Mercer has produced a trilogy of white papers in which we attempt to redefine the concepts of return and risk in the context of endowments and foundations.
• A New Approach to an Old Concept — Improving investment policy by refining risk management
• Integrating Expectations — Moral hazard and the plight of the investment committee
• The Lessons and Limits of Diversification
In the first installment of our trilogy, we proposed that by refining their investment committee’s definitions of different types of risk, organizations could outline their expectations of each risk area and develop action plans accordingly, leading to more effective portfolio design, consistent with the committee’s true risk tolerance. We believe that better defining risk can reduce committees’ tendency to react to shorter-term market events by modifying the long-term portfolio — changes that feel right to the current committee might exact a larger toll further down the road.