New white paper describes dual challenge of governance gap and cognitive biases facing smaller Canadian investment funds, suggests outsourced CIO strategies as potential mitigant
TORONTO, Nov. 19, 2014 /CNW/ - A recent white paper released by Russell Investments Canada Limited (Russell Canada) - To Err is Human: But Smaller Funds can Succeed by Mitigating Cognitive Bias! - describes the risk management challenges faced by many smaller Canadian pension plans. These plans are mired in outdated investing methods and susceptible to the impact of old-fashioned emotions on their desire to design a successful long-term investment approach for their constituents.
The report, authored by Bruce B. Curwood, director, investment strategy at Russell Canada, highlights a clear gap in resources and investment process between the Canadian "mega" plans (over $10 billion) and their smaller counterparts, which allows emotion to creep into the governance process of small- and mid-sized Canadian pension plans.
Curwood's premise is that smaller funds, which lack the economies of scale, need to be more deliberate in thinking about what may work best for their fund. They need to think outside the box and establish an investment framework to help ensure access to critical information to facilitate balanced thinking and overcome cognitive bias.
"The mega funds are already committed to this risk-managed approach, with often upwards of 20 specialists devoted to risk management alone. But how will smaller funds which lack scale and resources and perhaps even the will to change make that successful transformation?" says Curwood. By way of examples he goes on to describe the global financial crisis of 2008-2009 as a period in which larger Canadian plans were able to make significant enhancements to their risk management and governance processes while smaller plans simply weren't able to keep up.
Curwood offers guidance points to help smaller plans overcome these challenges, suggesting an Outsourced Chief Investment Office (OCIO) model as one way to address it. Russell Canada managing director of institutional Joe Gelly describes investment outsourcing as a way for small and mid-sized pension plans to partner with sophisticated investment managers. A reputable manager can provide access to the costly risk-management tools, research and staff to help implement an investment strategy or help the plan sponsor focus on larger elements of plan governance - such as asset mix, utilization of passive investment strategies and generally providing much needed scale to smaller plans.
"The OCIO model is a concept that has had strong awareness and acceptance in the U.S. and the U.K., but is still very much in its infancy in Canada. Each day, we see small and mid-size Canadian pension plans beginning to come to grips with the fact that today's markets require a more sophisticated and resource-intensive approach, which they may not be able to accomplish on their own. Through an outsourced investment model, there is less reliance on making emotional or irrational investment decisions. Decisions are set within an investment framework which aims to strategically achieve the best possible investment outcomes," said Gelly.
You can get a full copy of the study here .
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