Question

Write an IPS for someone anonymous (made up) with the brief summary of a person you made up.

• A portfolio manager who reads the IPS should be able to make informed decisions only based on the IPS and without having met the person

Example solution below:

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At this point we know (or can reasonably infer) that Mr. Franklin is:

•unmarried (a recent widower)

•childless

•70 years of age

•in good health

•possessed of a large amount of (relatively) liquid wealth intending to leave his estate to a tax-exempt medical research foundation, to whom he is also giving a large current cash gift

•free of debt (not explicitly stated, but neither is the opposite)

•in the highest tax brackets (not explicitly stated, but apparent)

•not skilled in the management of a large investment portfolio, but also not a complete novice since he owned significant assets of his own prior to his wife’s death

•not burdened by large or specific needs for current income

•not in need of large or specific amounts of current liquidity

Taking this knowledge into account, his Investment Policy Statement will reflect these specifics:

Objectives:

Return Requirements: The incidental throw-off of income from Mr. Franklin’s large asset pool should provide a more than sufficient flow of net spendable income. If not, such a need can easily be met by minor portfolio adjustments. Thus, an inflation-adjusted enhancement of the capital base for the benefit of the foundation will be the primary return goal (i.e., real growth of capital). Tax minimization will be a continuing collateral goal.

Risk Tolerance: Account circumstances and the long-term return goal suggest that the portfolio can take somewhat above average risk. Mr. Franklin is acquainted with the nature of investment risk from his prior ownership of stocks and bonds, he has a still long actuarial life expectancy and is in good current health, and his heir - the foundation, thanks to his generosity - is already possessed of a large asset base.

Constraints:

Time Horizon: Even disregarding Mr. Franklin’s still-long actuarial life expectancy, the horizon is long-term because the remainder of his estate, the foundation, has a virtually perpetual life span.

Liquidity Requirement: Given what we know and the expectation of an ongoing income stream of considerable size, no liquidity needs that would require specific funding appear to exist.

Taxes: Mr. Franklin is no doubt in the highest tax brackets, and investment actions should take that fact into account on a continuing basis. Appropriate tax-sheltered investment (standing on their own merits as investments) should be considered. Tax minimization will be a specific investment goal.

Legal and Regulatory: Investments, if under the supervision of an investment management firm (i.e., not managed by Mr. Franklin himself) will be governed by state law and the Prudent Person rule.

Unique Circumstances: The large asset total, the foundation as their ultimate recipient, and the great freedom of action enjoyed in this situation (i.e., freedom from confining considerations) are important in this situation, if not necessarily unique.

At this point we know (or can reasonably infer) that Mr. Franklin is:

•unmarried (a recent widower)

•childless

•70 years of age

•in good health

•possessed of a large amount of (relatively) liquid wealth intending to leave his estate to a tax-exempt medical research foundation, to whom he is also giving a large current cash gift

•free of debt (not explicitly stated, but neither is the opposite)

•in the highest tax brackets (not explicitly stated, but apparent)

•not skilled in the management of a large investment portfolio, but also not a complete novice since he owned significant assets of his own prior to his wife’s death

•not burdened by large or specific needs for current income

•not in need of large or specific amounts of current liquidity

Taking this knowledge into account, his Investment Policy Statement will reflect these specifics:

Objectives:

Return Requirements: The incidental throw-off of income from Mr. Franklin’s large asset pool should provide a more than sufficient flow of net spendable income. If not, such a need can easily be met by minor portfolio adjustments. Thus, an inflation-adjusted enhancement of the capital base for the benefit of the foundation will be the primary return goal (i.e., real growth of capital). Tax minimization will be a continuing collateral goal.

Risk Tolerance: Account circumstances and the long-term return goal suggest that the portfolio can take somewhat above average risk. Mr. Franklin is acquainted with the nature of investment risk from his prior ownership of stocks and bonds, he has a still long actuarial life expectancy and is in good current health, and his heir - the foundation, thanks to his generosity - is already possessed of a large asset base.

Constraints:

Time Horizon: Even disregarding Mr. Franklin’s still-long actuarial life expectancy, the horizon is long-term because the remainder of his estate, the foundation, has a virtually perpetual life span.

Liquidity Requirement: Given what we know and the expectation of an ongoing income stream of considerable size, no liquidity needs that would require specific funding appear to exist.

Taxes: Mr. Franklin is no doubt in the highest tax brackets, and investment actions should take that fact into account on a continuing basis. Appropriate tax-sheltered investment (standing on their own merits as investments) should be considered. Tax minimization will be a specific investment goal.

Legal and Regulatory: Investments, if under the supervision of an investment management firm (i.e., not managed by Mr. Franklin himself) will be governed by state law and the Prudent Person rule.

Unique Circumstances: The large asset total, the foundation as their ultimate recipient, and the great freedom of action enjoyed in this situation (i.e., freedom from confining considerations) are important in this situation, if not necessarily unique.

Answer 1

Investment Policy Statement of Franklin is given below:

Objectives :

a) Risk: Mr Franklin has above average willingness to take risk as he is already aware of investment skills as he already had held assets before wifes death. Above average ability to take risk as he has long term horizon , not any major current spend needs, free of debt and no major liquidity requirement.

b) Return: The major return requirement is the real growth of capital ie maintaining the purchasing power of the capital. This is required to maintain the spending needs of the foundation. Franklin don not have otherwise any major return requirement as the spending needs ar quite adjustable with the level of income he posses.

Constraints:

a) Tax : It is apparent from the data that Mr Franklin in highest tax bracket. Hence making tax saving investment should be the prior goal for the Portfolio.

b) Time Horizon : Mr Franklin has a long term time horizon even though considering his age of 70 years as the intention is leave the estate to the tax exempt foundation which has a long term time horizon.

c) Legal : Prudent person rule shall apply and along with that no other specific legal compliances has been stated.

d) Liquidity: The liquidity requirement are low as Mr Franklin is debt free and the current income is sufficient to meet the daily needs.

e) Unique : Mr Franklin is going to transfer all the estate to the tax exempt foundation on his death so this has to be specifically factored in while making portfolio.