2. Using information provided in the case, develop an Investment Policy Statement for Jane Smith. Jeff Blair, an investment adviser for National Securities Inc. had just met with a potential new client, Jane Smith. Smith had recently met with an independent, self-employed investment counsellor but was questioning whether, instead, to establish a relationship with an investment adviser at a well-known and reputable firm. A friend of Smith's, and a current client of Blair's, had suggested that Smith contact Blair for an initial discussion and sharing of ideas. Blair's task was to help Smith develop an investment policy statement and to provide advice regarding an initial asset allocation consistent with the investment policy statement. JANE SMITH Jane Smith was a senior vice-president of marketing at BestVal, a Canadawide retail chain, Last year, BestVal became a publicly-traded company, with an initial listing on the Toronto Stock Exchange (TSX). Since then, the company's stock had closely tracked the market index performance. Smith currently owned approximately $250,000 of BestVal stock and had no intention of selling her stock in the near term. Smith was age 30, single, and in good health. She had twin boys who were in their last year of high school and were both planning to attend university out of the province. She had a salary of $200,000 per year. She had accumulated individual savings of $350,000 as well as Registered Retirement Savings Plans (RRSPs) of $400,000. Virtually all of her savings and RRSPs were invested in a variety of savings accounts, short- term certificates of deposit (CDs) and guaranteed investment certificates (GICs) with maturities less than three years. Smith had a defined contribution plan, whereby she contributed five per cent of her salary cach year, which was matched by the firm's contribution. Over the past 25 years, her pension fund had grown and was now worth $650,000. With such a defined contribution plan, Smith was able to decide how to allocate the total contributions and could change allocations at month-end. She was able to choose among money market, fixed income, and equity asset classes. In addition, she was able to allocate a portion of her equities into non-Canadian markets. Currently, she had chosen to allocate 100 per cent in money market funds. Smith owned a $450.000 house that was recently mortgage-free. 6 rage z PAYOT UZY INITIAL MEETING During their initial meeting, Smith indicated that she was seeking advice regarding the asset mix of both her personal savings as well as her RRSP and corporate pension. Blair was able to obtain some additional information related to Smith's objectives. Her goal was to earn a nine per cent total return per year. Blair helped her assess her risk preferences and it was concluded that she could accept the possibility of up to a 10 per cent (nominal) decline in her portfolio in any one year and only a "very small" chance of losses greater than this). Blair examined internal research reports from his firm's economic department that indicated that inflation was projected to be in the three per cent range for the foreseeable future. PREVIOUS ADVICE Smith also showed Blair analysis provided to her from the independent investment counsellor, who had suggested the asset mix in "A" in Exhibit 1. The recommended portfolio included a 25 per cent allocation in money market funds, 10 per cent in corporate bonds, 35 per cent in Canadian stocks (with a tilt toward small market capitalization stocks), and 30 per cent in U.S. stocks. Blair supplemented this recommendation with expected returns for each asset class (as generated by Blair's firm's research department). To begin, he planned to calculate a projected total return for this portfolio. ANALYSIS AND RECOMMENDATION In order to help Smith understand the importance of the asset mix decision, Blair created four additional hypothetical portfolios, indicated in Exhibit 1 as "B" through "E." Utilizing expected returns (as indicated in the exhibit as E(R)). asset class standard deviations (as indicated in the exhibit as SD), as well as an estimate of the correlations among asset classes (not included in the exhibit), Blair calculated both the projected total annual retum and expected standard deviation for each portfolio. Blair wanted to begin his analysis by preparing an investment policy statement for Smith. The statement would include both return requirements as well as risk tolerance objectives. The statement would also include any constraints that Smith was facing including factors such as liquidity, investment horizon, regulations, tax considerations and any other unique circumstances. Next. Blair wanted to provide Smith with a fair critique of the independent investment counsellor's proposal in mix "A." In addition, considering only the alternative proposals "B" through "E." Blair wanted to indicate to Smith which of the four proposals met or exceeded her return objective as well as hier risk preference. He then wanted to recommend and justify one suggested asset mix (from "B" through "E"). Fit to page Exhibit 1 ASSET MIX PROPOSALS SD B D m E(R) 4% 10% 20% 25% 3% 10% 20% 25% 10% 8% 10% 30% 40% 20% 30% 5% 35% 30% 12.5% 12% money market corporate bonds Canadian stocks U.S. stocks international stocks projected total return expected standard deviation 20% 15% 30% 10% 30% 10% 20% 40% 30% 13% 22% 0% 10% 0% 10% ??? 9.85% 9.95% 8.83% 10.2% 9.75% 11.0% 8.50% 10.0% n/a 2. Using information provided in the case, develop an Investment Policy Statement for Jane Smith. Jeff Blair, an investment adviser for National Securities Inc. had just met with a potential new client, Jane Smith. Smith had recently met with an independent, self-employed investment counsellor but was questioning whether, instead, to establish a relationship with an investment adviser at a well-known and reputable firm. A friend of Smith's, and a current client of Blair's, had suggested that Smith contact Blair for an initial discussion and sharing of ideas. Blair's task was to help Smith develop an investment policy statement and to provide advice regarding an initial asset allocation consistent with the investment policy statement. JANE SMITH Jane Smith was a senior vice-president of marketing at BestVal, a Canadawide retail chain, Last year, BestVal became a publicly-traded company, with an initial listing on the Toronto Stock Exchange (TSX). Since then, the company's stock had closely tracked the market index performance. Smith currently owned approximately $250,000 of BestVal stock and had no intention of selling her stock in the near term. Smith was age 30, single, and in good health. She had twin boys who were in their last year of high school and were both planning to attend university out of the province. She had a salary of $200,000 per year. She had accumulated individual savings of $350,000 as well as Registered Retirement Savings Plans (RRSPs) of $400,000. Virtually all of her savings and RRSPs were invested in a variety of savings accounts, short- term certificates of deposit (CDs) and guaranteed investment certificates (GICs) with maturities less than three years. Smith had a defined contribution plan, whereby she contributed five per cent of her salary cach year, which was matched by the firm's contribution. Over the past 25 years, her pension fund had grown and was now worth $650,000. With such a defined contribution plan, Smith was able to decide how to allocate the total contributions and could change allocations at month-end. She was able to choose among money market, fixed income, and equity asset classes. In addition, she was able to allocate a portion of her equities into non-Canadian markets. Currently, she had chosen to allocate 100 per cent in money market funds. Smith owned a $450.000 house that was recently mortgage-free. 6 rage z PAYOT UZY INITIAL MEETING During their initial meeting, Smith indicated that she was seeking advice regarding the asset mix of both her personal savings as well as her RRSP and corporate pension. Blair was able to obtain some additional information related to Smith's objectives. Her goal was to earn a nine per cent total return per year. Blair helped her assess her risk preferences and it was concluded that she could accept the possibility of up to a 10 per cent (nominal) decline in her portfolio in any one year and only a "very small" chance of losses greater than this). Blair examined internal research reports from his firm's economic department that indicated that inflation was projected to be in the three per cent range for the foreseeable future. PREVIOUS ADVICE Smith also showed Blair analysis provided to her from the independent investment counsellor, who had suggested the asset mix in "A" in Exhibit 1. The recommended portfolio included a 25 per cent allocation in money market funds, 10 per cent in corporate bonds, 35 per cent in Canadian stocks (with a tilt toward small market capitalization stocks), and 30 per cent in U.S. stocks. Blair supplemented this recommendation with expected returns for each asset class (as generated by Blair's firm's research department). To begin, he planned to calculate a projected total return for this portfolio. ANALYSIS AND RECOMMENDATION In order to help Smith understand the importance of the asset mix decision, Blair created four additional hypothetical portfolios, indicated in Exhibit 1 as "B" through "E." Utilizing expected returns (as indicated in the exhibit as E(R)). asset class standard deviations (as indicated in the exhibit as SD), as well as an estimate of the correlations among asset classes (not included in the exhibit), Blair calculated both the projected total annual retum and expected standard deviation for each portfolio. Blair wanted to begin his analysis by preparing an investment policy statement for Smith. The statement would include both return requirements as well as risk tolerance objectives. The statement would also include any constraints that Smith was facing including factors such as liquidity, investment horizon, regulations, tax considerations and any other unique circumstances. Next. Blair wanted to provide Smith with a fair critique of the independent investment counsellor's proposal in mix "A." In addition, considering only the alternative proposals "B" through "E." Blair wanted to indicate to Smith which of the four proposals met or exceeded her return objective as well as hier risk preference. He then wanted to recommend and justify one suggested asset mix (from "B" through "E"). Fit to page Exhibit 1 ASSET MIX PROPOSALS SD B D m E(R) 4% 10% 20% 25% 3% 10% 20% 25% 10% 8% 10% 30% 40% 20% 30% 5% 35% 30% 12.5% 12% money market corporate bonds Canadian stocks U.S. stocks international stocks projected total return expected standard deviation 20% 15% 30% 10% 30% 10% 20% 40% 30% 13% 22% 0% 10% 0% 10% ??? 9.85% 9.95% 8.83% 10.2% 9.75% 11.0% 8.50% 10.0% n/a