The regulatory environment has reshaped how companies view their investment policy statements. And at a recent summit meeting of the two NeuGroup Treasury Investment Managers’ Peer Group meeting, members discussed some of the changes and challenges.
One suggestion shared by many (TIMPG) members at the meeting was to change authorization from full board approval to a smaller sub-set (some even just CFO-led group approval). This has proven more efficient and allows the organization to be more flexible and adapt to change more quickly. Another suggestion was to keep money fund investment language in the policy broad to accommodate changes in the regulatory landscape. A broader policy also allows for the investment team to make decisions. Most members do not require board approval for policy exceptions, for example, downgrades.
When proposing any change to the investment policy or guidelines, it is also important to have quantitative data to back up the proposed change. One member suggested that when trying to invest in BBB issues, share some of the names that you could buy. Management might be surprised to learn that they can buy European banks but not a name in their own backyard. There is also the increased diversification argument for moving down in quality.
Another question that came up was whether an exception was worth holding. Members had mixed feelings about holding investment policy exceptions resulting from credit downgrades. Most were willing to elevate and get approval to hold if the maturity date was within a certain threshold. The career risk to some to hold and have it blow up was not worth the holding, however. Also headline risk of holding an issue should be considered.
Choosing a benchmark for corporate portfolios is another challenge. Despite the benchmark being critical to the external manager as a gauge for risk, everyone agreed it is very hard to select a benchmark that appropriately reflects the investment basket and risk appetite. Many have found it more helpful to measure performance by comparing returns generated from similar mandates. For those members who feel their benchmark or policy is too conservative, members suggest using an “income lost” calculation. For example, members will show management the income lost from lost yield by not investing the portfolio more aggressively.
Regulatory changes are prompting members to rethink and revisit their investment policy. Members shared some excellent suggestions about the best ways to add to the policy and get things done quickly. Members all agreed the broader the policy, the easier to move. It is also important to have a clear chain of command to quickly deal with any investment policy exemptions–the rule isn’t always just sell.