How does a company evaluate its investment program? In the spring The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG) discussed a wide range of factors.
One member company that presented during the meeting relies on income from portfolio for earnings. One key metric for them is yield; and the member explained that the company is generating about 2 percent annually, which he was happy to report is very similar to the rest of the group. This company also looks at duration for a measure of risk. Its portfolio duration was also in-line with the group median of two years. In terms of resources committed to the program, the company has three fulltime employees, which is also the TIMPG group median.
This company is also looking to expand the portfolio beyond US Treasuries and it found it very helpful to show management the asset classes other TIMPG members use in their investment portfolio.
Another takeaway was that comparing manager performance is a popular measurement tool. Members have struggled with investment benchmarks and how to use them to measure performance. The presenting company has multiple managers for each mandate and compares managers within each asset class. They do let managers know how they rank against one another, and they give them a long runway and plenty of time to prove themselves.
Qualitative factors are also important, according to TIMPG members. One metric the presenting company considers but is more difficult to measure is how the manager performs in a crisis. One of the company’s investment managers foresaw this as too much trouble and took itself out of the pool. Others didn’t think it would be a big deal and was still a good value, so they stayed in. But can they make the call? This counts when deciding where to add money. Additional factors include level of service and ad hoc analysis. The company has found some managers are better than others in this area.
Demonstrating income generated is an important component of the evaluation, too, TIMPG members concluded. One member uses a metric that shows not only total return but also the income it has earned (extra above the benchmark). At another member company, the manager said they show total return and coupon to management. Doing this lays the groundwork for future negatives, if they happen. Another suggested strategy is to break down price and income return. One company that does this also shows management the dollars behind the numbers and provides both unrealized and realized gains and losses. At still another member firm, money market accounts are reviewed to see where they have added value.
Nothing beats showing your managers how you rank versus your corporate peers. Comparing your programs to peers can be used to increase risk if necessary or to see if other companies are taking on more; or to see if the risk stance is in the right place.