CASES IN PORTFOLIO MANAGEMENT, JOHN W. PEAVY III AND KATRINA F. SHE...

2. Cases in Portfolio Management, John W. Peavy III and Katrina F. Sherrerd, (AIMR, 1990)

Purpose:

To test the candidate’s knowledge of why investment policy statements are important in achieving

long term financial objectives and encouraging a healthy client/manager relationship.

LOS: The candidate should be able to:

“Developing an Investment Policy Statement” (Session 12)

• explain why creating an investment policy statement is good discipline, virtually indispensable,

and also sometimes legally required.

Cases in Portfolio Management (Session 22)

• discuss the overall portfolio management process leading to the asset allocation decision,

including the stage devoted to investor information requirements (i.e., objectives and

constraints) and the stage devoted to analyzing capital market expectations.

Guideline Answer:

A potential benefit of using a written investment policy statement that contradicts each of the

comments is:

• A policy statement identifies the pertinent investment objectives and constraints. Clearly

identified objectives and constraints help an investor, and investment manager, to focus on

appropriate investment strategies among the universe of possible strategies. The result should be

an optimal balance between return seeking and risk taking and an increased probability of

success in achieving investment goals.

• An investment policy statement provides a long-term plan for an investor and a basis for making

disciplined investment decisions over time. The absence of a policy statement reduces decision

making to an individual event basis and often leads to chasing short-term opportunities that may

not contribute to, or may even take away from, reaching long-term goals. The presence of a

policy encourages all parties to maintain their focus on the long-term nature of the investment

process, especially during turbulent times.

• A written policy statement can provide continuity from current manager(s) to future ones. In the

Mueller’s case, this could contribute to meeting long-term goals if they decide in the future to

hire an investment manager or if the control of their assets passes to their daughter or others

acting on their behalf. A well thought out policy will evolve over time but likely will not be

subject to a complete overhaul because of a change in managers. Similarly, a policy statement

can enhance communication between an investment manager and client by clarifying issues of

importance and concerns to either party. Improved communication, in turn, increases the

likelihood that the investment manager will faithfully implement the agreed-upon plan.

Level III: Question 3

Topic: Asset Allocation

Minutes: 12

Reading References: