The Watson Wyatt study on best investment practice for very big funds has confirmed a performance advantage of between 100-200bps for “good” governance, and even more of an advantage for “great” governance.

The results of the study, conducted in conjunction with Oxford University, were first flagged at the Watson Wyatt Ideas Exchange conference in Sydney mid last year. They flow from interviews with 10 of the world’s largest pension and endowment funds, including two from the Asia Pacific region, with assets ranging from $US5 billion to more than $US50 billion. They show that funds with effective internal investment staff, as well as having several other attributes at the board level, should outperform by well above the additional costs involved. The study identifies 12 best-practice factors, six of which are described as “core” and within reach of funds of any size. The other six – “exceptional” factors – require some scale, probably involving a minimum of about $2 billion in assets. The core attributes are: mission clarity; effective focusing of time; investment committee leadership; strong beliefs; risk budgeting framework; and fit-for-purpose manager line-up. The exceptional attributes are: highly competent investment executive; high level board competencies; supportive compensation; real-time decision making; exploit competitive advantage; and learning organisation. Andy Grimes, an Australian-based Watson Wyatt consultant, said the study showed the potential return advantage should be a strong motivator among institutional funds to improve governance and then align it with investment strategy. “However, it is clear that for many funds the governance gap – insufficient governance for the complexity of investment strategy pursued – is widening due to lack of focus on the core attributes coinciding with the greater complexity of prime investment opportunities.” The funds were promised anonymity for the study.