I most concerned about the open questions of the exam, in particular the portfolio management part about investment policy statements and asset allocation. Does anyone have any suggestions as how to study this part? Are there certain key words you will have to use in order to get the points?
I think the best way to get your head around these is just to practice a bunch of them. Starting probably next week, I’m going to pull up as many old exam IPS’ as I can and just work through them until I feel somewhat comfortable with it. There are some parts that seem pretty standardized for individual IPS’ - here are some notes I’ve taken so far: Return: I haven’t done much with this yet but it seems that they want you to write two parts: the client’s stated goals (ie have 1 million by retirement, make 500k donation to charity, whatever), and then an actual return calculation. For the return calculation, I think one of the big keys is to make sure you check the question to see if you want pre or post tax returns and add an adjustment for inflation. Other than that it’s probably going to be based on the info in the question. Risk tolerance: You need to make three statements: willingness to take risk, ability to take risk, and overall risk tolerance. But, luckily, there will only be three answers to use: above average, average, and below average. You will obviously also need to list anything that supports your claim. Time horizon: Always list the number of stages. Typically either 1 stage if they are in retirement or two if they are still working (one for working years, one for retirement), then add any other stages you see in the client’s case (could be caring for sick mother, kids in college, etc.). From there I’m not really sure but I guess we will need to decide if the overall horizon will be short, intermediate, or long. Tax: I would think this is usually given, but I expect this might get tied to that horrible new reading so I would be ready to address anything from that section here. Also look out for low basis stock. Legal: Always write “Prudent Investor Rule” applies. Otherwise there usually isn’t anything else here, but if there seem to be complicated issues then advise consulting with a lawyer. Liquidity: This one is a little iffy to me, but I think we’re basing this on any spending needs on the upcoming year. Not sure if there’s a standardized answer we can give here but I would probably go with “low, moderate, or high” based on the % of the portfolio. Also we should be keeping 3-6 months worth of expenses in cash as an emergency fund. Unique: This always seems really grey to me but I guess its anything that doesn’t get addressed above (and sometimes even if they are). I guess anything that just stands out as unusual should be listed here. Let me know if anything above is wrong or if theres anything else to add. I’m a lot less certain about what to do with the institutional IPS, but hopefully a few practice questions will help with that.
Great, thanks Aimee.
Funny. I was using almost the same write up as Aimee. Let’s hope Schweser is right about getting full credit for a one or two words answers.
One thing I’d add is to remember to take any large expenditures for the coming year out of the portfolio value before calculating your returns. I.e., portfolio worth $10MM, going to make a $2MM donation next year, needs $200K yearly to live on would be a required return of 2.5% (.2MM/8MM), not 2.0% (.2MM/10MM). Institutional investors are a whole different ballgame, and there’s rules to remember (just went over them today, actually). For instance, under “legal and regulatory”, you need to put ERISA for pension funds, UMIFA for foundations and endowments, and NAIC for insurance (and that’s just one constraint). Return for banks is to maximize their spread, blah blah blah. Also, banks have a short to medium time horizon, insurance companies are long term but getting shorter, etc…it’s a pain in the ass, but guaranteed points for some rote memorization.
For the return calculation, you sometimes have to do a PV calculation. Like, they have $PV now and need $FV at retirement in n years, where there is a net annual expense (= -PMT). Plug into calculator and solve for i. (I think 2008 #1 is like this) For liquidity, read the case very carefully. A lot of them are line calls requiring judgment… e.g. one of the past exams had the foundation needing to set aside $$ for required spending + management fees. I’m sure those who put down just required spending (like me) got docked 1/2 the points.
great, just to add from what I saw in CFA problem review: For tax, you want to write if any investments are favored. This usually means putting down favoring growth/capital appreciation stocks when cap gains taxes are lower then dividend or interest income. Liquidity: I didn’t really see them wanting you to explicitly write low/med/high, but just what the event is, how much, and state how they should set aside X dollars in short-term liquid cash securities. The emergency fund came up a lot too. Unique: usually pretty obvious from reading the question. Concentrated stock positions, gifting desires, large expected inheritances, etc…