Investment Management: 8 Steps to Improve Performance HFM (06/01/03) Vol. 57, No. 6 p.45; Calvello, Angelo A.
Companies can improve their prospects for investment success in their defined-benefit plans with help from an investment process that is based on established economic practices. The first thing companies need to do is to revisit their investment goals and make sure they are clearly defined for each pool of assets. Once the goals are established, managers should link them to specific investment objectives. For the next step, companies should determine whether the investment targets they selected are still relevant; this may require the commissioning of an actuarial study, which will project pension obligations and identify the return the defined-benefit plan needs to earn to meet these obligations. The data provided in this study can also help the company forecast needs that might influence the financial health of the organization. Depending on whether the study finds that the defined-benefit plan is healthy and the selected target return is sufficient, the company should then review the methods used to achieve the return targets; the analysis should include an evaluation of policy asset allocation. An organization may also want to consider adding uncorrelated, higher returning asset classes to the policy asset allocation, and review the rebalancing plan. The policy asset allocation should then be discussed with the governing committee; afterwards the focus should shift to the best way to implement the investment policy statement and policy asset allocation. Finally, when considering the appropriate portfolio construction, management should review the funds' current vendors, paying close attention to fees and costs related to managing and protecting the various asset pools.