Need for a Policy Statement
The Need for a Policy Statement
Portfolio Management Process * Manager should study current financial and economic conditions and forecast future trends a. The investor’s needs and financial market expectations will jointly determine investment strategy * Construct the portfolio b. Minimize the investor’s risks while meeting the needs specified in the policy statement * Continual monitoring of the investor’s needs and capital market conditions, and when necessary, updating the policy statement
Two important reasons for constructing a policy statement 1. It helps the investor decide on realistic investment goals after learning about the financial markets and the risks of investing 2. It creates a standard by which to judge the performance of the portfolio manager
Understand and Articulate Realistic Investor Goals * An important purpose is to help investors understand their own needs, objectives, and investment constraints * Constructing a policy statement is mainly the investor’s responsibility * It is a process investors become familiar with financial markets and investing risks
Standards for Evaluating Portfolio Performance * The portfolio’s performance should be compared to guidelines specified in the policy statement, not on the portfolio’s overall return * Managers should be judged by whether they consistently followed the client’s policy guidelines * The policy statement will typically include a benchmark portfolio, or comparison standard * The risk of the benchmark, and the assets included in the benchmark, should agree with the client’s risk preferences and investment needs
Other Benefits * A sound policy statement helps to protect the client against a portfolio manager’s inappropriate investments or unethical behavior * A clearly written policy statement helps avoid future potential problems * Just because one specific manager currently manages your account does not mean that
Portfolio Management Process * Manager should study current financial and economic conditions and forecast future trends a. The investor’s needs and financial market expectations will jointly determine investment strategy * Construct the portfolio b. Minimize the investor’s risks while meeting the needs specified in the policy statement * Continual monitoring of the investor’s needs and capital market conditions, and when necessary, updating the policy statement
Two important reasons for constructing a policy statement 1. It helps the investor decide on realistic investment goals after learning about the financial markets and the risks of investing 2. It creates a standard by which to judge the performance of the portfolio manager
Understand and Articulate Realistic Investor Goals * An important purpose is to help investors understand their own needs, objectives, and investment constraints * Constructing a policy statement is mainly the investor’s responsibility * It is a process investors become familiar with financial markets and investing risks
Standards for Evaluating Portfolio Performance * The portfolio’s performance should be compared to guidelines specified in the policy statement, not on the portfolio’s overall return * Managers should be judged by whether they consistently followed the client’s policy guidelines * The policy statement will typically include a benchmark portfolio, or comparison standard * The risk of the benchmark, and the assets included in the benchmark, should agree with the client’s risk preferences and investment needs
Other Benefits * A sound policy statement helps to protect the client against a portfolio manager’s inappropriate investments or unethical behavior * A clearly written policy statement helps avoid future potential problems * Just because one specific manager currently manages your account does not mean that