“One solution for pension funds to generate higher returns in a low-yield environment would be to introduce good governance.”  Keith Ambachtsheer

    One of the leading voices in investment governance, Keith Ambachtsheer specifically refers to pension funds in this quote, but it applies to all forms of investing. 

    Yet there are a number of challenges to introducing good investment governance, including how you define what it actually is. 

    What is good investment governance?

    There's no single answer to this question, but academic studies on this subject tend to identify the following three key attributes:

    • Clarity of purpose
    • Alignment to this purpose
    • Desire to improve

    It's also important to make sure governance isn't just a tick box exercise or about “going through the motions”.

    Instead it should be actively integrated into your investment process, with the ability to evidence and report on the governance in place. 

    Let's look at these factors in a bit more detail.

    Clarity of purpose

    Those involved in the investment process should have a clear sense of what success looks like and how it will be achieved. 

    This typically means having clear objectives and well-defined beliefs in place which frame the investment process, as this gives a clear sense of strategic direction for all portfolios.

    Alignment to this purpose

    It's important that investment policies and processes are aligned to the objectives and beliefs set out, and that there is full buy-in to these objectives and beliefs from those involved in the investment process.  

    Doing this means there is a consistency of approach; priorities are identified and resource is aligned to areas that will have the most impact on future outcomes. 

    In well-governed operations, a suitable balance needs to be struck between rigorous yet challenged decision-making, and the process also being 'fleet of foot' to meet short-term challenges and opportunities. 

    Focus needs to be given to understanding the fees and costs involved in order to consider how these 'return leakages' can be managed to improve future net returns.

    Desire to improve 

    This includes:

    • assessing portfolio and manager performance;
    • carrying out an honest reflection of existing processes to identify if there are areas of improvement;
    • having an ongoing training programme; and
    • having a willingness to learn from and improve governance practices, and encouraging others to do the same.

    Following these key principles can't guarantee success, but they do increase the probability of successful investment outcomes being achieved. 

    In his 2006 publication, 'How much is good governance worth', Ambachtsheer estimated that good governance could add between 1 and 2 per cent in additional returns per annum.

    Evidencing good governance

    There are a number of factors to bear in mind when assessing how robust and effective an investment process is. These include:

    Independent oversight

    Is there an independent investment committee involved?

    It's also worth considering the make-up of the investment committee, whether it includes external as well as internal members, and the diversity of thinking represented. 

    An investment committee that draws on a range of backgrounds and experience can result in strong challenge and robust oversight, as well as the ability to learn and share best practice from across the industry. 


    When it comes to managing portfolios, understand who is responsible for what.

    For example, what decisions need to come back to the investment committee for discussion and approval? Is the right process in place to allow key decisions and analysis to take place in a timely way?

    Clear beliefs

    Investment beliefs provide a framework for decision-making. 

    Everyone involved in the investment process should be aware of and have bought into these beliefs. Having these in place helps support a consistent process, allows investment activity to be prioritised and should provide clients with greater transparency.

    Fees and costs

    What is the specific role of each fund or fund group that forms part of a portfolio? By building a detailed assessment of this into investment selection, you can get a sense of future return prospects. 

    When considering charges, assess the explicit asset management fees alongside the other fund fees incurred, such as trading costs. 

    Ongoing monitoring

    What are the steps that have been put in place to monitor asset managers, and whether they continue to be suitable?

    This will include reviewing past performance and assessing forward looking prospects, and may also extend to things like the managers' approach to voting and engaging on environmental, social and governance related matters. 

    Overall, we are firmly of the belief that good governance adds value. 

    As a result, we think good governance should a core part of any investment proposition, and can be seen as an additional source of investment return. 

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