Getting the Most Out of Your Investment Committee August 2011 Campion Wealth Management 1934 Old Gallows Road, Suite 402 Vienna, Virginia (703) 848-0344 www.campionwealth.com
Who We Are and What We Do Campion Wealth Management is a Registered Investment Adviser that specializes in providing independent and objective portfolio management for tax-exempt organizations and private clients. Our vision, mission, and core values reflect our commitment to the highest ethical and professional standards in the investment management profession. Campion Wealth Management provides the following services to our non-profit clients: Investment Management Financial Planning for Long-Term Endowments Performance Measurement and Attribution Analysis Investment Committee Education Custodial Framework
Agenda Investment Policy Statement: Maintaining a Dynamic Policy RFP Process: Asking the Right Questions Asset Allocation: Picking the Right Mix Performance Measurement: Seeing Results
Investment Policy: Maintaining a Dynamic Policy Your IPS Should: Reflect your organization s mission, vision, and core values Establish operating guidelines for how the portfolio is managed Reinforce discipline during turbulent market conditions Outline a framework for evaluating the performance of your portfolio Document the responsibilities of committee and investment adviser Institute an annual IPS review Provide institutional memory
Investment Policy: Maintaining a Dynamic Policy Introduction Organization s mission and purpose Delegation of responsibilities Investment Objectives Investment objectives for the short and long-term. Investment Guidelines Liquidity Requirements / Spending Policy Investment Time Horizon Risk Tolerance Legal Issues (UPMIFA and Standard of Care) Unique Needs and Circumstances Investment Restrictions / Permissible Investments Rebalancing Threshold and Methodology Performance Measurement and Evaluation Strategic Asset Allocation
Investment Policy: Maintaining a Dynamic Policy Spotlight on Liquidity Requirements and Spending Policy Liquidity Document liquidity needs in advance according to your organization s strategic objectives (buildings, programs, etc.) Express liquidity needs in real dollars Why? Planning ahead for liquidity needs prevents the frantic sale of securities at an inopportune moment. Spending Assess if current spending policy provides for tangible organizational growth Express spending policy as % of a rolling 3-year average Why? Creating a realistic policy will ensure growth, while expressing the policy as a % will help your organization avoid large fluctuations.
RFP Process: Asking the Right Questions Will the investment adviser act in a fiduciary capacity? What is the firm s profile? History Ownership structure Qualifications of investment professionals (CFA Yes or No?) Subject of a written complaint(s) over the last 10 years? Does the firm take legal custody of assets? References from organizations of similar size and nature. What is the firm s investment management framework? What is the firm s investment philosophy? What is the firm s asset allocation process? What is the firm s operational risk management framework?
RFP Process: Asking the Right Questions Will the investment adviser meet with your investment committee on a quarterly basis to provide and review the following information: Quarterly comparison of the current versus strategic asset allocation Quarterly Investment Action Plan Quarterly Macroeconomic Outlook Quarterly Performance Attribution Analysis Quarterly Portfolio Holdings Report What is the firm s 5-year performance composite (aggregate and asset class by year and since inception). What do the firm s reports include? Ask for a sample reports including: asset allocation, investment performance, and portfolio holdings. Does the firm have adequate insurance? What are the firm s fees?
RFP Process: Asking the Right Questions Spotlight on Investment Management Framework Macroeconomic Outlook Investment Policy Statement Strategic Asset Allocation Risk and Return Expectations Portfolio Construction Performance Measurement and Evaluation Portfolio Monitoring and Rebalancing
Strategic Asset Allocation: Picking the Right Mix ASSET CLASS: 60/40 STRATEGIC ASSET ALLOCATION 70/30 STRATEGIC ASSET ALLOCATION Cash and Equivalents 5% 5% Taxable Fixed-Income 35 25 Equities: 60 70 U.S. Large-Cap 32 35 U.S. Mid-Cap 10 12 U.S. Small-Cap 4 5 Non-U.S. 9 11 Real Estate (REITs) 5 7 Expected Return: E(r) 8.91% 10.16 % Standard Deviation: σ +/- 11.73 % +/- 13.87 % 2.8 % 2.8 % Spending Policy 4.0 % 4.0 % 2.11 % 3.36 % Source: Expected return and standard deviation estimates based on data provided by Ibbotson Associates.
Strategic Asset Allocation: Picking the Right Mix Spotlight on Alternative Investments Certain asset classes and investment products provide little or no benefit unless the portfolio exceeds $50 $100 million, the initial allocation to alternative investments is significant, AND clients have direct access to specific managers. Even then, further due diligence and diversification by manager is necessary to reduce risk. Despite reasonably sound theoretical arguments for including alternative investments (especially private equity, hedge funds, fund-of-funds) in a portfolio, research suggests that the net-of-fees investment performance often provides investors with returns similar to the S&P 500 Index. Therefore, many organizations would be better off, all other things being equal, revising their overall allocation to publicly traded equities (where there exists a far greater level of liquidity, transparency, and regulatory oversight) than allocating any assets to alternative investments. Alternatives investments are more often than not a compensation scheme for the few at the expense of many.
Strategic Asset Allocation: Picking the Right Mix Spotlight on Portfolio Segmentation Using a segmentation strategy to meet investment objectives: Liquidity Reserve. The purpose of the Liquidity Reserve is to provide liquidity for the organization s current operating needs and cash earmarked for strategic initiatives. This reserve will represent 60 90 days of operating expenses. Contingency Reserve. The purpose of the Contingency Reserve is to act as a repository for the accumulation of cash reserves needed to cushion your organization from economic downturn. Assets will be invested with a two to five-year horizon to achieve capital preservation and maximize income. Long-Term Reserve. The purpose of the Long-Term Reserve is to invest assets with a long-term investment horizon and ultimately generate growth to fund future programs and initiatives.
Performance Measurement: Seeing Results Ideal benchmark characteristics are: Measurable Appropriate Reflective Investable Specified in Advance Unambiguous Asset Class Relevant Benchmark Inappropriate Benchmark Large-Cap U.S. Equities S&P 500 Index Dow Jones (DJIA) Large-Cap U.S. Growth Russell 1000 Growth NASDAQ Non-U.S. Equities MSCI EAFE (free-float) MSCI EAFE Taxable Fixed-Income Barclays Capital Aggregate Lipper Funds Average
Performance Measurement: Seeing Results Spotlight on Your Investment Advisor Does your investment advisor understand your mission and objectives? Do the firm s advisors hold CFA charters? Will your investment advisor personally manage your investment portfolio? Is the advice you receive based on a cookie cutter product line? Does your investment advisor meet with your committee quarterly? Would you recommend this firm to your family and friends?