Speaking at the recent Foundation, Endowment & Not For Profit Investment Summit, Sheila Norman, a portfolio manager with CGOV Asset Management, and president of the GGOV Foundation, addressed the topic of managing risk.
While Norman spoke specifically about endowment funds, many of the risks she outlined are the same faced by pension plan administrators: not fully understanding investments being made, aggressive deviation from benchmarks and making “big bets” by focusing on asset classes, sectors or a single investing strategy.
As much as risks need to be managed, Norman pointed out that funds can’t expect to thrive without taking on some risk. In order to mitigate risk and achieve the returns needed for fund stability and growth, Norman advised investment committees and boards to stay invested.
She said that while the temptation—especially in turbulent periods—is often to part ways with investment managers posting poor returns, this isn’t necessarily the smartest strategy. “A study in the Journal of Finance in 2008, entitled The Selection and Termination of Investment Management Firms, showed that the recently fired poor-performing investment managers of 3,400 funds outperformed the newly hired investment manager in the two years following that change,” she said.
Good governance also mitigates risk. Norman talked about a study that showed the vast majority of investment boards of U.S.-based organizations were made up of white males over age 50. She said this leads to too much homogeneity and a lack of different perspectives, which can hinder decision-making.