R5 Asset Mgt Industry

Question 1

R5

Asset Management Industry Trends (3)

Answer 1

1. Growth of Passive Investing

• Management fees for index (or other passive) funds are often a fraction of those for active strategies
• Many active asset managers face in generating ex ante alpha, especially in somewhat more-efficiently priced markets, such as large-cap US equitie

1. Big data

• Social media data. -can aid key market sentiment indicators and indicate potential specific user trends related to products and services
• Imagery and sensor data - relevant to economic considerations (e.g., weather conditions, cargo ship traffic patterns) and company-specific considerations (e.g., retailer parking capacity/usage, tracking of retail customers).

1. Robo advisors

• Growing demand from “mass affluent” and younger investors
• Lower fees
• New entrants. Lower barrier to entry

Question 2

R5

Smart Beta

Answer 2

• Involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.
• Feature higher management fees and higher portfolio turnover relative to passive market-cap weighted strategies

Question 3

R5

What tasks does effective governance perform?

Answer 3

• Effective governance models perform the following tasks:

1. Articulate long- and short-term objectives of the investment program
2. Allocate decision-making rights and responsibilities among the functional units in the governance hierarchy while considering their knowledge, capacity, time, and position in the hierarchy
3. Specify processes for developing and approving the IPS
4. Specify processes for developing and approving the investment program’s strategic asset allocation
5. Establish a reporting framework to monitor the investment program’s progress toward the agreed-upon goals and objectives
6. Undertake periodic governance audits

Question 4

R5

Reporting Framework

Answer 4

• Benchmarking is necessary for performance measurement, attribution, and evaluation.
• Management reporting to understand which parts of the portfolio are performing ahead of or behind the plan, and why as well as whether assets are being managed in accordance with investment guidelines.
• Governance reporting, which addresses strengths and weaknesses in program execution

Question 5

R5

Asset manager focus - individual vs Institutional

Answer 5

Asset managers who focus on individual investors typically package investment strategies through highly regulated pooled vehicles (e.g., mutual funds or exchange-traded funds). Institutional-focused managers typically package their investment strategies in less regulated and more customizable product structures (e.g., separately managed accounts and limited partnerships).

Question 6

R5

What must portfolio management process reconcile?

Answer 6

The portfolio management process must reconcile (balance):

1. Asset owner objectives
2. The possibilities offered by the investment opportunity set

Question 7

R5

Explain the importance of the IPS.

Answer 7

The investment policy statement (IPS) is the foundation of an effective investment program.

• A well-designed IPS serves as the foundation and guidance to investment managers/advisors for ongoing management of scheme assets.
• A well designed IPS assures stakeholders that program assets are managed with the appropriate care and diligence.

Question 8

R5

Six typical key elements of an IPS

Answer 8

1. An introduction that describes the purpose and scope of the document itself and describes the asset owner. The description of the asset owner should allow the reader of the IPS to understand the context within which the investment program exists.
2. A statement of investment objectives, which describes the target investment returns and willingness to endure risk to achieve these returns.
3. A section discussing the investment constraints within which the investment program must operate to include liquidity requirements time horizons tax concerns, legal and regulatory factors, and unique circumstances
4. A statement of duties and responsibilities outlining the allocation of decision rights and responsibilities among the investment committee, investment staff and any third-party service providers.
5. An explanation of the investment guidelines to be followed in implementation and on specific types of assets excluded from investment, if any.
6. A section specifying the frequency and nature of reporting to the investment committee and to the board of directors.