7/23/2019 AF Note-3 (2)

http://slidepdf.com/reader/full/af-note-3-2 1/4

Foundation IPS 

Return: Depends on time horizon stated for the foundation.

Risk tolerance: Moderate to high, depending on spending rate and time horizon. Usually more aggressive than pension funds.

Liquidity: ! of assets for "ndependent and #ompany sponsored foundations, $! of dividend and interest income for %perating foundationsand may &e su&'ect to spending (.((! of assets. )o spending requirement for #ommunity foundations.

*ime horizon: Usually infinite.

*a+ considerations: )ot ta+a&le ith the e+ception on investment income from private foundations in the U.-./!0.

Legal1Regulatory: 2e. Many states in the U.-. have adopted the Uniform Management "nstitutional 2unds 3ct as the regulatory frameork.

4rudent investor rule generally applies.

Endowment IPS 

Return: Usually funded for the purpose of permanently funding an activity. 4reserve asset &ase and use income generated for &udget needs.

)o specific spending requirement. 5alance the need for high current income ith long6term protection of principal. 7nsure purchasing poer isnot eroded &y inflation. May use total approach or may strive to minimize spending level volatility.

Risk tolerance: Linked to relative importance of the fund in the sponsor8s overall &udget picture. "nversely related to dependence on current

income. 7+posure to market fluctuation is a ma'or concern. "nfinite life means that overall risk tolerance is generally high.

Liquidity: Usually lo. 9igh if large outlays i.e., capital improvements0 are e+pected.

*ime horizon: Usually infinite.

*a+ considerations: "ncome is ta+6e+empt.

Legal1Regulatory: 2e. Many states in the U.-. have adopted the Uniform Management "nstitutional 2unds 3ct as the regulatory frameork.

4rudent investor rule generally applies.

Unique needs: Diverse and endoment specific.

Life Insurance Company IPS 

Return: *hree components: /0 minimum required rate of return statutory rate set &y actuarial assumptions; <0 enhanced margin rates of

return or =spread management=; (0surplus rates of return, here surplus equals total assets total lia&ilities.

Risk tolerance: -pecific factors include: market volatility adversely impacts asset valuation, a lo tolerance of any loss of income or delays in

collecting income, reinvestment risk is a ma'or concern, and credit quality is associated ith timely payment of income and principal.

Liquidity: )eed to address three primary concerns: disintermediation, asset6lia&ility mismatches, and asset marketa&ility risk.

*ime horizon: *raditionally <>6?> years, &ut progressively shorter as the duration of lia&ilities have decreased due to increased interest rate

volatility and competitive market factors.

*a+ considerations: *a+es are a ma'or consideration. *o parts for ta+ purposes: policyholder8s share is not ta+ed; funds transferred to the

surplus are ta+ed.

Legal1Regulatory: 9eavily regulated at the state level. Regulations relate to eligi&le investments, prudent person rule, and valuation methods.

7/23/2019 AF Note-3 (2)

http://slidepdf.com/reader/full/af-note-3-2 2/4

Unique needs: Diversity of product offerings, company size, and level of asset surplus.

Nonlife Insurance Company IPS 

Return: @reater uncertainty regarding claims, &ut not as interest rate sensitive. 2i+ed income component should ma+imize the return for

meeting claims. 7quity segment should gro the surplus1supplement funds for lia&ility claims. "mpacted &y: competitive pricing policy,

profita&ility, groth of surplus, after6ta+ returns, and total return.

Risk tolerance: Risk must &e tempered &y the liquidity requirements. "nflation risk is a &ig concern &ecause of replacement cost policies. #ash

flo characteristics are unpredicta&le. Many companies have self6imposed ceilings on the common stock to surplus ratio.

Liquidity: Relatively high.

*ime horizon: -hort, due to nature of claims.

*a+ considerations: *a+es play an important role; frequent contact ith ta+ counsel is advised.

Legal1Regulatory: #onsidera&le leeay in choosing investments. Regulations less onerous than for life6insurance companies.

Unique needs: *he financial status of the firm and the management of the investment risk and liquidity requirements influence the "4-.

Bank IPS 

Return: *he return o&'ective for the &ank8s securities portfolio is primarily to generate a positive interest rate spread.

Risk: *he most important concern is meeting lia&ilities, and the &ank cannot let losses in the securities portfolio interfere ith that. *herefore, its

tolerance for risk is &elo average.

*ime horizon: 5ank lia&ilities are usually fairly short term, so securities in the portfolio should &e of short to intermediate maturity1duration.

Liquidity: -ince &anks require regular liquidity to meet lia&ilities and ne loan requests, the securities must &e liquid.

*a+: 5anks are ta+a&le entities.

Legal and regulatory: 5anks are highly regulated and required to maintain liquidity, reserve requirements, and pledge against certain deposits.

Unique circumstances: -ome potential unique circumstances include lack of diversification or lack of liquidity in the loan portfolio.

Ethics

A Bait to &uy1sell until pu&lic media C %A Market impact selling1&uying something illiquid ithout &ad intention C %A )ot attri&uting original author even ith his approvalC E"%L3*"%)A Legal does not imply ethicalA @ifts from clients should &e disclosed to the employer, hich ill determine if affects independence and o&'ectivityA "E 5 C additional compensation agreements C ritten consent from all parties involved A nature, amount, duration

A @uarantee something rong0 C E"%L3*"%)A "4- C at least annually and prior to material changesA #ompliance officer reports to #7% or 5oard of DirectorsA "nfo de clients to fello employees involved C %A "f &eneficial oner, act only 32*7R clients and employersA Disclosure in research report of &eing &eneficial oner C %A )ot enrolled C not a candidateA -mall fee for something not related to professional activities ithout conflict C )o disclosure necessaryA 5ut if the situation creates a conflict, ritten consent necessaryA 3M# C disclose fees and other costs, management fee, incentive fee, commissions

7/23/2019 AF Note-3 (2)

http://slidepdf.com/reader/full/af-note-3-2 3/4

A Disclosure of using simulated data C %A 3M# C disclose pro+y voting policyA 4ro rata C on the &asis of order sizeA 3M# C disclose regulatory actionsA 3M# C disclose significant changes in organizationA "ntern C employee for "E 30A #reating ne company during your free time hile employed0 C %

A -upervisors: investigation firstA #ompliance approval of something &ad does not mean you are free to do itA Discovering that some report has an error and is going to &e pu&lic C tell supervisor and eventually dissociate A legal advice0A La Es #23: follo the stricter oneA *rips: donFt accept payments e+cept hen really necessary0. Use 'udgementA DonFt accept pressure from "5A Disclosure of client giftsA DonFt rite issuer paid research if compensation includes &onus for ne investors &uying the underlyingA DonFt e+aggerate hat you 1 your firm can doA Research: if you receive compensation, disclosure necessary you ould not &e independent0A *ypo C %, &ut if discovered you must take necessary stepsA 3cknoledgement hen quoting other peopleFs orkA *esting and modifying a model C still not yours, credit the original authorA #opying plain language, &asics C E"%L3*"%)A Guote original source or second A original source

A #ivil diso&edience C okA "f source C unrelia&le, info is not materialA Mosaic theory C %A Liquidity pumping C % if disclosedA "f client C pension, client C orkers, not managementA #lient &rokerage that does not &enefit the client A not getting &est e+ecution C E"%L3*"%)A *ell change of recommendation to 3LL clientsA Disclose trade allocation policy to clients and prospectsA Disclosure of rong practice does not mean you can do itA -haring your vie more positive or negative0 ith only a fe clients C E"%L3*"%)A -uita&ility depends on portfolio, not a single assetA "f using performance from previous 'o&, disclosure necessaryA #lient doing something illegal C supervisor, legal counsel to check if notification to regulator is requiredA 7mployee6led &uyout C %A DonFt take ith you softare, even if you created it

A #ontacting pu&lic clients C %A *ime consuming second 'o& C permission from employerA 5onus from clients C disclosure to employerA H5ased on the factIJ C usually a violationA @roup research: document the difference of opinion and request to remove his nameA )otify change in investment processA Kyr records R7#%MM7)D7DA our family C any other clientA Disclosure of referral fees to employer, clients and prospectsA ou change recommendation &ut receive a order contrary0 C advise the customer &efore accepting the orderA "5 client C put the stock on restricted list and give only factual infoA Britten consent from employer if independent practice that competesA DonFt contact clients &efore leaving for ne firm or start independent practiceA 3M# specific for companies, #23 code can &e part of a companyFs code of ethicsA Disclosure of 3LL conflicts, not only those related to #URR7)* portfolio holdingsA Receiving an order contrary to "4- C inform investor that you can not do itA "f compliance system is rong, decline supervisor responsi&ilitiesA 9istorical data that actually happened C factA 4ersonal trade / eek after report C accepta&leA -haring equity and &ond research C okA sp C pu&lic info you can use ithout quotingA Ultimate responsi&ility for compliance C compliance officerA #urrent via&le 4R%-47#*- C current clients, donFt contact themA Re'ected 4R%-47#*- C you can call them, okA Little details of models, algorithms C proprietary details, not disclosure necessary

7/23/2019 AF Note-3 (2)

http://slidepdf.com/reader/full/af-note-3-2 4/4

A -ome&ody accidentally tells inside info C try to convince him to make it pu&licA Ha #hartered 2inancial 3nalystJ C E"%L3*"%)A *ell personal details to the clientFs family C E"%L3*"%)A Missing important nes a&out a company you research C E"%L3*"%)A )o limit to value of gift received from a client if you have permissionA "nternal meetings: talk a&out clients B"*9%U* saying names, for confidentiality

Assumed• 5ank8s asset N its lia&ility

• Living 7+pense is after6ta+ if not mentioned.

• *he yield curve is steepening from a normal upards not inverted0 shape.

• 7ndoment and pension plan are not ta+a&le entities.

• 2or pension6ad'usted B3## calculations: *he plan is fully funded.

• 5alanced portfolio can include asset classes, such as equities and &onds.

• *o calculate B3##, the &eta of de&t1lia&ility is >.

• =3dditional compensation arrangements= is a&out conflict of interest &eteen employee and employer...)othing to do ith the clients.

enforces policies of investment and non6investment related activities equally. mandatory vacations...0

• -harpe ratioglo&al market0C-harpe ratiolocal market0.

• *he market portfolio has the highest -harpe ratio on the efficient frontier.

• real interest rate is the same across countries if not specified;

•

real interest rate groth CN currency appreciation.• inverted yield curve CN interest rate ill fall.

• steep yield curve CN interest rate ill rise.

• *he &reakeven price of a zero6cost collar is: the stock price at time >

• *he issuer of a calla&le &ond &ought a call.

• Bith &lack6letterman model, /0 the manager ould eight her portfolio the same as the orld6ide asset class eight if the manager has no

particular e+pectations a&out the asset class. 66 the active eight is >. *his is hat the passive strategy has in equity portfolio management.<0 the investor ho holds the market portfolio has average risk tolerance.

• Bith active strategy, the manager could set eight to > if no opinion.