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The Concept of Investment Efficiency and its Application to Investment Management Structures

Published online by Cambridge University Press:  10 June 2011

T.M. Hodgson ,
S.J. Breban ,
C.L. Ford ,
M.P. Streatfield  and
R.C. Urwin
R.C. Urwin
Affiliation:
Watson House, London Road, Reigate, Surrey, RH2 9PQ, U.K. Tel: +44(0)1737-241-144; E-mail: roger.urwin@eu.watsonwyatt.com
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Abstract

Investment efficiency is a function of the risk, return and total cost of an investment management structure, subject to the fiduciary and other constraints within which investors must operate. Institutional investors implement their investment policies through investment management structures. In this paper the aim is to enhance the investment management structure by broadening the financial objectives, by recognising the effect of behavioural issues and by incorporating governance constraints. We therefore suggest that investment efficiency should be considered as a combination of financial efficiency and non-financial efficiency.

Modern portfolio theory had a revolutionary effect on portfolio construction. In the same way, we believe that investment management structures should be constructed in a more disciplined and quantitative manner. In this paper we outline the quantitative and qualitative methods by which these structures can be developed. The proposed new framework for designing investment management structures seeks to optimise net information ratios while simultaneously recognising the level of regret risk facing fiduciaries, minimising non-financially-productive behavioural biases and taking account of the resources available to the fiduciary to monitor these structures.

Keywords

Active ReturnActive RiskBehavioural FinanceGovernanceInvestmentInvestment Management StructureNet Information Ratio
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 6 , Issue 3 , 01 October 2000 , pp. 451 - 545
Copyright
Copyright © Institute and Faculty of Actuaries 2000

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