The third phase concentrates on having the systems and procedures in place to monitor and adjust the strategy based on changing conditions. This phase of the process must also be set out before hand, to guard against the many human weaknesses which begin to arise when circumstances change. It tends to be in Phase Three that investment managers begin to have problems and where most good strategies breakdown. A good strategy can be ruined by poor execution.

Procedures and Systems:

• Following the flow chart shown in Phase One.
• Focusing on the strategic Asset / Liability management and economic forecast issues.
• Having a plan in place for monitoring and measuring performance.
• Having benchmarks in place at each step of the review process.
• Clear designation of areas of responsibility.
• Clearly defined reporting relationships.
• Reports should be consistent in format and regular.
• Reporting periods should match the investment time horizons.
• Compliance with AIMR guidelines
• An annual third party audit.

Some behavior to avoid:

• Excessive portfolio turnover.
• Attempting to “time the market”.
• Excessive attention on individual assets rather than asset classes.
• Insufficient monitoring of cash flows and their impact on performance.
• Excessive paperwork and reporting.

These behaviors all tend to arise due to the investment manager becoming distracted by the day-to-day happenings in the financial markets. Too much attention is paid to the rather exciting wild gyrations of the markets on a short term basis, and not enough attention is paid to the rather mundane long term fundamental trends. It is the fundamental trends in a company’s business and the markets where the added value is found.