GLOBAL - Better governance structures lead to better performance, according to joint research by Oxford University and consultants Watson Wyatt.
The study identifies the areas of risk management, time-horizon focus on the long term, innovative capabilities, clarity of mission and effective management of external fund managers and other agents as the main reasons for the funds' "exceptional reputation and strong sustained performance".
Research was carried out by Watson Wyatt ‘s Roger Urwin and Gordon Clark from Oxford University among 10 of the "world's leading institutional investors", six pension funds, two sovereign funds and two endowments in North America (five funds), Europe (three funds) and the Asia-Pacific region (two funds).
Names could not be revealed as part of the agreement on exchange of information. However, Urwin noted "half of the funds are 'the usual suspects' the other half are our discovery".
"The potential return advantage should be a strong motivator among institutional funds to improve governance and then align it with investment strategy," Urwin, who is global head of investment consulting at the consultants, pointed out.
He noted all the funds chosen for their reputation and performance had an in-house chief investment officer.
"This position is vital as real-time decisions are key to good governance," Urwin explained. With a committee decisions would often take too long, he added.
He acknowledged this might not be possible for all funds. Those should then consider fiduciary management or implemented consulting to manage daily investment decisions.
However, in general he urged funds to "spend a little more at home" and less on outsourced services.
"The research shows there is an un-preparedness in the industry to consider in-house resources as anything other than highly visible 'costs' whereas external spending on managers and transaction costs tend to be seen as 'performance benefits'", he said.
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