At the EPFIF (International Pension Fund Investment Forum) on September 4th, the theme of the seminar was challenging investment beliefs; critically questioning the conventional or self-evident truths.

My presentation focused on the challenging part. Investment beliefs are a tool to help you challenge conventional truths, thought out badly, or ignored, they become a challenge to the investment organization. Investment Beliefs is part of a broader approach to investigate and improve how we manage institutional investments. Is has to do with a simple question: what makes a fund a good investor? One of the things we observe when analyzing investment processes and how they are organized, is that no matter how large or complex the organization is, the major decisions are closely linked to a limited set of fundamental choices, where the organisation articulates how it views debates like active vs. passive management, risks, costs, or for example the role of diversification.

Writing down the major choices you have made in designing, and implementing the investment policy and processes that in your view is the best way to achieve the participants’ goals, are a sensible thing to do, and help discipling the decision making process. However, many organisations fail to do so. The presentation argues that trustees miss out on a valuable tool to manage the principal-agent relationship, because asset manager tend to have their own investment beliefs, which in the implementation of the investment policy might not always help the pension fund achieve its goals.
Unfortunately, there is no free lunch to be had. The presentation also draws attention to the decision making and implementation process. Investment beliefs can also challenge the design and performance of the organisation in a bad way. An organisation runs into trouble if beliefs and its investment process are based on one or more of the following reasons, such as adopting a beliefs system which are copied from leaders, without a real grasp why these beliefs matter. Finally, the presentation concludes with a number of observations on how funds have applied investment beliefs in a sustainable manner.