A guide for trustees for the long term

Last month, the book Achieving Investment Excellence , authored by Kees Koedijk, Alfred Slager and Jaap van Dam was launched in the auditorium of Dutch pension investor APG. The book is a guide to empowering pension fund trustees to get a good grip on the difficulty of successful long-term investing for pension funds. spoke to one of the authors, principal director investment strategy of PGGM, Jaap van Dam.

Q: Congratulations on the launch Jaap, can you tell us why you set out to write this book?

A: We strongly believe that pension funds as institutional investors have a strong added value for participants. Whichever way you look at it, this means that there is a crucial role for boards and trustees: they set the policy, are in charge of designing and overseeing the investment organization. We set out to help and empower the board members. Almost all journals and books on investing are dedicated to technical stuff about portfolio management, alpha, factor investing, but to our surprise only a handful publications focus on the board member. We set out to “right this wrong”.

Q: Why is long-term investing important?

A: Many key assumptions in investing hinge on an important assumption: that you have the horizon and patience to sit through. Equity risk premiums and liquidity risk premiums are earned in the long term, furthermore the long term expands the investment opportunity set: new assets can be added. On the other side, often being impatient and acting on the short term will come at significant cost. The fruits come at a price: a board needs to understand where and how acting on the short term can and will come at a cost and has to act upon this knowledge. This is psychologically extremely difficult. The combination of having the relevant knowledge and the relevant behavior is crucial. Having the right horizon, focussing more on the forest and less on the individual trees are key for well functioning boards. We call this the right horizon, the right distance, the right altitude.

Q: Do you think there is a knowledge gap around the boards of asset owners when it comes to long-term investing?

A: Absolutely. And this is in a certain sense logical. All the time new board members will come in, and often they do not have a background in investment management. Yet they are expected to hit the ground running without a lot of formal training in this specialized field. Another thing is that the collective wisdom of a board is often lost when boards change. This is why we plead for learning boards, that pay a lot of attention to learn from their history. We ended up spending a good part of the book due to discussions with board members on how to avoid this dilemma and improve long term results.

Q: What do you see as the most difficult aspect of long-term investing, and how does the book help guide trustees in that endeavor?

A: Taking an integral approach, being detracted by short term developments, or even worse, not being prepared for short term fluctuations. Based on our discussions and case studies, the paradox is that, in order to be successful in the long term, you have to prepare for the short term, acknowledging all the short term pressures, biases and counter them or integrate them within your strategic policy to remain on course. With that in mind, onboarding new trustees is crucial, and if not done properly, it become a challenge for the board to remain long term focused.

Q: What are some of the practical insights that the book gives trustees?

A: The great thing of this book is that it is peppered with practical insights. We chose to collect as many as practical experiences as possible, and – true to our standing – filtered them through an evidence based lens – to derive at a set of self reflection questions for boards. So far we received great feedback on that, and that was our ultimate purpose – helping boards. At the launch, the first copies of the book were handed over to Geraldine Leegwater and Florent Vlak, chairs of the investment committees of ABP and PFZW respectively. In his comments, Vlak emphasized the relevance of the book for the boards of trustees of pension funds: “Because of the way this book is written, it is extremely accessible. And the self-reflection questions will help boards to discuss the tough questions that really matter. I wish I had this book when I became a member of the PFZW Investment Committee”. And Leegwater emphasized the strength of packaging academic insights into a practical handbook. Both stated that this is a much needed book for trustees, filling a gap between the high level oversight knowledge a board needs and the often extremely technical nature of the books which are available on the many specialized fields within the investment realm.

For further information on the book click here Achieving Investment Excellence


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