Asset Management: Education

1. Asset Management: Education Investment Policy Statements

2. Objectives A. Understand Investment Policy Statements B. Understand the GFA Investment Policy Statement and its Importance

3. B. Understand Investment Policy Statements • What is an Investment Policy Statement (IPS)? • The single most important document you will prepare in regards to your personal investing activities • The critical document you must understand and live by if you are investing for others • Have more asset managers lost their jobs due to poor performance or due to failing to heed their IPS? • Failing to do what the Investment Policy Statement states

4. Investment Policy Statements (continued) • Why is the IPS so important? • Your IPS sets the framework on every investing activity. It states: • What you can invest in • How you will invest • Why you will invest • What percentages you will invest, etc. • In short, it is the key document that will impact your investment returns for the immediate future.

5. Investment Policy Statements (continued) • What will a well-written IPS help you do? • It is a detailed description of all the key areas of your investment framework. It will help: 1. Represent your client, your client’s risk tolerance, and your client’s constraints 2. Articulate what you can and cannot invest in, how you will invest, and any investment guidelines to help you invest wisely 3. Stay away from making rash or poor investment choices which could have a major impact on your ability to manage assets in the future

6. Investment Policy Statements (continued) I. Risk and Return Objectives • A. What are your client’s expectations for returns? • Return expectations will drive your asset allocation decisions. • B. What are your client’s expectations for risk? • What is your client’s risk tolerance? • Where they are in their life cycle will have an impact on how much risk you can take • Balance their risk and return requirements • Risk can be standard deviation, residual risk, risk tolerance numbers, or other methodologies

7. Investment Policy Statements (continued) II. Investment Guidelines and Constraints A. What are Your Investment Guidelines? • What are the different phases in your life in regards to investing? • e.g., Accumulation, Growth, Capital Preservation, Income Generation, etc. • Your Investment Guidelines are the general road map on how you will be investing your assets over your life cycle • It integrates your personal goals and your financial goals into a complete financial perspective

8. Investment Policy Statements (continued) B. What are your Investment Constraints? • Liquidity • The speed and ease with which an asset can be converted into cash • Investment Horizon • When will you sell the investment? • Tax Considerations • What is your tax position, your marginal tax rate? • Unique Needs • What are your special needs?

9. Investment Policy Statements (continued) III. Investment Policy • What will you and will you not invest in, how will those investments will be evaluated, how will the assets be invested, how will your portfolio will be funded, and any guidelines for new investments • a. Acceptable and Unacceptable Asset Classes • b. Investment Benchmarks • c. Asset Allocation • d. Investment Strategy • e. Funding Strategy • f. New Investment Strategy

10. Investment Policy Statements (continued) • a. Acceptable/Unacceptable Asset Classes • Which asset classes will you invest in? • Which assets will you not invest in?

11. Investment Policy Statements (continued) • b. Investment Benchmarks • How will you know if you are doing well? • How will you measure your performance (e.g.,monthly, quarterly, or annually) • c. Asset Allocation • How much will you invest in each asset class?

12. Your Investment Plan(continued) • d. Investment Strategy • How will you invest your assets, i.e., via what strategy? • Active management, passive or both? • Will you invest in mutual funds or individual assets? • Mutual Funds/Exchange Traded Funds: • Individual stocks and bonds: • Mix: Combinations of funds and individual stocks

13. Your Investment Plan (continued) • Will you use leverage (i.e. debt) to invest? • Will you buy on margin? • Key risks: you can lose much much more than your original investment—don’t take the chance!! • Will you short-sell? • Key risks: You can lose much much more than your original investment. Don’t risk it!!!!!!!!!!!!

14. Your Investment Plan (continued) • e. Funding Strategy • How will you fund your investments? • f. New Investment Strategy • What about new investments? • Decide the maximum percentage you will invest in any new investment, i.e., not more than 10% of my assets

15. Your Investment Plan (continued) • IV. Monitor your Portfolio, Reevaluate and Rebalance as Necessary • Monitor your performance • Compare your performance to benchmarks. • Re-evaluate • Re-evaluate your performance over 2-3 year periods. • Rebalance • Rebalance back to your asset allocation targets through inflows of new money and tax-minimizing selling

16. Your Investment Plan (continued) • Thoughts on performance and monitoring • Develop a good asset allocation plan and stick to it • Beware of last year’s best performers—winners rotate. Do not chase them • Remember the tax consequences of selling • Re-evaluate your investments as necessary • Rebalance annually or less often • Rebalance to with an eye to limiting tax consequences

17. Questions • Do you understand the investment process and how to write your investment plan (i.e., your investment policy statement)?

18. B. Understand the GFA Investment Policy Statement and its Importance • Key Points: • I. Return and Risk • Return: • Beat the benchmark of an 80% S&P 500 Index and a 20% Russell 2000 Index • Risk: • Maintain a target beta of the portfolio of 1.0 versus the benchmarks • Maintain realized volatility of the portfolio below 20%

19. GFA IPS (continued) • II. Investment Guidelines and Constraints • A. Investment Guidelines • Assets are to be considered long-term assets • B. Key Constraints • Partners are taxed at the 35% Federal and 4.5% state marginal tax brackets • Portfolio weights are to be maintained consistent with the 80% / 20% S&P500 and Russell 2000 allocation • 80% S&P 500 Portfolio must be neutral to S&P determined industry weights

20. GFA IPS (continued) • III. Investment Policy • A. Acceptable and unacceptable asset classes • Acceptable include stocks, bonds, mutual funds, and ETFs • Unacceptable include options, derivatives (except covered calls), short selling, and buying on margin • B. Investment Benchmarks • 80% S&P 500 and 20% Russell 2000 • C. Investment Strategy • Maintain a strategy neutral to S&P 500 level 2 GICS • Maintain neutral weights with Sector SPDRs • D. Account Operations • TD Waterhouse is the custodian • Team has access to account via internet • Trading by Supervising Professor

21. GFA IPS (continued) • IV. Evaluation, Modification and Reporting • Portfolio monitored weekly • Performance is reported on monthly to GFA and others • April and December will have major portfolio performance reporting, with additional information on performance, attribution, and market outlook

22. Questions • Any questions on the GFA Investment Policy Statement?