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More than 20 Years
in Accounting

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Five Step Process – the “Investment Cycle“

Step 1.

Setting Investment Objectives

At first glance, this step may appear unnecessary.  However, in our experience this is key to developing a suitable strategy.  Getting this right can pre-empt significant difficulties later on.  In practice, investment objectives vary radically from scheme to scheme.

We look for answers to:

  • What constitutes ‘risk’ for you?
  • Which of the different approaches for valuing the liabilities are important?
  • Is the funding position in percentage terms of assets compared with liabilities more critical than the size of the deficit in absolute £ terms?
  • What is your appetite for risk?
  • Are there any other factors that we should take into account when recommending a strategy?

We are very keen not to skip this step, so we do not charge you for the report or tool.

It is also the only area where we will not give you a firm recommendation.  We will rarely be in a better position than you to judge what is important for your scheme.  Instead we can support you in making your decision with:

  • Guide to setting your investment objectives (free on our website)
  • Facilitation at a trustees’ / company meeting

Step 2.

Setting Investment Strategy

  • Do you know how much risk your scheme currently takes?
  • Do you know which risks your scheme is exposed to? 

Understanding the implications of risk is vital when setting asset allocation.

We have developed a proprietary Asset Liability Model (ALM) to manage risks arising due to mismatches between assets and liabilities. Our ALM extends beyond the approach used by more traditional UK investment consultants by applying the risk management techniques used by fund managers to pension fund liabilities.

Our ALM gives you the advantage of comparing various potential investment strategies with regard to different aspects of risk, so you can understand the full implications of your decisions, particularly the risk / reward trade-off.

Usually we can find strategies that reduce risk at the same time as increasing the expected long-term return on the assets.  We will make an unambiguous recommendation based on our understanding of your objectives.  However, the ALM is an interactive tool.  We encourage you to investigate alternative approaches to put you in a position to make an informed decision.  The two pictures below are sample screen shots of the model we used for one of our clients in 2017.


Selecting a Fund Manager

We try to avoid recommending fund manager selection exercises to our clients, as the costs can be hard to justify for small schemes.  We prefer to implement the new asset allocation strategies with the existing managers if possible.  However, there are circumstances where this is either not practical or not desirable.  So we still take manager research seriously.

Past performance is very unreliable as a guide to future success of active fund managers as it is impossible to separate luck and skill when examining historic data.  Frequently periods of good performance are followed by periods of poor performance (or vice versa).

Selecting a fund manager : Five factors

Our answer is to focus on five specific factors which can increase the likelihood of selecting a fund manager that will outperform in the future.  These five factors are:

  • Why do they believe that they can outperform the other market participants?  What ‘edge’ do they believe they have?  We look for a plausible, well-thought-out philosophy.
  • Process – How do they translate their philosophy into portfolios?  We look for a process which is robust and consistent with their philosophy.  We also look for evidence that they actually follow their stated process.
  • They need to employ the appropriate number and quality of personnel to carry out their stated process. We assess personnel numbers alongside the quality of the individuals.  Generally, a small team of high quality individuals delivers better than a huge, mediocre team.
  • While quality and quantity are both important, the most important aspect is originality.  Efficient use of third party research can also be an advantage.
Risk controls
  • A comprehensive range of risk controls is needed to manage the many facets of risk.  In terms of market risk, they need to ensure that the right level of risk is always taken, and that the fund managers are always aware of all of their risk exposures.  Safeguards against operational risk are also important.

Our fund manager research programme covers 138 investment managers.  We use a third party provider, CamraData, to help us with initial screening.  This enables us to refine our search to a smaller universe of managers, which we then visit for more detailed research.

Our focus is on qualitative research where we believe our experience and background provides valuable insight.


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Bloomsbury Square, London WC1B 4EA
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12-16 Addiscombe Road
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Copyright by Barker Tatham 2024. All rights reserved. Regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities.

Copyright by Barker Tatham 2024. All rights reserved. Regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities.