As stewards of company finances, CFOs play a crucial role in overseeing investment management and optimizing investment returns. With access to financial data and insights into business operations, CFOs are well-positioned to align investment strategies with overall corporate goals. However, many CFOs struggle to effectively monitor investment activities and lack the expertise to properly evaluate investment managers. This article explores best practices for CFOs to improve investment oversight and highlights key considerations when reviewing investment managers.
Leverage financial analysis skills to regularly evaluate investment performance
CFOs should conduct regular reviews of investment results to identify any performance gaps or deviations from targets. This involves analyzing portfolio returns relative to benchmarks and examining key performance metrics, including risk-adjusted returns like the Sharpe ratio. CFOs can also evaluate the investment manager’s adherence to stated mandates as well as portfolio diversification. Comparing results to peer organizations can provide useful context. It is critical to dig into the drivers of underperformance and determine if poor results stem from manager skill issues or external factors.
Insist on transparency and frequent communication with investment managers
To effectively oversee investments, CFOs need transparency into investment decision-making and portfolio positioning. Investment managers should provide detailed and timely reporting that enables the CFO to understand key exposures, risks, and performance attribution. CFOs should maintain open dialogues with investment managers to discuss market developments, portfolio activity, changes in investment approach, and any other issues relevant to the organization’s investments.
Assess investment manager expertise, resources and alignment of interests
When undertaking manager reviews, CFOs should scrutinize the manager’s expertise in relevant asset classes as well as experience in different market environments. Organizational stability and depth of resources should be evaluated to ensure continuity of decision-making and risk management. CFOs should also analyze how manager and employee incentives are structured to confirm alignment with the organization’s interests. Fee schedules deserve close examination since higher costs can drag on net investment returns.
Regularly review asset allocation to ensure it aligns with evolving organizational needs
An organization’s optimal asset allocation evolves over time as strategic goals, capital requirements, and risk tolerance change. CFOs are well-suited to reassess asset allocation given their understanding of the business and involvement in financial planning. CFOs should work with investment consultants and managers to periodically review asset allocation and identify any gaps relative to organizational objectives or peer allocations. Proactively realigning the asset mix can enhance returns or reduce risks.
By leveraging their financial skills and business insights, CFOs are uniquely positioned to enhance oversight of corporate investment activities. Rigorously evaluating investment manager performance, resources and incentives is crucial to optimizing investment outcomes over the long-term. Maintaining open communication and constantly aligning investments with strategic needs will enable CFOs to add significant value.