Investment Process

Process and Strategy
Investment Policy Statement (IPS)
Client Objectives
Investment Constraints

Process and Strategy:
The first step in the investment process is to formalize the strategy for the management of the client’s assets. This strategy is laid out in detail in the investment policy statement (IPS), which constitutes a unique plan developed for each client.

Investment Policy Statement (IPS):
The IPS has two major parts:

  • A statement of client objectives.
  • A list of investment constraints.

Client Objectives:
Two issues are addressed under objectives:

  • Risk tolerance.
  • Return goals.

An investor’s risk tolerance is a qualitative assessment based upon two related, but separate, issues:

  • The ability to bear risk.
  • The willingness to bear risk.

The return goals are stated in terms of expected returns. The expected returns are determined by the target asset allocation, which is determined in large part by the client’s risk tolerance.

Investment Constraints:
There are typically 5 categories of constraints addressed in the IPS:

  • Legal and regulatory factors.
  • Liquidity needs.
  • Tax considerations.
  • Time horizon.
  • Unique circumstances.

Legal and regulatory factors are external constraints, and are most often associated with pension plans and other institutional investor portfolios for which the manager has fiduciary responsibility. This type of responsibility may also be present for certain types of individual trust portfolios.

Liquidity needs are determined by the investor’s anticipated cash expenditures over the foreseeable future.

Tax considerations are present when the investor’s assets are subject to taxes, such as income, capital gains, or estate taxes.

The time horizon is determined by the length of time over which the portfolio is required to generate returns to meet investor needs. There may be more than one time horizon for a given investor. For example, an investor might have pre-retirement and post-retirement horizons.

Unique circumstances are those that do not fit neatly into any of the other 4 categories. For example, an investor may want to avoid investment in some types of companies because of the nature of their business.

Once the strategy has been defined, it needs to be put into action. However, there is more to the execution process than simply placing orders to buy or sell assets.

This important part of the investment process must be done in a deliberate, but timely, manner. In addition, transaction costs can have a material adverse effect upon portfolio returns, so any expenses incurred must be commensurate with the brokerage services provided.

Accounts are reviewed on a quarterly basis.  The objective of the review is to ensure that the portfolio assets are consistent with the strategy and investment objectives as laid out in the IPS.

Each review looks specifically at the portfolio’s exposure to risk. There are several different aspects from which risk exposures can be assessed.

From quarter to quarter the aspect of the review changes, such that, over the course of a calendar year, the reviews collectively examine asset allocation based upon:

  • Industry sector.
  • Firm size.
  • Currency exposure.
  • Credit quality and maturity.

Following the outcome of the review, any adjustments required to bring the risk exposures back into line with the stated investment objectives are implemented.

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