We have developed this guide to help Trustees balance between the need for process and rigour with the harsh reality that financial markets are complex systems and therefore subject to constant change
Financial markets are complex systems. This means that there is no top down structural co-ordination between the market participants (who get to make their own decisions). This differs from complicated systems, for instance those based on the laws of physics.
An example of a complicated system is an aircraft cockpit. When the pilot pulls back on the yoke the flaps on the wing moves and the nose of the plane is lowered. There can be complications and accidents of course, but the laws of physics always apply.
Although there are 'laws' regarding financial markets and trading, they don't actually control the behaviour of market participants. If something 'goes wrong' for some market participants, it may be going extraordinarily well for others.
Good investment governance involves balancing the need for some rigour with the realities that financial markets do not follow the laws of physics. An investment process can benefit from inclusion of specific steps and expectations, but there is also an enormous role for one or more people to step back and look at the bigger picture.
For some inspiration, we have prepared an investment allocation process that demonstrates different mindsets for management and Trustees. Effectively these become different components of the overall corporate culture of the organisation as investments work their way through the 'funnel'.
Of course, the right process for your fund may be different.