Investment beliefs: Examples from practice

Investment beliefs set the direction for investment policy, investment practice and organisational culture.

They help define how the asset owner will create investment value, in the context of future uncertainty, risk and opportunity. They also help asset owners to make practical decisions about their investment style, their selection and monitoring of investment managers, their asset allocation, their investment decisions, their performance objectives, and their approach to active ownership.

Internal stakeholders, in particular the board, senior management and portfolio management team are key to translating investment beliefs into investment practice. It is therefore critical that these stakeholders are closely involved in the process of developing, formalising and agreeing the final set of approved beliefs.

It takes time for internal stakeholders to develop confidence that the investment beliefs will enable them to deliver better investment performance, and for investment practice to align with these beliefs.

Environment Agency Pension Fund

Our Statement of Investment Principles (SIP) (annex 3) fully embeds our commitment to Responsible Investment (RI) and the balance of responsibilities in delivering a sustainable and sufficient return on all our investments. A summary of the key Responsible Investment principles:

Apply long term thinking to deliver long term sustainable returns.
Seek sustainable returns from well governed and sustainable assets.
Apply a robust approach to effective stewardship.
RI is core in our skills, knowledge and advice.
Seek to innovate, demonstrate and promote RI leadership and ESG best practice.
Apply evidenced based decision making in the implementation of RI.
Achieve improvements in ESG through effective partnerships that have robust oversight.
Share ideas and best practice to achieve wider and more valuable RI and ESG outcomes.
Be transparent and accountable in all we do and in those in which we invest.

Pension Belief 1: A retirement system must meet the needs of members and employers to be successful.
Pension Belief 2: Plan design should ensure that lifetime retirement benefits reflect each employee’s years of service, age and earnings and are adequate for full-career employees.
Pension Belief 3: Inadequate financial preparation for retirement is a growing national concern; therefore, all employees should have effective means to pursue retirement security.
Pension Belief 4: A retirement plan should include a defined benefit component, have professionally managed funds with a long-term horizon, and incorporate pooled investments and pooled risks.
Pension Belief 5: Funding policies should be applied in a fair, consistent manner, accommodate investment return fluctuations and support rate stability.
Pension Belief 6: Pension benefits are deferred compensation and the responsibility for appropriate funding should be shared between employers and employees.
Pension Belief 7: Retirement system decisions must give precedence to the fiduciary duty owed to members but should also consider the interests of other stakeholders.
Pension Belief 8: Trustees, administrators and all other fiduciaries are accountable for their actions, and must transparently perform their duties to the highest ethical standards.
Pension Belief 9: Sound understanding and deployment of enterprise-wide risk management is essential to the ongoing success of a retirement system.
Pension Belief 10: A retirement system should offer innovative and flexible financial education that meets the needs of members and employers.
Pension Belief 11: As a leader, CalPERS should advocate for retirement security for America’s workers and for the value of defined benefit plans.

British Columbia Investment Management Corporation (bcIMC)

bcIMC’s Responsible Investing Principles

As our primary responsibility is to ensure enduring long-term investment returns, environmental, social and governance matters are addressed when these factors present material risk to an investment and/ or the portfolio.
As significant ESG risks vary between asset classes, regions, sectors and companies, we adapt our approach and strategy to what is appropriate for the investment.
Knowledge and reason, while looking out for our clients’ f investment return expectations, inform our responsible investing decisions and activities. ¡ ¡ We encourage companies to identify practical and realistic solutions to ESG risks, and recognize that introducing good governance and operational practices takes time.
We must own a company to be able to influence its governance and operational practices. As a longterm owner, we have a responsibility to interact with companies about their governance structures, policies and operations.
We believe that engaging is more effective in seeking to initiate change than divesting, and that aligning with like-minded investors and organizations is sometimes more effective than working in isolation.
As a significant investor, we have a duty to advance responsible investing within the investment industry.
As responsible investing continues to evolve, integrating ESG considerations into our investment approach is constantly under development; we shall continuously learn from our own practices and experience.

Balance sheet thinking: Investment strategy should be integrated into the overall funding and risk management strategy of the pension fund or insurance company (”the client”). The client’s funding objective, sponsor covenant and liability profile should form the basis for establishing the right risk and return objectives for the investment portfolio.
Investment horizon: The long-term nature of the liabilities is a key consideration and typically implies a long-term investment horizon. That said, circumstances may occur that mean that shortterm metrics also become relevant. It is therefore important to balance the opposing forces of shortterm requirements and opportunities with long-term objectives.
Investment discipline: At all levels, the investment process should be disciplined and based on unambiguous assumptions in line with the client’s ultimate goals. It should be supported by an effective risk management framework which that allows decision-making to be rigorously monitored and the investment process fine-tuned.
Responsible investment: Investing responsibly and achieving excellent returns are not mutually exclusive. In fact, investments will generate solid returns in the long run only if communities evolve in a balanced way. We believe in investing in well governed companies in a way that minimises negative impacts on society and the environment and, where possible, makes a positive contribution.
Knowledge: Value is created by building an organisation with in-depth knowledge and experience of global markets, and draws on the expertise of a wide network of external partners.
Innovation: Investors can achieve attractive risk adjusted returns by being early adopters in emerging technologies and markets.

New Zealand Super Fund

Investment Decisions, Beliefs and Facts

Governance and investment objectives

Clear governance and decision-making structures that promote decisiveness, efficiency and accountability work to add value to the Fund.
It is important to be clear about investment objectives for the Fund, risk tolerance, and the timeframe over which results are measured.

Asset allocation

The key investment decision. Investors with a longterm horizon can outperform more short-term focused investors over the long-run.
Risk and return are strongly related. There are varied investment risks that carry premiums / compensations. Illiquidity risk is one such premium. Investment diversification improves the risk to return (Sharpe) ratio of the Fund.

Asset class strategy and portfolio structure

Asset class expected returns are partly predictable and returns can revert toward a mean over time.
Markets are competitive and dynamic, with active returns very difficult to find and constantly changing source. Market volatility clusters over short horizons but mean-reverts over longer horizons. Unbundled investment risks increase fund efficiency: the separation of market (beta) and investment-specific investment manager skills (alpha).

Manager and investment selection

True skill in generating active returns vs a manager’s benchmark (pure alpha) is very rare. This makes it hard to identify and capture consistently. Some markets or strategies have characteristics that are conducive to a manager’s ability to generate active return. These characteristics tend to evolve slowly over time, but the shorter-term opportunity set that may be available in any market/strategy can vary through the cycle. We believe most active return is driven by a combination of the manager’s research signals, the conduciveness of their market to generating active returns, beta factors and luck. Responsible investors have concern for environmental, social and governance factors because they are material to long-term returns.
More efficient markets make generating active return more difficult. Research signals and methods used by managers tend to commoditise over time through market forces. Synthetic exposure to a market or factor can provide a guaranteed active return to the Fund, and this is an additional hurdle that an active manager must surpass.

Execution

Managing fees and costs and ensuring efficient implementation can prevent unnecessary cost.

Railpen

Our Investment beliefs

We value effective governance, leadership and strong culture as essential for a world-class investor.
We work to clear investment goals and accountabilities to meet our liabilities.
We act as a long-term investor.
Price matters so we will be patient but ready to act.
We believe diversification usually reduces risk more than return.
In managing risk we recognise it is multi-faceted and not fully quantifiable.
We manage environmental, social and governance issues as they can have an impact on the long-term performance of investments.
We seek to achieve alignment of interests between ourselves, our beneficiaries and those acting on our behalf.
We believe that costs matter and can be managed.
We believe the best investment solution for most Sections is through a small number of distinct multi-asset funds which enables flexible investment decision-making.