2016 Investment health check: Top 7 tips for reviewing your investment objectives

In assessing your investment program during an annual review, it is important to keep in mind the following considerations.

  1. Historical performance. Is your portfolio achieving its investment goals? While past performance is not an indicator of future performance, it is important to highlight whether the portfolio did not perform as you had expected. In particular, reviewing returns you had not anticipated helps you to identify whether there were unexpected risks in your portfolio. Further, reviewing your past performance can help you understand whether you are on track to meeting your investment objectives.

  2. Risk profile. If your portfolio did not perform as expected, were there risks in the portfolio that you had not anticipated, or with which you are no longer comfortable? When faced with an environment where expected returns are low, some organisations accept more risk, such as is incurred with increasing exposure to equities, in the hope that the returns from the portfolio will be higher. However, in a period where equities are not performing well, you may find that the additional risk results in lower returns than you are comfortable with. It is important that you include stress testing in the analysis of your objectives and strategy; such testing gives you a demonstration of greatest expected loss or gains, to help you confirm that the scenarios are in keeping with your expectations.

  3. Changes in circumstances. Has anything about your organisation’s circumstances changed significantly? There are many reasons for an organisation’s circumstances to have changed enough that its stated objectives are no longer appropriate – new decision makers, a different purpose for the investment program, the shortening or lengthening of the portfolio’s time frame, or new spending requirements or funding arrangements, just to name a few. It is important that you consider your circumstances and identify whether any changes to your investment objectives are necessary as a result of these changes.

  4. Impact of a change in funding. Have your funding sources and funding level changed substantially? If your investment portfolio depends on funding sources outside of capital growth and income, you will need to consider any changes to your funding expectations and whether these have implications for how you invest. If you expect to have less-predictable funding, and therefore greater reliance on investment income, it may be prudent to consider changing your investment strategy if doing so may give you a better chance to meet your organisation’s needs. If you have a surplus in funding, you may want to consider increasing your spending or setting an objective that includes a more defined spending strategy.

  5. Impact of a change in liquidity needs. Have there been any changes to your liquidity needs over the short term? If the time frame for your portfolio has changed, due to, say, an upcoming project or changes in your expected spending, it is important to reconsider your liquidity needs in light of your objectives and investment strategy. An organisation’s overall investment time horizon may be perpetual, but there could be a capital-intensive project coming up in the next couple of years that requires more liquidity than is usually expected of the portfolio. This may mean that you need to include higher levels of cash or less-risky assets in the portfolio.

  6. Market conditions. Are you prepared for 2016? Markets are unpredictable and always changing. We know that, typically speaking, equities will outperform fixed income, which is expected to outperform cash. However, this is not always the case, and it is important to consider the current and expected market environment so that you can determine whether your investment objectives are likely achievable in the short to medium term, as well as over the long term.

    It is important to include in your considerations of objectives the probability of your being able to meet them. This will help you better understand the risks. We are heading into 2016 with an expectation that returns will be middle to low single digits for the most “traditional” asset classes, if inflation is relatively benign. Investors who aim for real returns exceeding 5% may find it difficult to achieve this goal in the short to medium term. If you review your objectives and find that you have a much reduced likelihood of achieving them in the coming years, it may be time to reconsider your investment strategy. Determining which risks you may need to accept as you seek to reach your desired level of return, or determining a likely achievable rate of return, given the risk levels you feel comfortable managing, can help you assess the appropriateness of your expectations.

  7. Reaffirmation of objectives. Now that you have considered your past investment performance, your risk profile, your circumstances and the expected market conditions, are you comfortable with your current objectives – or do your objectives or investment strategy need to be modified? You should discuss whether any of your objectives have changed, and ensure that your investment strategy is aligned to objectives appropriate to your organisation’s goals and mission.