In a previous article, we introduced the
CFA Institute Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7
modules, covering all the essential topics in finance, economics, ethics and
regulations. This series of articles
will highlight the core knowledge of each chapter.
Chapter 16 provides an overview of the
investors and their needs. The learning outcome of chapter 16 is as follows:
·
Describe
the importance of identifying investor needs to the investment
·
process;
·
Identify,
describe, and compare types of individual and institutional investors;
·
Compare
defined benefit pension plans and defined contribution pension plans;
·
Explain
factors that affect investor needs;
·
Describe
the rationale for and structure of investment policy statements in serving
client needs.
Each investor—individual or
institutional—has different investment objectives. Key factors that are common
to all investors but that will vary for each investor include the following:
· Required return
· Risk tolerance
· Time horizon
Investors may also have specific needs
in relation to liquidity, tax considerations, regulatory
requirement, consistency with particular religious or ethical standards,
or other unique circumstances. Investors’ circumstances and needs change
over time, so it is important to re-evaluate their needs at least annually.
It is good practice to capture
information about the client and the client’s needs in an investment policy statement
(IPS). An IPS—for both individual and institutional investors—serves as a guide
for the investor and investment manager or adviser regarding what is required
of and acceptable in the investment portfolio. An IPS also forms the basis for
determining what constitutes success in managing the portfolio.
The IPS should capture the investor’s
objectives and any constraints that will apply to the portfolio. The investor
and manager/adviser should agree on the IPS and review it on a regular basis,
typically once a year. It should also be reviewed when the client experiences a
change in circumstances. Creating and reviewing an IPS is a good opportunity
for the investment manager and client to discuss the client’s goals.
·
Objectives
o Return requirement
o Risk tolerance
·
Constraints
o Time horizon
o Liquidity
o Regulatory constraints
o Taxes
o Unique circumstances
Most institutional investors create and
adopt a comprehensive IPS. These statements specify many of the following
points:
·
the
general objectives (including return objectives) of the investment program and
their relationship to the mission of the institution
·
the
risk tolerance of the organisation and its capacity for bearing risk
· all
economic and operational constraints, such as tax considerations, legal and
regulatory circumstances, and any other special circumstances
·
the
time horizon over which funds are to be invested
·
the
relative importance of capital preservation and capital growth
·
the
asset classes in which the institution is allowed to invest
·
a
target asset allocation that indicates what proportion of the investment funds
will be invested in each asset class
·
whether
leverage (use of debt) or short positions are allowed
·
how
actively the institution will trade
·
how
investment decisions will be made
·
the
benchmarks against which the institution will measure overall investment
returns
No comments:
Post a Comment