Investment Policy and Portfolio Development - Example

Investment Policy and Portfolio Development Investment Proposal Introduction Building upon the information you availed in the investment questionnaire, Fund Managers have crafted an investment proposal, which also incorporates the latest financial research and economic trends available. Given that the economic and investment landscape varies, Fund Managers have designed your portfolio such that it will adapt to those changes. As your needs change, Fund Managers can effect the necessary adjustments to ensure your portfolio meets them. This investment proposal document offers details about your optimal investment strategy which has been specifically tailored to your time horizon, risk profile, and investment objectives. Through a questionnaire, Fund Managers have designed a suitable asset allocation as well as the most appropriate implementation method which includes several investment products and vehicles. This proposal serves to give a clear understanding between the advisor and the investor as to the investment objectives, goals and management policies applicable to the investment portfolio of the investor. This proposal serves as a suggested action plan and not a contract. It summarizes your objectives and outlines an investment philosophy, strategy as well as the implementation plan to assist you reach them. On a regular and consistent basis, Fund Managers will review your portfolio and make the necessary changes as required to be satisfied that it reflects any variations in your financial situation. Your investment policy statement This investment policy statement is a core ingredient of your personal investment strategy. Its main purpose is to set forth in writing: i. A collection of objectives and goals deemed appropriate for the attainment through the investment of your assets of the portfolio. ii. The boundaries for the allocation of your portfolio’s assets and the investment guidelines iii. A comprehensive analysis as well as understanding of the Fund Managers and the customized portfolio you and Fund Managers, as your investment advisors, have selected to meet your investment objectives best. The Fund Managers will be referring to this Investment Policy Statement as your investment grows and evolve. The Fund Managers will use the criteria outlined here to ensure that your chosen portfolio continues to meet your requirements. In case a variation occurs in your circumstances or goals, your Investment Policy Statement can be updated to accommodate the new demands and changes to your portfolio. Your Investor Profile Setting our basis in your response to the questions we asked you through the questionnaire and our meeting, the Fund Managers were able to assess your Investor Profile, which forms the basis for an investment strategy, which has been tailored to your goals. An overview This is the summary of your investor profile that Fund Managers determined based on the information you availed: Assessing your investor profile The information you provided Fund Managers with is a stepping stone in creating an investment strategy, which best meets your future needs. The key elements in developing an effective investment strategy that is best suited for you are the definition of your investment objectives, understanding your investment time horizon, and establishing your risk tolerance. Your primary investment objective From our discussion, you stated that your primary investment goal is to achieve growth and income. A correlation between the returns of the portfolio and its risk subsists, and you are prepared to assume it. The Portfolios that emphasize long-term growth are characterized by high price fluctuations over the short-term. Therefore, given the trade-off between the risks and returns, you will have to accept higher risk portfolios if you want to achieve higher returns. Investment time horizon You stated that your portfolio’s investment time horizon is 40 years. The longer the investment time horizon, the higher the likelihood that you will attain your investment objectives. Time is an asset when it comes to investing. Maintaining your investment strategy through all conditions of the market is critical to achieving your investment objectives, especially when the market is volatile. A longer-term strategy is best suited for equities because they are known to fluctuate significantly in the short-term. In addition, during the long-terms, investment losses can often be recouped. You will also be able to take advantage of market upswings in order to enhance the portfolio’s returns. Very low and very high returns eventually average out over time. Your risk tolerance Risk tolerance describes the risk degree you are willing to take to achieve your investment objectives. Typically, higher potential returns possess higher levels of risk. To attain your expected portfolio returns, you have indicated that will tolerate high volatility, such as negative returns and a temporary decline in your portfolio that might be realized over your portfolio’s period. Creating a diversified portfolio solution will assist you to achieve higher returns while minimizing your risk level. About Fund Managers One size never fits all. As a result, through a different and a critical eye, Fund Managers consider you and your particular needs. Fund Managers believe that individual parts, as well as elements, remain individual, but when brought together, they give an inspiring solution, which turns your vision into reality. Fund Managers have a diverse team that comprises skilled experts who will help you achieve your goals while uncovering other opportunities. This team will assess, simplify and coordinate your financial affairs. Fund Managers consider the bigger picture while defining your whole financial landscape and then leverage Fund Managers in-house Fund management philosophy to efficiently build, build, monitor as well as control every aspect of your portfolio, while appropriately striking a balance between your goals and risk tolerance. This gives rise to a holistic Fund management solution which mixes boutique level client services, leading edge technology, and institutional caliber portfolio management to assist you meet all of your goals. Unique advantages Unified Managed Household Capability Diversification in 18 Separate Asset Classes Tax-efficient Core- Satellite Portfolio Implementation Proprietary ETF Selection Methodology Proven Systematic Equity Strategies In-house Institutional-caliber Portfolio Managers Fresh-start Personalized Portfolios Optimized Personal Strategic Asset Allocation Investment vehicles Individual Securities Broad Index Funds Exchange-Traded Funds (ETFs) Life Insurance Hedge Funds Real Estate Investments Private Equity Investments 1. Define your financial objectives Identify investment objective Identify time horizon Assess risk tolerance Identify liquidity needs Establish income targets Identify return objectives and ranges of volatility Create client profile 2. Creating your investment strategy Identify suitable asset classes for portfolio Generate optimal Strategic Asset Allocation Select appropriate performance benchmarks Create an Investment Policy Statement 3. Constructing your portfolio Conduct security and investment fund research Identify suitable mix of investment options Combine securities and funds in optimized proportions Consider further customization to accommodate additional needs Construct a diversified portfolio 4. Implementing and managing your portfolio Deliver cost effective implementation as well as best trading execution Rebalance regularly according to the strategy calendar Monitor changes, trends and market conditions Periodically re-align your portfolio with the market conditions changes 5. Evaluating and reviewing Periodically review changes in your investment objectives Continually evaluate progress towards financial goals Modify the portfolio in accordance with your changing circumstances Investment Recommendation In this section, Fund Managers will recommend a target asset allocation, which has been designed to give you the optimal possible chance of realizing your investment goals given your attitude to risk. Achieving the right overall asset mix within your portfolio remains a critical element in constructing an investment portfolio to meet your needs. In other words, the right asset mixes which will help you to maximize return on this investment while ensuring that risks remain at a level with which you are comfortable. A suitable asset allocation is shown by the target portfolio below which has been designed based on what was agreed regarding your approach to risk and as balanced attitude towards risks. Target Portfolio Fund Managers’ recommendations From the understanding of your needs as well as attitudes relating to your investment goal, Fund Managers have constructed the following portfolio. The portfolio is comprised of a gamut of collective funds that offer benefits of professional daily management and investment spread. Fund Managers consider it suitable for your needs because it has been designed with reference to the information you availed to Fund Managers about yourself and your goals. From this information, Fund Managers constructed a target portfolio as an asset allocation level, created to offer you the best returns given the risk level with which you are comfortable. As indicated below, the target portfolio was referenced by choosing a range of funds to develop a proposed portfolio. Your proposed portfolio has been created to match your target portfolio closely. The proposed portfolio slightly differs with the target portfolio in some aspects, but given your circumstances, Fund Managers believe that the proposed portfolio remains appropriate. Proposed portfolio Recommended holdings Investment name Allocation % Allocation $ Beta OLeary Canadian bond yield (series A) Fund 37.58 140,000 0.48 RBC global energy fund 4.03 15,000 1.29 CL money market fund 3.36 12,500 0.98 Mawer Canadian Equity Fund 5.37 20,000 0.81 Mawer U.S. equity fund 26.85 100,000 1.09 AGF Canadian Bond Fund 22.82 85,000 0.71 Total 100% 372,500 Investment objective The principal investment objective of investing in OLeary Canadian bond yield (series A) fund is to offer you a steady flow of income as it invests in Canadian fixed income securities. This fund will help you achieve your liquidity needs and other anticipated annual contributions. Investment in the RBC global energy fund is aimed at providing long-term capital growth. It primarily invests equity securities of companies involved, either directly or indirectly, in the exploration, development, production and distribution of energy and other related products. This would give Aaron McDavid good sum of money at retirement. The CL money market fund has three products and investment in it is expected to enable you realize your liquidity needs. Through its Money market fund (SRA) and the LC Money market fund (SRA), you will realize superior current interest incomes returns and maximize your liquidity since it invests in short-term investment vehicles that are highly diversified. Through the Money market fund (MFS), you will give you a real rate of return virtually from income. The objective of investing in Mawer Canadian Equity Fund is to realize above average long term returns which are risk-adjusted. It also invests in short-term investments and treasury bills to help you achieve liquidity needs. The investment in Mawer U.S. equity fund is to achieve above average long-term returns from both capital growth and dividend income. It also invests in treasury bills and other short-term investments. By investing in AGF Canadian Bond Fund, you will achieve superior incomes as well as capital growth that are consistent with the current rate of incomes. It primarily investments in guaranteed bonds, which are issued by the Canadian federal and provincial governments. Return from the portfolio The CAPM model was used to establish the required rate of return on the proposed investment. 0.54% are the Canada’s treasury bill rate of return used in this proposal and 2% being the market return from past data. KE = Rf + (Rm-Rf) βE Portfolio beta = 37.58%*0.48+4.03%*1.29+3.36%*0.98+5.37%*0.81+26.85%*1.09+22.82%*0.71 = 0.7635 This portfolio’s required rate of return = KP = Rf + (Rm-Rf) βP, where KP denotes required rate of return for this portfolio while βP is its beta. KP =0. 54% + (2%-0.54%) *0. 7635 = 1.6547% Investment Projections In this section, your projected returns from the investment portfolio at the retirement age has been computed based on the expected rate of return as established in the preceding section. In addition, the value of your annual contributions of the retirement before tax has also been completed. Projected value of the portfolio at retirement Initial investment return years $372,500 1.016547 40 Portfolio’s value at retirement = 372,500 (1.016547) ^40 Value at retirement = $718,166 Potential pre-tax retirement income The future value of the first annual contribution of $7,000 per annum after four years is the terminal value of an annuity. Future value = 7000* {(1.016547) ^5-1} /0.016547 = $36,177.615 The future value of this amount of retirement (after 35 years) is 36,177.615* (1.016547) ^35 = $64,254.144 The value of the annual contribution of $9,500 after the fifth year to retirement will be: 9,500* {(1.016547^35)-1} / 0.016547= $445,561.66 Total projected value = $445,561.66+64,254.144 = $509,815.80 Disclosures The projections in this proposal are hypothetical in nature, not representative of actual investment results and are appropriate as at the reports date. They have been based on the information you availed concerning your attitude to risk, your goals, and the time horizon over which you intend to invest and resources you have planned to allocate towards realizing your goal. In case you come across some inaccurate information in this proposal, or if some comments made and conclusions drawn are not reflective of your circumstances, attitudes or objectives, please bring it to our attention. This proposal remains relevant to your goals. Your target portfolio is a representative of the most appropriate asset mix to assist you realizes your investment goal given your attitude to investment risk. In reference to the target portfolio, your proposed portfolio has been designed and represents a gamut of appropriate investment to assist you meet your goal. The recommendations for your proposed portfolio has collective funds, which are pooled investments that will enable you to benefit from professional daily management and investment spread. The proposed portfolio’s values are prone to fluctuations, falls and rises. This implies that, a guarantee does not exist that your portfolio’s value will always be enough to enable you realize your goal. References Balakrishnan, R. (2008, June 11). Sample Investment Policy Statement. Canadian Capitalist, pp. http://www.canadiancapitalist.com/sample-investment-policy-statement/. Appendices Appendix I Asset weight of OLeary Canadian bond yield (series A) Fund Source: Financial post Appendix II Growth of $10,000 of OLeary Canadian bond yield(series A) Fund Source: Morningstar Appendix III Comparative performance of OLeary Canadian bond yield(series A) Fund Source: Financial post Appendix IV RBC global energy fund asset allocation Source: RBC Global Asset Management Inc. Appendix V RBC global energy fund growth of $10,000 Source: RBC Global Asset Management Inc. Appendix VI CL money market fund Annualized performance Source: Morningstar Appendix VII CL money market fund growth of $10,000 Source: Morningstar Appendix VIII Mawer Canadian Equity fund growth of $10,000 Source: The Globe and Mail Appendix IX Mawer Canadian Equity fund annualized returns Source: Globe Fund Appendix X Mawer U.S. equity fund net performance Source: Mawer Appendix XI Mawer U.S. equity fund growth of $10,000 Source: Morningstar Appendix XII Mawer U.S. equity fund asset allocation Appendix XIII AGF Canadian Bond fund growth of $10,000 Source: Morningstar Appendix XIV AGF Canadian Bond Fund asset allocation Source: Morningstar Appendix XV Assumptions This investment policy statement is based on the assumption that the rate of return on the portfolio will be constant throughout the investment period. Another assumption is that the purchasing power of the dollar never changes. Read More