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IPS STATEMENTS

INDIVIDUAL:
1. RISK OBJECTIVE 1. Willingness (be very conservative) 2. Ability (be very conservative) 3. Overall - If willingness is less than or equal to ability, honor willingness. If willingness is above ability, suggest investor education to reconcile difference. 4. State one of the three: Below Average, Average, Above Average 2. RETURN OBJECTIVE 1. Primary Goal: Wealth Accumulation to meet required and desired expenditures. 2. Maintain Inflation-Adjusted Value of Portfolio 1. If NO NUMERICAL CALC's, then: 1. State: "Maximize After Tax Return within risk objectives" 2. State: "No Numerical Return Objective" 3. Support Living Expenses in Retirement 4. Calculate Next Years Liquidity Needs  Inflows - normally Salary adjusted for Taxes  Outflows - pay attention if they need to be adjusted for inflation (this year vs coming year)  Net Outflow / Portfolio = 3% + INFLATION (2%) = 5% AFTER TAX NOMINAL REQUIRED RATE OF RETURN  Always Protect Principal, unless specifically stated 3. TIME HORIZON 1. "Long Term Consisting of Two Periods: (1) X years until retirement, (2) retirement years. Possible Third Stages for bequests/unique situations." 4. TAXES 1. "Average Tax Rate is XX%, so tax aspects of investments should be considered." 2. If tax rates are DIFFERENT, state: "The difference in the rates makes investment returns via X preferable to Y." 5. LIQUIDITY: 1. State: How much the Portfolio must provide in Year 1 2. State: Negative liquidity events in the future (new house, college, etc) 3. State: Emergency Cash Reserve is prudent 6. LEGAL 1. Normally NONE, unless trusts are involved. 2. "Prudent Investor Rule Applies"  Can always recommend "legal counsel." 7. UNIQUE 1. Read back through story and look for constraints:  Desire to AVOID certain sector/class of investments  Keeping aware of a CONCENTRATED HOLDING.  SUPPORT/BEQUESTS of/for children/CHARITIES (Donations valued at MARKET VALUE and taken as DEDUCTIONS).

DEFINED BENEFIT:
1. RISK OBJECTIVE 1. "Company X should minimize the probability that funded status falls below 100%" and/or "Minimize the probability that Company X will need to make future contributions." 2. Funded Status 3. Workforce Characteristics (Consider employee's average age and retired ratio) 4. Sponsor Financial Status 5. Sponsor and Pension Fund common risk exposures 2. RETURN OBJECTIVE 1. "To achieve a total return sufficient to fund its liabilities on an inflation adjusted basis." (Primary Goal) 1. Should at least equal the actuarial assumed discount rate." 2. Two reasons to propose a return objective above the discount rate: 1. To minimize the company's future contributions 2. To generate pension income. 3. TIME HORIZON 1. First Depends on if the company is a "going concern" or "plan-termination" is expected (like switching to a Defined Contribution plan). 2. Average time until retirement (a young work force = longer relative Time Horizon). 3. Retired Lives Ratio (A low ratio = longer Time Horizon). 4. TAXES 1. Generally No Tax Implications 5. LIQUIDITY 1. Sufficient to meet current year liabilities. (Payments to Retired, and Contributions to Plan) 2. Consider retired lives population and age of workforce. 3. Look for "Lump Sum Payments" occurring in the current year due to early retirements. 6. LEGAL/REGULATORY 1. Must follow ERISA guidelines and all state and federal laws. 1. "Employee Retirement Income Security Act" 2. "Prudent Investor Rule" applies 3. Plan must be managed for the sole benefit of plan participants. 4. Country Specific International Holdings Limits may apply. 7. UNIQUE 1. Note Prohibited Investments 2. Small Plans may not be able to efficiently invest in alternative investments due to $ barriers to entry. 3. Any factor that is different than the industry average: 1. Relatively OLDER avg workforce. 2. Relatively HIGHER retired lives ratio. 3. Relatively WORSE company earnings outlook.

DEFINED CONTRIBUTION:
1. 2. 3. 4. 5.
Clearly distinguish among the responsibilities of the Company, the Plan Participants, and Fund Managers. Provide descriptions of the investment alternative available to Plan participants Provide criteria for monitoring and evaluating the performance of investment managers via benchmarks Provide criteria for manager/fund selection, termination, and replacement (Type I and II errors) Establish effective communication procedures for the fund managers, trustee, the Company, and Plan Participants.

ENDOWMENT(University or Hospital - Permanent):
1. RISK OBJECTIVE 1. Depends on the Endowment's role in the operating budget and the institutions ability to adapt to
drops in spending.

1. To be able to provide reliable stable flow of funding 2. To protect endowment's long term purchasing power 2. Endowments that DO NOT use a smoothing rule may have LESS tolerance for short term
portfolio risk.

2. RETURN OBJECTIVE: 1. "The goal of the Cougar Fund is to provide a significant annual distribution to support the [institution]'s spending needs while maintaining the fund's long-term purchasing power. 1. Calculation = [(desired $spending/portfolio MV) or (%spending rate) + inflation] 3. TIME HORIZON 1. Potentially Infinite, a 3-5 year capital market expectation outlook should be used and appropriately
reviewed.

4. TAXES 1. Non-Profits do NOT pay taxes. 5. LIQUIDITY 1. Must have sufficient cash to cover annual spending needs PLUS Management Expenses PLUS
any stated objectives (Hospital needs $10m for a new wing this year). 2. Since there are no legal spending requirements, normally liquidity needs are LOW, making Endowments WELL suited for ILLIQUID INVESTMENTS. LEGAL/REGULATORY 1. Should understand and obey applicable state and federal laws and adhere to the "Prudent Investor Rule." UNIQUE 1. Specific to the Institution the endowment is funding.

6. 7.

FOUNDATION (Grant Making Institutions):
1. RISK OBJECTIVE 1. Given Foundations LONG time horizon, they have the ABILITY to take MODERATE RISK, as long as no undue volatility is introduced that would affect the ability to meet short term "scholarship" payments. 2. RETURN OBJECTIVE: 1. Should focus on "Total Return", with the Primary Goal to cover: [(5% spending requirement * Management Expenses * Inflation*) -1] *Protecting Principal is a goal unless otherwise stated. 1. "The Foundation's purpose is to provide university educations for as many deserving individuals as possible for as long as possible." 2. Since the Fund must Spend 5% annually to preserve the foundation's tax-exempt status, and school costs are rising at 4% annually the Return Objective should be 9% [5%+4%] 3. TIME HORIZON 1. Potentially Infinite, a 3-5 year capital market expectation outlook should be used and appropriately reviewed. 2. If Foundation has intent to be "spent down", then you must respect it. 4. TAXES 1. Maintaining the Foundation's Tax-Exempt Status (via spending 5% annually) is paramount. Should be reviewed annually. 2. Note: Gift Shop Sales ARE taxable. 5. LIQUIDITY 1. Normally the 5% annual spending requirement PLUS Management Expenses PLUS any stated objectives. 2. Smoothing Rules may apply: 1. Simple Spending Rule = [5%(BEGGING PERIOD market value)] 2. Rolling 3 year average: [(5%)*([MVt-1+MVt-2+MVt-3]/3)] 1. Drawback: Extraordinary changes in portfolio value may cause dramatic shifts in spending. 3. Geometric Spending Rule = Weights the prior year's spending level adjusted for inflation by a smoothing rate (normally between .6 and .8). 6. LEGAL/REGULATORY 1. Should understand and obey applicable state and federal laws and adhere to the "Prudent Investor Rule." 7. UNIQUE 1. Note: Costs of Education have risen FASTER than inflation. 2. Others?

LIFE:
1. RISK OBJECTIVE 1. Short Term Portfolio: "Risk should not Exceed Stated Benchmark" 2. Long Term Bond Portfolio: "Risk Should not Exceed Stated Benchmark" 3. Equity Portfolio: "Can Accept Market to Above Market levels of Risk"  STATE: "The Portfolio Should be well diversified, and abide by max % allocation constraints. 2. RETURN OBJECTIVE: 1. Should SEGMENT their portfolio along product lines. 2. Short Term Portfolio: "Return Should Meet the return Stated Benchmark" 3. Long Term Bond Portfolio: "Return Should meet/exceed the: [CREDIT RATING + OPERATING EXPENSES] 4. Equity Portfolio: "Returns should meet or exceed the returns for the Benchmarks to grow the surplus" 3. TIME HORIZON 1. Short Term Portfolio: 30 days to one Year 2. Long Term Bond Portfolio: 10-20 Years, A laddered maturity portfolio is appropriate 3. Equity Portfolio: Perpetual due to growth preference. 4. TAXES 1. State and Federal taxes apply, so investments should be considered on an AFTER-TAX basis. 5. LIQUIDITY 1. Short Term Portfolio: HIGH - Need to provide cash as needed to cover liability payments 2. Long Term Bond Portfolio: Liquidity required to meet credited rates and net interest margin, can be met via laddered maturity bonds. 3. Stock Portfolio: LOW - focus is on long term growth. 1. LEGAL/REGULATORY 1. State: "State Regulations and NAIC should be considered and the Prudent Investor Rule Applies." 2. CHECK: Any outstanding lawsuits? 2. UNIQUE 1. CHECK: Uncertain Losses Due to Hurricane = yes 2. NOTE: Steep Competition is not unique to firm = no

PROPERTY & CASUALTY:
1. RISK OBJECTIVE 1. Uncertain Cash Flow Characteristics of P&C Claims. 2. Primary Objective is to be able to meet policyholder claims 3. OVERALL: Risk tolerance is LOW 2. RETURN OBJECTIVE: 1. Should SEGMENT their portfolio along product lines. 2. Canned Answer, " Mitch Co. should follow a total return investment objective that maximizes their ability to maintain a competitive pricing policy, reduce volatility in overall profitability, and achieve a reasonable growth in surplus." 3. TIME HORIZON 1. The Duration of Mitch Co.'s Liabilities is relatively: SHORT. 4. TAXES 1. State and Federal taxes apply, so investments should be considered on an AFTER-TAX basis. 5. LIQUIDITY 1. CHECK: Stage of Underwriting Cycle 2. CHECK: Unique (Hurricane) reasons that suggest liquidity needs are high. 1. LEGAL/REGULATORY 1. State: "State Regulations and NAIC should be considered." 2. CHECK: Any outstanding lawsuits? 2. UNIQUE 1. CHECK: Uncertain Losses Due to Hurricane = yes 2. CHECK: Geographical Concentrated Policies = yes 3. CHECK: High STOCK to SURPLUS ration = yes 4. NOTE: Steep Competition is not unique to firm = no

BANK:
1. RISK OBJECTIVE 1. [Below-Average Risk Tolerance] Focus is on funding liabilities, Risk Relative to liabilities rather than absolute risk is of primary concern. 2. Leverage Adjusted Duration Gap = [Durationassets - (Leverage Ratio * Durationliabilities)] 2. RETURN OBJECTIVE: 1. Primary Goal: Provide LIQUIDITY, manage credit risk, manage duration (duration = interest rate risk: most important), and lastly to generate income (Positive Interest Spread). 3. TIME HORIZON 1. [Intermediate Term, 3-7 years] Most Bank liabilities are of SHORTER terms than its loans, the time horizon for the banks Security Portfolio must balance the difference and usually has a maturity of 3-7 years. 4. TAXES 1. Security portfolios are FULLY TAXABLE, so should appraise investments on an AFTER-TAX basis. 5. LIQUIDITY 1. Bank Liabilities are uncertain, so the securities portfolio must be fairly liquid. 2. Liquidity is determined by net outflows and demand for new loans. 6. LEGAL/REGULATORY 1. Banks are highly regulated and face capital requirements, reserve requirements, and regulations on asset risk. 7. UNIQUE 1. Geographically concentrated loans 2. ?