Piloting through Covid-19 requires investment committees to emulate aircraft industry in putting safety first


The investment industry needs to emulate the aircraft industry in the way it learns from past mistakes, in order to successfully pilot investors through the Covid-19 crisis, according to new research from the Thinking Ahead Institute.

The pandemic has disrupted the ways in which investment committees operate, with social distancing meaning many financial professionals have had to adjust to remote working. At the same time, worldwide markets have been rocked by volatility, increasing the pressure on those investment teams.

Roger Urwin, co-founder of the Thinking Ahead Institute, says that a safety-first approach like that adopted by the aircraft industry, could improve the way investment companies handle crises. 

“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,” says Urwin.

He points out that aircraft firms have improved the safety of flights through structured learning, with 2,000 travellers losing their lives for every 10 billion kilometres travelled in 1930s. Today, that figure has been reduced to under one casualty per 10 billion kilometres.

New research entitled ‘Going from good to great’, explores best-practice governance for investment committees and sets out a best-practices checklist to improve outcomes for committees.

Governance is critical, says The Thinking Ahead Institute, suggesting that investment committees should learn to avoid the drags inherent in Strategic Asset Allocation, by favouring a Total Portfolio Approach (TPA) instead. 

TPA starts with clearly specified investment goals and looks at all investment opportunities, rather than filling quotas for asset classes. The SAA asset class set-up often underweights or even misses assets like reinsurance or bridging loans, opening up more alpha.

In the shorter term, the research also suggests three large changes in investment committee practice which are “necessary in the near term and may prove critical the medium term as well”. 

Firstly, investment committees should prioritise transitioning to a fully functioning virtual meeting configuration, compensating for losses of effective practice in the physical-meeting model with practice enhancements in the virtual model. “We believe this model is useful near term but has longer-term appeal to complement physical meetings once they resume,” says the think-tank.

Next steps also include ensuring that opportunities for innovation are addressed by investment committees, an example being the way the outsourced chief investment officer (OCIO model) was adopted in earnest following the 2008 global financial crisis. 

This is part of the “re-wiring” that must take place in the value chain to value creation, says The Thinking Ahead Institute, and investment committees should place new parameters for critical concepts like trust and professionalism, and acknowledge that new cultural norms will be needed. 

Nevertheless, investors “cannot afford to lose sight of the longer-term mission”. 
“The fundamental temptation is to over-do anxiety, instead of stepping up to better governance by meeting the long-term mission through a balance of time horizons,” reads the report.