Investment Management

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InvestmentManagement Hot Topics

• What would I expect to find in the way of Best
  Practices?

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Best Practices for Investment Managers

• STEWARDS
• COMMITTEE MEMBERS
• TRUSTEES
• BOARDS
• MONITORING
• CHOOSING

• MANAGERS
• SELECTING
• BUYING
• SELLING
• MANAGING

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EVOLUTION OF THE CONCEPT OF PRUDENCE

• Harvard v. Amory (1830)
• Prudent Man Rule
• Common Law
• ERISA (1974)
• Prudent Expert Rule
• Federal Law
• Uniform Prudent Investor Act (1994)
• Private Trusts
• State Law
• Uniform Management of Institutional Funds Act
  (2002)
• Charitable Trusts
• State Law

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Definition of Prudence

• The fundamental principle for professional money
  management, stated by Judge Samuel Putnum in 1830
  
• "Those with responsibility to invest money for
  others should act with prudence, discretion,
  intelligence, and regard for the safety of
  capital as well as income."

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INDUSTRY BEST PRACTICE

• www.cfainstitute.org
• Trade Management Guidelines
• Soft Dollar Standards
• Research Objectivity Standards
• Global Investment Performance Standards
• Asset Manager Code of Conduct
• www.nccusl.org
• UPIA (1994)
• UMIFA (2002)

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INDUSTRY BEST PRACTICES

• www.sia.com
• Compensation Practices
• Firm Management
• Internal Firm Policies
• Relationships with Regulators
• Role of Compliance Professionals
• Investor Confirmations
• Registered Rep Supervision
• Investor Complaints
• Soft Dollars
• Sales Supervision

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Best Practices for Investment Managers

• Key decision-makers demonstrate expertise in
  their field, and there is a clear succession plan
  in place.
• Qualitative Evaluation of Expertise
• Formal Succession Plan
• Compensation Practices
• Firm Management

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Best Practices for Investment Managers

• There are clear lines of authority and
  accountability, and the mission, operations, and
  resources operate in a coherent manner.
• Strategic Plan
• Tactical Plan
• IT Plan
• Firm Management

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Best Practices for Investment Managers

• There are effective and appropriate external
  management controls.
• Audits
• Examinations
• Compliance Program
• Board Committee Oversight

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Best Practices for Investment Managers

• Mutual Funds, Hedge Funds Annuities associated
  with the organization have suitable board
  governance.
• Performance
• Suitability
• Expenses
• Standards for Selection Retention
• Conflict Self-Dealing Addressed

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Best Practices for Investment Managers

• Remuneration of the Investment Manager/s and
  compensation of key decision-makers are aligned
  with client interests.
• Performance Based
• Long-term Focus
• Fully-disclosed
• Compensation Practices

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Best Practices for Investment Managers

• The working atmosphere is conducive to attract,
  retain, and motivate key employees.
• Turnover
• Decision-making Process
• Creativity
• Opportunity
• Compensation Practices
• Formal Evaluation Process
• Internal Firm Policies

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Best Practices for Investment Managers

• There is a formal structure which supports
  effective compliance.
• Corporate Culture/Attitude
• Compliance Program
• Compliance Officer
• Control Self-assessments
• Role of Compliance Professionals

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Best Practices for Investment Managers

• The organization provides financial transparency
  that demonstrates there is capital and
  profitability to sustain operations and adequate
  disclosures are made.
• Financials
• Form ADV
• Fee Schedules
• Agreements
• Disclosure Documents
• Proxy Voting, Soft-dollar, Pricing Best
  Execution

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Best Practices for Investment Managers

• The organization is committed to firm-wide
  innovation and has established a competitive
  position of strength.
• Creativity
• Decision-making
• Best Practices
• Systems
• Personnel Development

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Best Practices for Investment Managers

• There is an effective process for allocating and
  managing both internal and external resources and
  vendors.
• Soft-dollar
• Trade Allocations
• Research Objectivity

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Best Practices for Investment Managers

• The organization has a diverse client base, and
  the capacity to service the same.
• Concentrations by
• Fees
• Asset Class
• Security
• Client
• Product

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Best Practices for Investment Managers

• The organization is properly managing the
  growth/decline of assets under management.
• Growth/Decline Rates
• Fees
• Assets
• Accounts

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Best Practices for Investment Managers

• The investment system is clearly defined and
  consistently adds value.
• Investment Story
• Process
• Policies, Procedures Controls
• Exception Identification, Tracking Resolution

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Best Practices for Investment Managers

• The investment research process is defined,
  focused, and documented.
• Soft-dollar Budget
• Benefit Derived
• Off-list Securities
• Research Objectivity

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Best Practices for Investment Managers

• The portfolio management process for each
  distinct strategy is clearly defined, focused,
  and documented.
• Benchmarks
• Asset Allocation
• Deviations from Policy
• Periodic Reviews
• Risk Return Differentiation

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Best Practices for Investment Managers

• The trade and execution process is defined,
  focused, and documented.
• Soft-dollars
• Best Execution
• Trade Allocation

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Best Practices for Investment Managers

• The organization has responsible and ethical
  marketing and sales practices.
• AIMR/CFA Compliant (Best Practices)
• Performance Reporting (GIPS)
• Return
• Risk
• Benchmarks
• Time-frame
• Classification
• Trade Management
• Research Objectivity
• Proxy Voting

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Best Practices for Investment Managers

• There is a defined process for the attribution
  and reporting of costs, performance, and risk.
• Performance Measurement
• Risk
• Return
• Benchmark
• Performance Attribution
• Classifications
• Cause Effect
• Fees Expenses Disclosed

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Best Practices for Investment Managers

• The investment system and portfolio management
  processes are monitored and are consistent with
  assigned mandates.
• Performance Dispersion
• Off-list Securities
• Concentrations
• Exceptions to Min/Max Allocations

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Best Practices for Investment Managers

• There is an effective risk-management process to
  evaluate both the organizations business and
  investment risk.
• Control Self-assessments
• Risk Management Plan
• Role of Compliance Professionals

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Best Practices for Investment Managers

• Control procedures are in place to periodically
  review policies for
• Best Execution,
• Soft Dollars,
• Pricing, and
• Proxy Voting.

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Best Practices for Investment Managers

• There is an effective process for identifying,
  managing, and disclosing conflicts of interest.
• Broker/Dealer
• Investment Managers
• Mutual Funds
• Insider Trading
• Front-running
• Pricing
• Asset Manager Code of Conduct

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Best Practices for Investment Managers

• There is a process to periodically review the
  organizations effectiveness in meeting its
  fiduciary responsibilities.
• Annual Reviews
• Investment Policy Statements
• Investment Objectives
• Risk Return Levels
• Vendor Selection Usage

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BEST PRACTICES FOR INVESTMENT MANAGERS

• 27 Practices

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ANALYZE

• Practice No. 1.1 Investments are managed in
  accordance with applicable laws, trust documents,
  and written investment policy statements
• Practice No. 1.2 Fiduciaries are aware of their
  duties and responsibilities
• Practice No. 1.3 Fiduciaries and parties in
  interest are not involved in self-dealing
• Practice No. 1.4 Service agreements and contracts
  are in writing, and do not contain provisions
  that conflict with fiduciary standards of care
• Practice No. 1.5 There is documentation to show
  timing and distribution of cash flows, and the
  payment of liabilities
• Practice No. 1.6 Assets are within the
  jurisdiction of U.S. courts, and are protected
  from theft and embezzlement

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DIVERSIFY

• Practice No. 2.1 A risk level has been identified
  
• Practice No. 2.2 An expected, modeled return to
  meet investment objectives has been identified
• Practice No. 2.3 An investment time horizon has
  been identified
• Practice No. 2.4 Selected asset classes are
  consistent with the identified risk, return, and
  time horizon
• Practice No. 2.5 The number of asset classes is
  consistent with portfolio size

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FORMALIZE

• Practice No. 3.1 There is detail to implement a
  specific investment strategy
• Practice No. 3.2 The investment policy statement
  defines the duties and responsibilities of all
  parties involved
• Practice No. 3.3 The investment policy statement
  defines diversification and rebalancing
  guidelines
• Practice No. 3.4 The investment policy statement
  defines due diligence criteria for selecting
  investment options

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FORMALIZE (continued)

• Practice No. 3.5 The investment policy statement
  defines monitoring criteria for investment
  options and service vendors
• Practice No. 3.6 Investment policy statement
  defines procedures for controlling and accounting
  for investment expenses
• Practice No. 3.7 Investment policy statement
  defines appropriately structured, socially
  responsible investment strategies

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IMPLEMENT

• Practice No. 4.1 The investment strategy is
  implemented in compliance with the required level
  of prudence
• Practice No. 4.2 Fiduciary is following
  applicable Safe Harbor provisions (when
  elected)
• Practice No. 4.3 Investment vehicles are
  appropriate for the portfolio size
• Practice No. 4.4 A due diligence process is
  followed in selecting service providers,
  including the custodian

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MONITOR

• Practice No. 5.1 Periodic performance reports
  compare the performance of money managers against
  appropriate index, peer group, and IPS objectives
• Practice No. 5.2 Periodic reviews are made of
  qualitative and/or organizational changes to
  money managers
• Practice No. 5.3 Control procedures are in place
  to periodically review a money managers policies
  for best execution, soft dollars, and proxy
  voting
• Practice No. 5.4 Fees for investment management
  are consistent with agreements and with the law
• Practice No. 5.5 Finders fees, 12b-1 fees, or
  other forms of compensation that have been paid
  for asset placement are appropriately applied,
  utilized, and documented