TITLE

Results vs. Process: Analyzing the Future Benefit of Common Investment Policy Statement Provisions

AUTHOR(S)
Blanchett, David M.
PUB. DATE
November 2009
SOURCE
Journal of Financial Planning;Nov2009, Vol. 22 Issue 11, p54
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• Formal investment processes are becoming increasingly popular especially in 401(k) plans. This process is typically codified in an investment policy statement, or PS. • While following an IPS can provide the plan sponsor with some degree of legal protection, it is not clear whether doing so leads to better outcomes. • This paper explores the actual benefit of following three common investment-monitoring criteria: underperforming the category median, the effect of a change in portfolio management, and style drift. Relative performance was tested by comparing performance over one-year three-year and five-year periods (or some combination of the three periods) to the category median. The findings suggest that if an PS is going to have a performance replacement criterion, the Watch List should not be longer than two or three quarters. the potential benefit/cost from an investment that changes investment styles. Funds that exhibited drift actually slightly outperformed the no-drift group (by 15 bps). • Manager change was assessed by exploring the relationship, if any, between manager tenure and performance. The results suggest that an investment should not be replaced simply because there is a new portfolio manager (or investment team). A low manager tenure should signal the need for additional due diligence on the respective investment • This paper finds few future performance benefits from following the three IPS criteria considered for this analysis. • The author recommends that, rather than abandoning investment policy statements, planners try to understand how they can truly add value for clients and realize that a prudent process and better results can be two • Style drift was analyzed by determining very different things.
ACCESSION #
45433375

 

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