In October 2013, the Independent Directors Council issued a whitepaper to assist fund directors in overseeing a fund’s portfolio structure and risks and its performance results. The paper focuses on various topics, including: (i) understanding the characteristics and performance expectations of a fund; (ii) understanding the adviser’s investment organization and processes; (iii) reviewing a fund’s performance on an ongoing basis; and (iv) addressing performance issues.

Understanding the Characteristics and Performance Expectations of a Fund

The paper states that boards should understand a fund’s key investment characteristics and how they correlate with the fund’s benchmarks and expectations for performance and risks relative to those benchmarks. Fund advisers should provide boards with such information at the time of fund formation and on an ongoing basis. In particular,

boards should understand a fund’s investment objectives and principal investment strategies; the rationale for selecting a fund’s benchmark or benchmarks; expectations for when and why a fund’s returns may differ from its peer group; the degree to which the adviser is using active management, including how that may affect portfolio turnover and transaction costs; and whether the adviser has adopted investment guidelines in addition to the fund’s investment strategies as set forth in its prospectus and statement of additional information.

Understanding the Adviser’s Investment Organization and Processes

Among other oversight responsibilities, the paper states that board oversight includes understanding the adviser’s processes for: (i) selecting fund portfolio managers, including the portfolio managers’ experience and performance records for the investment mandate to be used by a fund, (ii) monitoring a fund’s portfolio structure, including the adviser’s risk management processes, and (iii) evaluating fund performance. The paper indicates that boards also should understand the qualifications and roles of research analysts, traders and other personnel who are involved with the investment process. In addition, the paper encourages boards to be aware of the portfolio manager compensation methodology and the adviser’s succession plan for key portfolio managers.

Reviewing a Fund’s Performance on an Ongoing Basis

The paper states that the board and the adviser should agree on the format, content and frequency of performance reports, noting that boards generally receive oral and written performance reports at each board meeting and may receive more frequent informal summaries. As part of its oversight, the board should evaluate a fund’s performance, as well as whether the fund is being managed consistent with its investment mandate. To accomplish this, board reports may include commentary and analysis regarding the portfolio managers’ primary investment decisions, a fund’s performance relative to its benchmarks and the impact of relevant market and economic events. Performance reports may include components such as executive summaries, fund dashboards and performance attribution reports. Depending on the structure of the board, the in-depth investment and performance review may be conducted by board committees or by the full board. In addition to reviewing fund performance at each board meeting, for larger fund complexes, a board may determine to focus on a sub-set of the funds (e.g., fixed income funds) at designated meetings throughout the year.

Addressing Performance Issues

The paper discusses the methods by which boards and advisers may address performance issues, noting that some fund groups may address performance issues on a case-by-case basis while others may have a process for monitoring performance, such as a fund “watch-list.” Regardless of the approach, the board and adviser should discuss whether a performance issue appears to be temporary and the adviser’s process for monitoring and any remediation plans. The paper cites possible solutions for long-term performance issues such as making fund investment strategy changes, replacing the fund’s portfolio managers, hiring an external sub-adviser or merging or closing the fund.

The paper is available at www.idc.org/pdf/pub_13_performance_oversight.pdf