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What the airline industry's 'safety first' mantra can teach asset managers

New research finds that AMs would benefit from emulating the aircraft industry best practices and implementing 'Total Portfolio Approach'.

What the airline industry's 'safety first' mantra can teach asset managers

The aircraft industry has been much talked about during the Covid-19 event, but seldom to praise its checklists. Yet, new research has highlighted the benefits of the aircraft industry’s structured-learning environments. 

In a recent paper, entitled ‘Going from good to great’, non-profit platform the Thinking Ahead Institute (TAI) said investment organisations are not learning from their experience when it comes to improving investment committees and governance.

In the paper, governance refers to a strategic investment role, where investment implementation is left to others under delegation from investment committees. 

The research said investors can remedy this defect and improve financial safety for billions of people by emulating the aircraft industry best practices. 

Roger Urwin, co-founder of TAI, said the aircraft industry is the living proof that learning from experience and errors can increase safety enormously.

‘The aircraft industry is far from perfect, but one statistic is telling: in the 1930s, for every 10 billion kilometres travelled, 2,000 travellers lost their lives. Today, there is less than one casualty per 10 billion kilometres travelled.

‘Through structured learning, the aircraft industry reduces its mistakes. Additionally, this sector demonstrates that trials and errors have fostered innovative checklists to improve decision making and dashboards for tracking mission-critical issues,’ the report said.

Ensuring safety

The report said the aircraft industry ensures the safety of billions of people through learning from experience. Investment committees can likewise provide for the financial safety of billions of people by applying best-practice frameworks to their context.

‘In doing so they will be better placed to tackle the challenges that lie ahead such as systemic risks, performance pressures, complexity management, increased regulatory influence and the growing influences from multiple stakeholders,’ Urwin added. 

TAI set out 10 key points that investment committees could use to ensure a stronger governance, and altogether more successful outcomes. The first point consists in ensuring strategic focus.

Urwin said: ‘Retaining a strategic focus is vital for effective board governance and doubly important for investment committees, where there is often a temptation to get lost in the weeds.

‘Key to this discipline is having an effective chairperson. This leadership role is crucial in terms of setting and managing overall strategic direction, facilitating the contributions from all committee members and extracting all the benefits of a strong culture.’

Further suggestions

TAI also highlighted further set-up rules, as well as suggestions to enhance investment committee’s quality, thinking, and effectiveness.

These points include delegations, sizing, members competency, effective chairing, diverse thinking, effective in-sourcing and outsourcing, as well as well-rounded principles and good culture. 

Despite the very nature of investments, which defies attempts to create templates or formulaic investing processes, the organisation said that the current crisis was an opportunity to review traditional set ups.

To reach collective intelligence, TAI said there needs to be the implementation of a ‘disciplined oversight’. This consists of challenging the executive while helping to maintain the executive team’s motivation.

‘Understanding the foundations of the executive’s decision-making process, including how beliefs and comparative advantages  are incorporated will strengthen this oversight. Good oversight involves the IC [investment committee] as a sounding board for the executive’s ideas, while periodically making critical interventions,’ the report said. 

To achieve positive outcomes, the report stresses that asset managers should solely ideal investment committee members. While there is no one-size-fits-all specification for IC member competencies, TAI praises having members with investment subject matter competency is strong.

‘Organisations with a high exposure to illiquid, private market assets will benefit from members that draw on wider knowledge and a broader repertoire of experience.’

What is more, smaller IC teams are more likely to produce better
outcomes. The research finds that five to seven members is a good size for an IC.

‘Being large enough to ensure a wide range of expertise and diverse perspectives but small enough that decision making is timely and efficient. Importantly the relatively small size also leads to higher-conviction decisions,’ the report said. 

Additionally, the research suggests the adoption of a holistic investment methodology, which is named Total Portfolio Approach (TPA), over the more traditional Strategic Asset Allocation (SAA) approach. The research said TPA introduces more dynamism and focus on goals in decisions.

TPA is essentially the real-time implemention of the best single portfolio that achieves its objectives by a single team working collaboratively.

It would involve the investment team working together on one shared objective with the TPA, while an SAA team divides and works on their respective separate objectives. 

‘Large asset owners are using advanced best-practice governance to unlock the complexities of modern investment, notably when dealing with ESG considerations, and employing TPA helps the integrated thinking required.

‘We believe that this crisis will accelerate the adoption of TPA and, in time, it will become one of the defining innovations of this period,’ the co-founder added. 

For more information, the full report may be found here

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