might get you above 80%, but which will require a lot of skill and energy.
In Part III, the focus shifts from thinking to acting. Central in this part is the execution of the plan. During execution, many very expensive mistakes can be made, ranging from a naïve belief in active management to lax cost management, the lack of disciplined rebalancing and an overdose of hiring and firing of managers. Each badly thought-through or poorly executed decision might have a minor negative impact, but together they can really derail the board's plans to realize decent investment returns for their participants. When the execution does not live up to the goals or expectations, there is shortfall. Shortfall is typically caused by a lack of knowledge and by failing to control human behavioral mistakes, both by boards and investors. The contribution to excellence of this part is clear: shortfall can be dramatically reduced by pragmatic, evidence-based choices, made by disciplined boards.