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Home > Investment Performance and Monitoring

21.0 Introduction

This section covers asset allocation, stock selection and performance monitoring.


Investment strategy

Trustees of Defined Benefit schemes should monitor investment performance and review the appropriateness of their investment strategy in the light of the employer covenant, the scheme funding level and liability profile, and changes to economic circumstances. Trustees need to be satisfied that their investment strategy is consistent with:


their funding objectives


their risk appetite, informed by their understanding of the scheme’s risk profile based on their approach to risk management (and so consistent with their objectives for the scheme and the level of risk that the employer covenant can support)


the scheme’s liquidity needs (and the options to meet these) and


the trustees’ assessment of the employer’s needs.

Asset allocation

Asset allocations often make the greatest contribution to investment performance – more than, say, individual stock selection. Asset allocation can also have a disastrous effect on performance and occasionally does so. Trustees are required to seek and obtain appropriate advice over their asset allocation strategy.

Although evidence suggests that asset allocation explains away most of the variation in pension fund relative returns, Myners found that [see 18.8] ‘insufficient resources were being devoted to the asset allocation process, relative to its impact on total fund returns’.

The government has since confirmed that there continues to be ‘little evidence that trustees are devoting greater resources and attention to asset allocation’ and has extended the third Myners principle  ‘in relation to effective decision-making’ by stating that:

the chairman of the trustees must ensure that trustees taking investment decisions are familiar with investment issues and that the trustee board has sufficient trustees for that purpose [see 7.3.1 (Note)], and

schemes with more than 5,000 members should have access to in-house investment expertise equivalent at least to one full-time staff member who is familiar with investment issues.

Whether the latter is possible is another matter. In short, trustees are required to seek and obtain appropriate advice over their asset allocation policy.

Factors influencing asset allocation

The factors influencing asset allocation include the trends between foreign economies, currency rates, the world inflation forecast and the attractiveness or otherwise of accessing world markets.

Stock selection

Stock selection (the choosing of individual investments) becomes the main contributor to performance when both country allocation and sector distribution are neutral. Normally having the right mix between equities, fixed interest, cash and property is the key to obtaining performance.

Performance measurement

When performance results are compared with benchmarks (the popular timeframe for performance reviews is over rolling three-year periods) trustees need to know how their funds have performed against targets set. Regular meetings with investment managers throughout the review period help this. It may be worth commissioning a report from an external investment consultant on the performance of your managers. The government proposes to clarify and simplify the requirement relating to explicit mandates, to state that trustees should agree mandates containing clear timescale(s) for performance measurement and evaluation.

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