Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Directors’ skill levels scrutinised
With increasing pressure for diversity among boards of directors and scrutiny by regulators, shareholders and their agents, spare a thought for the question of director capabilities.
The Actuaries Institute dissected whether there was “an issue around the skills required to be a director”, in a plenary session last week (May 12) at the actuaries’ summit currently being held.
Chaired by actuaries Barry Rafe and Ian Laughlin, the session featured several luminaries in the world of non-executive directors: Peter Yates, Trevor Matthews and Diana Eilert, as well as the chief executive of ACSI (Australian Council of Superannuation Investors), Louise Davidson.
Yates, the deputy chair of AIA Australia, chair of Colonial Mutual Life and a director of Linfox, said he would like to see some “patent experience or knowledge” on a board. As an example, he said that he had run the former Publishing and Broadcasting Ltd, whose assets included Crown Casinos. He was able to take some of the experience from gambling with respect to how odds were priced to AIA. “At Crown, with high rollers, price is everything,” he said. “There was patent recognition because you had to understand how something was priced.”
Matthews, an Australian life insurance expert who spent about 15 years in the UK running life offices, said curiosity was also important in a director. It was sometimes difficult for directors to work out what they should be asking, he said, especially if they were bombarded by 500 pages of papers.
“I think visiting the front line, where a lot of the action takes place, the factory floor, is where a director can find out a lot.”
Rafe said that if directors were getting the wrong information from management it was the board’s problem. “Shouldn’t they know it’s the wrong information?” he asked. Louise Davidson said that part of a director’s role was to make sure that “bad news is welcome, as it were, at the board”.
Yates said that compliance with regulations also presented a problem in that there was an assumption that there should be 100 per cent compliance. “When did the community start with the expectation of 100 per cent of anything?” he said. ACSI’s Davidson agreed that 100 per cent compliance was not “real world”.
Another issue riling Yates was the difficulty good directors might face for a long time after they had been on the board of a company which went broke. He felt that being on a board which went through such difficult times was “an MBA experience”. As it was for scientists, he said, the experience of failure was very helpful for the future.
“I was on the board of OneTel for 28 days and I spent the next 14 years being litigated for one decision… If your organisation goes bankrupt, it sits with you forever,” Yates said.
With respect to the financial services industry in particular, Diana Eilert said that boards needed to think deeply about what the organisation’s sources of revenue were and whether they were sustainable.
“We still have asset-based fees and I don’t know whether we’ve seen the end of this,” she said. “Boards need to ask themselves similar questions about their companies and not just say: ‘that’s the way things are done around here’.”
