Published in the Schroders Private Bank Dialogue Magazine - Q3 2005.

In recent years, there has been a great deal of attention focused on the role of the trustee. Being responsible for the investment of trust assets, often without the necessary expertise to manage them internally, trustees may choose to delegate this task to appropriately qualified experts.

Having acknowledged a need to out-source the investment management, how should trustees go about establishing and confirming the trust’s requirements and choosing an investment manager who will be able to meet their needs?

This subject was covered recently in a joint presentation by Executive Director of Schroders & Co., Toby Joll and by Grahame Goodyer and Suzanne Addrison, directors of Fenchurch Data, at the Investment Issues seminar presented by the Jersey branch of STEP (Society of Trust and Estate Practitioners) at the Jersey Opera House last month. The Seminar was entitled “A Trustee’s Guide to Investment”.

The joint presentation at the STEP seminar took delegates through the processes involved in stating aims and objectives for a new trust, drawing up a comprehensive investment brief, how an investment manager might respond to that brief and then how an investment strategy might be constructed to meet with those objectives. It also addressed the issues relating to the monitoring of a portfolio and managing the ongoing relationship with the investment manager.

In the first instance, trustees need to clarify the trust investment objective, goals and investment parameters. This can be achieved by constructing a clear and concise Investment Policy Statement.

An investment policy statement is designed to set the guidelines and conditions under which the trust’s investment portfolio is to be delegated and managed. If the trustees’ requirements are stated clearly and concisely in this document, the investment manager will be able to develop and implement a strategy that will fulfill the trust’s specific objectives.

There are five key areas to be covered in a good policy statement. In the first instance it is important to confirm the aims and objectives of the trust. This section should include details of the amount to be invested and whether income and or capital growth is required with stated goals where appropriate, such as the desired amount of income. Defining the risk profile and detailing any specific time scales is also important. Identifying the risk profile should confirm whether capital preservation is a priority and a maximum downside risk may be specified. Any particular constraints or preferences should also be noted such as a maximum limit in any one asset class or a restriction on investing in certain geographical or market areas.

With each of these areas covered in the initial investment policy statement, the trustees will have made a positive assertion as to the degree of risk to which they are prepared to expose the assets of the trust, putting in place procedures to ensure that the risk profile is controlled according to their wishes. The investment manager will be fully aware of the requirements of the trust and the trustees will be able to demonstrate that they have complied with them.

The preferred asset allocation of the portfolio and the parameters within which it is intended that the investment manager should work, together with a suitable benchmark, should also be confirmed. This part of the process may be carried out in conjunction with the chosen investment manager.

Once an investment manager has been appointed and a strategy has been implemented, the trustees need to carry out regular reviews. These reviews should address the ongoing requirements of the trust, to ensure that the aims and objectives remain the same as those stated at outset and if not to make changes accordingly.

As part of the review process, trustees should look to assess the performance of the portfolio at intervals typically ranging between 3 and 12 months depending upon the type of investments it holds. Portfolio monitoring can be carried out in-house or can be outsourced. Either way, the trustees need to review the performance to ensure that it is meeting the portfolio objective in growth terms. The degree of risk to which the trust assets are exposed is important, as is the relationship between the portfolio return and that of its benchmark.

By following these guidelines, it should be possible for trustees both to fulfill their responsibilities and to be able to demonstrate this to regulators and beneficiaries alike. By keeping the lines of communication with their chosen investment manager open, any queries or concerns may be addressed before they become a serious problem. This kind of relationship between trustee and investment manager is beneficial to both parties, and ultimately serves the best interests of the beneficiaries.

For more information on the expert witness services we provide please e-mail us at info@tirp.co.uk or telephone us on 44 (0)1425 620001.