Richard Willoughby is a Partner with Torys LLP in Toronto. He serves on a number of foundation Boards and Investment Committees.
What has been your greatest challenge as a member of an Investment committee (IC)?
Richard Willoughby (RW):
What I find most challenging is the big picture question – how to decide among the various approaches when managing the investment function, as well as portfolio construction and implementation.
Assuming relatively common investment objectives for a foundation (return and capital preservation expectations, cash fl ow needs and appetite for volatility, etc), the choices available for that
foundation can range from a low-cost passive approach to an outsourced chief investment officer (OCIO), and everything in between. It seems to me that there are relatively few evidence-based best practices. That means the membership of the IC is very important because they will be deciding among a wide range of choices. Different ICs will make different decisions in similar situations. I find that challenging to reconcile.
What information do you need as an IC member to allow you to do your job?
I would like to have more information supporting evidenced-based best practices for similarly situated foundations with respect to the investment function itself. I think many ICs struggle with these questions and would benefit from more clarity on the types of approaches and structures that have produced the most reliable outcomes. The answer may be that a number of approaches are just as likely to work equally well — but again, some rigorous, independent analysis would be useful.
What kind of support do you expect to receive from the organizational staff?
Many organizations are in the positon of being able to provide limited support to ICs. This is the case where the size of the foundation does not warrant dedicated staff and so the investment function needs to be sourced externally, often through a volunteer IC and third party professionals. In these cases, staff support tends to be administrative, including to financial reporting. The organization’s staff can also provide important institutional memory to an IC whose membership turns over from time to time. These are the types of situations where a consultant or
OCIO may be helpful.
Describe how the ICs you are in make significant decisions, such as how to hire/fire managers.
ICs employ a variety of decision-making processes. In cases where a consultant is involved, the consultant will assist with recommendations. These recommendations are usually based on the
consultant’s own due diligence and interviews, and interviews by the IC. The consultant’s recommendation and supporting rationale provides a useful “straw man” for discussion by the IC. ICs will not always follow the consultant’s recommendation, but the reasons for taking a different decision are clearer for having moved through this kind of process.
In situations where there is no consultant or OCIO, I see either a very engaged and active IC, or one assembled to oversee a more low-cost, passive investment approach that does not entail the
hiring or firing of managers.
How well do you think ICs mitigate risk?
One kind of risk that ICs face is the risk that comes from poor governance and a poor decision-making process. How well are ICs fulfilling their fiduciary duties? In my experience, ICs do well in
this regard. They tend to be populated by engaged and capable individuals who are seeking to act in the best interests of the foundation. Whether or not a consultant or OCIO assists an IC in fulfilling its duties depends on the circumstances, including the particular investment strategy employed and the level of engagement by the IC. In many cases, having a professional in the mix is helpful to a volunteer IC; in other cases, the value add is not worth the cost.
Where do you think the industry is headed?
For foundations investing “forever money” – meaning that the investment objective is to preserve the capital of the foundation on an inflation-adjusted basis while supporting a regular distribution – the supportable distribution has tended to be around 4% of asset value. This translates into return expectations of around 6.5% per year over the long term. My guess is that
returns at that level will be harder to achieve in the future, which will put pressure on ICs. The pressure will be not only to find appropriate risk-weighted returns, but also to be able to demonstrate best practices in the investment of the foundation.
I think this pressure, along with the increasing variety and sophistication of investment products and vehicles available, will create an opportunity for consultants and OCIOs. Volunteer ICs are
more likely than ever to feel under-resourced and interested in exploring their options.