The top 5 investment monitoring challenges for trustees


Trustees have a core fiduciary duty to act in the best interests of their beneficiaries. In order to do so, they must gain an understanding of their long-term goals and aspirations. This is particularly important when it comes to investable assets.

Working with clients and investment managers, trustees construct an investment policy statement outlining performance objectives, reference currency, time horizon, risk profile, liquidity needs, any restrictions, and any additional information that will be important to the overarching strategy.

To ensure that wealth is being preserved and enhanced in line with their fiduciary duty, it is vital that trustees monitor their investment managers, implement independent control measures, and regularly evaluate performance and risk levels.

But to do this requires near real-time portfolio data, when most trustees are reliant on static reports from investment managers and consultants, creating a number of obstacles. Here are the five largest ones when it comes to monitoring trust investment portfolios.

Timely data

There is a case that timely data sourcing underpins all the wider challenges with trust investment monitoring. Data is the foundation on which trustees review performance, manage risk, scrutinise investment managers, create balance sheets and reports, and build book-keeping efficiencies.

With trustees often forced to wait up to 6-8 weeks after quarter end to receive reports from consultants or investment managers, this data is not likely to reflect the latest market movements, making it difficult to take decisive action on the latest position of the portfolio.

The main data challenge stems from many trustees not receiving automated data feeds directly from a client’s banks and custodians, meaning they cannot establish their own view of transactions and positions and create a consolidated view of a client's holdings on a t+1 basis. Such timely data can form the basis of portfolio analysis, risk management, and wider manager reviews, without having to wait to receive reports from consultants or investment managers.

When partnered with an alerts system, t+1 data directly from custodians can also enable trustees to flag IPS breaches to investment managers directly, as they occur.

Missing IPS breaches

Once trustees have selected an investment manager and investment policy statements have been drafted, many are reliant on the quarterly reports from managers or consultants to highlight or determine for themselves whether there has been any IPS breaches in the period. This can lead to delays in rectification and, in the worst cases, IPS violations being missed altogether.

Trustees need a system to monitor portfolios against the agreed IPS, to ensure that the investment manager is not significantly deviating from their mandate by, for example, investing in restricted financial instruments or companies, increasing exposure to equities by more than agreed, or unilaterally increasing the portfolio risk level.

Unable to scrutinise investment managers

As market turbulence increases, trustees will need to have greater awareness and involvement in what their investment managers are investing in, and the methodology being used. They will have to regularly assess their investment managers and not hesitate to question performance when necessary. Trustees should have access to data that allows them to quickly answer the following questions:

  • Is performance in line with any pre-agreed benchmarks?
  • Has the investment manager made any hazardous or speculative investments?
  • Does the strategy still suit the client’s risk profile?
  • Is the portfolio meeting income and growth requirements?
  • Is it being achieved in the required time frame?
  • Are all investment restrictions being adhered to?

Managing investment risk

Many trustees are starting to take a more proactive approach to investment risk management. However, the data that they receive from investment managers often does not provide them with an adequate understanding of a client’s total exposure to risk. And with specialised risk personnel and sophisticated risk systems coming at a prohibitive premium, trustees often lack the capabilities and operational capacity to perform comprehensive risk analysis and monitor risk across all asset classes.

Recognising the importance of data and robust risk analysis to risk capabilities, trustees are increasingly employing third-party providers so that investment risk and exposures can be monitored in a cost-effective manner, in addition to measuring potential liquidity risk that could emerge under various economic scenarios.

Consolidating reports across multiple managers

Where trustees receive multiple reports from consultants or directly from investment managers, it can be difficult to consolidate this information to create a holistic view of the trust’s performance. That only adds to the challenge, adding little room for independent oversight and analysis of investments. It is also unlikely that performance and risk analysis in these reports would be decomposed to single holdings, for a detailed view of drivers and detractors. .

The future of trust investment monitoring

As market uncertainty and volatility increases heading into 2023, transparency and a risk-focused approach to investment management will be critical to continued success in attracting and retaining business for trust companies. The fiduciaries reaping the rewards will be those whose clients are confident their assets are secure and in safe hands.

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