Just about every investment strategy is supported by certain underlying investment principles or beliefs, but not many investors actually take the time to check that they are aligned with these underlying beliefs. If they did, they would be much better off for it. This is true for asset owners and retirement-fund members too. If not, a mismatch exists.

In an emerging trend, more and larger asset owners are therefore taking the time and putting in the effort to formulate their beliefs and formally state them. As a result, ‘Statements of Investment Beliefs’ are becoming more and more common. This trend has great benefits in terms of investment conviction and consistent investment decision-making. Clearly stated investment beliefs provide a foundational framework for all investment decision-makers to align their decisions with the asset owner’s view of global investment markets and vision for participating in them to accomplish its fiduciary goal.

Investment beliefs can therefore be defined as a statement that provides a foundation for the governance and implementation of the investment programme. Asset owners are said to have investment beliefs, while fund managers’ investment beliefs are incorporated into their overarching investment philosophy.

Asset owner portfolios can include many investment styles and strategies including active, quantitative and passive management. Their beliefs need to encompass this. The massive shift towards passive management by investors can partly be explained by changing investment beliefs. Investors are more inclined to capture market beta at low cost and eliminate higher costs and the uncertainty and variability of active management outcomes. Fundamental indexing or smart beta is the expression of an investor’s belief in a compromise between these investment approaches, namely, potential lower alpha at lower cost. Thus, investment costs are also a key feature of investment beliefs.

A number of large asset owners in South Africa, for example the Eskom Pension and Provident Fund and the Government Employees Pension Fund (GEPF), do state their investment beliefs publicly.

The benefits of having clearly articulated investment beliefs

A clearly articulated set of investment beliefs adds a form of protection as it prevents asset owners from being enticed by whatever is currently in favour in markets in terms of investment style.

It also protects investors who are aligned with an asset manager’s investment beliefs against making rash decisions when their manager experiences weak returns, which is inevitable from time to time.

According to the UN Principles of Responsible Investment, ‘investment beliefs set the direction for investment policy, investment practice and organisational culture’. Such beliefs help asset owners to make practical decisions about investment style, the selection and monitoring of investment managers, asset allocation, investment decisions, performance objectives and their approach to active ownership. Internal stakeholders are key to translating investment beliefs into investment practice. It is therefore critical that these stakeholders are involved in the process of developing, formalising and agreeing to the list of approved beliefs.

Case study: How investment beliefs turned around a pension fund’s performance

Successful asset owners tend to follow a consistent investment approach that flows from their investment beliefs. A good example of this is the Public Employees Retirement System of Idaho (PERSI), the state’s pension plan. Their first 27 years were so poor – from a return perspective – that they were afraid to issue annual reports. On reflection, they realised that they were inadvertent ‘investment trend chasers’ following an overly complex approach.

In the 1990s, they restructured and simplified the portfolio to emphasise having a stable and consistent investment approach. They diversified the portfolio by adding new asset classes (such as inflation-linked bonds) and investing outside the US. Their performance turned around and PERSI is now consistently in the top quartile among public retirement funds. Their approach values inaction. They also make use of both active and passive management with about 50% of the portfolio invested in capitalisation-weighted index funds. By reflecting on their history, they were able to identify mistakes and create an approach and belief system that work for them. PERSI has orchestrated a remarkable turnaround with the help of firmly held investment beliefs.

How many investment beliefs should one have?

There is no magic number. The number should be low, as too many can dilute the core beliefs. The California Public Employees’ Retirement System (CalPERS) has 11 investment beliefs while South Africa’s Government Employees Pension Fund (GEPF) has nine. The Local Pensions Partnership Investments in the UK has just four core investment beliefs:

• Conviction investing over a longer time horizon: We believe that our long-term investment philosophy provides us with the ability to target outperformance against benchmarks.
• Structural advantage: We believe our scale, market presence and structured internal resources allow us to access attractive investment opportunities.
• Strong governance: We believe that high-quality investment governance and discipline underpin our investment processes.
• A multi-faceted approach to managing risk: We believe a multi-faceted approach to managing risk that is regularly calibrated against a portfolio’s objectives will deliver better outcomes.

Common investment beliefs include many ‘investment best practices’ such as

• Aligning with long-term liabilities
• Strategic asset allocation as the main driver of risk and return
• Acknowledging the efficacy of differing styles, as many asset-owner portfolios seek to use active and passive management

As the adoption of ESG becomes the norm across the investment industry, more and more asset owners are also adding this to their belief statements. As mentioned, costs are front of mind for asset owners and statements about reducing and minimising the investment costs are common. Some institutions prefer a set of generic investment beliefs while others prefer a mix of generic and specific beliefs.

Asset consultants provide advisory services to retirement funds and can play a valuable role in formulating and reviewing investment beliefs for large asset owners. If a client continually chops and changes, it usually is an indication that they do not have a clear set of investment beliefs. Large asset owners should be encouraged to adopt sensible beliefs while smaller funds should be encouraged to adopt the investment beliefs embedded in the solution they use, e.g. implemented consulting.

Formulating a unique set of beliefs is key. Copying and pasting a list of common beliefs will do a disservice to the bespoke characteristics of many large asset owners. Beliefs can change as new information becomes available (as in the case of PERSI) and they can corrode with time and experience.

Importantly, investment beliefs should not stifle debate and discussion. Beliefs evolve and should be reviewed from time to time but clearly not so often that it disrupts stability. Efficient, consistent investment decision-making should always include differing views.

The investment stability and conviction that flow from having investment beliefs are extremely valuable. A firm belief system can play a valuable role in keeping a consistent and stable investment approach in a world where short-termism is the cause of much investment value destruction.

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