TAGOLOAN Community College MODULE WEEK NO.

6
Baluarte, Tagoloan, Misamis Oriental
University Tel.No. (08822)740-835/(088)5671-215
Logo

College of Business Administration

COURSE Code: Investment and Portfolio Management
2nd Semester of A.Y. 2021-2022

Introduction

This course is designed to help learners realize the need for investors to prudently manage risk within
the context of their investment goals and preferences. They would know that income, spending, and
investing behavior will change over a person’s lifetime. Learners will also discover that the success of of
the investment program depends on the first step of the portfolio management process which is the
construction of policy statement. COU
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Rationale

● Constructing a policy statement is an invaluable tool that will help the investor understand his or
her needs better as well as assist an advisor or portfolio manager in managing clients’ funds. While
it does not guarantee investment success, a policy statement will provide discipline for the
investment process and reduce the possibility of making hasty, inappropriate decisions.
● Constructing a policy statement helps the investor decide on realistic investment goals after
learning about financial markets and the risks of investing. Constructing a policy statement also
creates a standard by which to judge the performance of the portfolio manager.

Intended Learning Outcomes

After discussion, students should be able to:

A. Explain the importance of constructing portfolio policy statement;

B. Develop their own portfolio policy statement; and

C. Define policy statement

Activity

ILO1

Online Discussion
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Provide handout through google classroom
Noel Q. Formoso
Assistant Professor lV Online Quescussion
formosonoel1003@gmail.com
 MODULE WEEK NO.6

ILO2

Online Discussion

Provide example of constructed policy statement

Quescussion

ILO2

Online Discussion
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Provide activity to develop policy statement
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Discussion
Hello everybody! We have just finished our Preliminary Exam last Sunday, so for this module we will have
a sort of relaxing week which means let’s take a short break from numbers and formula. This time, we will
focus on how are we going to prepare an investment policy statement. But before that, lets answer this
what I know chart in the first column to test your prior knowledge about our new lesson. This will only
take you 3 minutes to answer. You may start now!

Part I. What I know chart.

What I know
The Portfolio Management Process
Questions What I learned
What is a policy statement?
What is meant by portfolio
management process?
What are the steps in portfolio
management process?

The process of managing portfolio never stops. Once the funds are initially invested according to the plan,
the real work begins in evaluating the portfolio’s performance and updating the portfolio based on changes
in the economic environment and the investor’s needs. The first step in the portfolio management process is

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6
for the investor, either alone or with the assistance of an investment advisor, to construct Policy statement.

A policy statement is a road map; in it, investors specify the types of risks they are willing to take and their
investment goals and constraints. All investment decisions are based on the policy statement to ensure that
these decisions are appropriate for the investment. A policy statement is the statement that contains the
investor’s goals and constraints as it relates to his investments.

What is a portfolio? It is a financial term denoting a collection of investments held by an investment

company, hedge fund, financial institution or individual. A collection of financial assets such as cash.

What is a portfolio management? It refers to the professional management of securities and other assets. It
is also called an asset management or wealth management. It is also the art and science of making decisions
about investment mix and policy, matching investments to objectives, asset allocation for individuals and
institutions, and balancing risk against performance.

Portfolio management process is the process an investors takes to aid him in meeting his investment goals.
An ongoing way of managing a client's portfolio of assets.
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An Investment Policy Statement (IPS) lists the investor's investment objectives, along with his time horizon.
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For example, an individual may have an IPS stating that by the time they are 65 years old, they want to have
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the option to retire, and their portfolio will annually return PhP5,000,000 in today's pesos value given a
certain rate of inflation.

The Portfolio Management Process:

1. Policy Statement
Focus: Investor’s short-term and long-term needs, familiarity with capital
market history, and expectations

2. Examine current and projected financial, economic, political, and social

conditions
Focus: Short-term and intermediate term expected conditions to use in
constructing a specific portfolio

3. Implement the plan by constructing the portfolio

Focus: meet the investors’ needs at minimum risk levels

4. Feedback Loop: Monitor and update investors’ needs, environmental

conditions, evaluate portfolio performance

Objectives:

● Long-term growth and capital preservation

● Risk profile: Conservative
3

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6
● Time horizon: Greater than 5 years
● Short-term liquidity needs: None
● Long-term rate of return expectation: 6% (based upon historical rates of return) 2

Financial Advisor Duties and Responsibilities:

● Fiduciary, non-biased third-party charged with helping clients meet long-term financial goals.
● Confer with client to create asset allocation.
● Select assets in accordance with asset allocation providing sufficient diversification of risk and
returns.
● Control and report all investment costs.
● Monitor all investment options and portfolio custodian. (Custodian is responsible for safekeeping of
client’s assets)
● Value all portfolio holdings on a regular basis.
● Provide monthly reports that include securities, cash flow, income, and the monthly change in value.

Portfolio Selection Guidelines:

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In general, long term investment performance is determined by asset performance. Historically, stock assets
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offer higher rates of return along with greater volatility. Fixed assets generally yield lower rates of return,
lower correlation with equities and less risk. Diversification across asset geography and size is ULE
recommended.

Based on the client’s conservative risk profile, the portfolio asset allocation will be 60% stock assets and 40%
fixed.

The individual composition of holdings will be selected from index funds and exchange-traded funds from

the following asset classes:

Equity

● Philippines
● High-Dividend
● Value
● Small Cap
● International, including developed and developing markets

Fixed

● Philippine Bonds
● Corporate Bonds
● Government Bonds
● High-Yield Bonds
● Real Estate Investment Trusts (REIT)
● Global Bonds
● Global REITs
4

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6
Rebalancing of Asset Allocation:

Accordingly, there is no universally agreed upon asset allocation. Neither is there data to

recommend rebalancing more frequently than annually. Thus, the portfolio will be rebalanced annually,
while attempting to minimize the tax consequences of asset sales.3

Performance Monitoring:

Each index mutual fund or exchange-traded funds’ returns will be compared with their related benchmark.
Any deviation from that benchmark will be evaluated and discussed annually. The holdings will also be
compared with peer group funds. 

The parameters for selling a fund due to poor performance include one year of greater than 1% deviation
from the benchmark and/or falling in the bottom half of the cohort fund group.

Costs will be monitored annually to ensure that total costs do not surpass 1% of all investable assets.

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Annually, at a minimum, the overall portfolio will be monitored to consider whether initial goals are in place
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or have changed. Performance and fees will also be included in this conference. Together, Mr. Salcedo and
the advisor will determine the future portfolio direction. MOD
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The Bottom Line
An investment policy statement is personal and individualized for the circumstances of the advisor’s client.
The previous example is one type of Portfolio Policy Statement. Each financial advisory firm will have a
version of their own statement.

Finally, large investment brokerage companies also have portfolio policy statements for their individual
mutual funds and/or client groups. The investment policy statement keeps both the client and advisor on the
same investing page and holds the advisor accountable to a certain standard.

I’m sure you enjoyed reading this module and perhaps you tried practicing on your own how to make an
investment policy statement. For now, let’s again your comprehension about the concepts and
terminologies you have read a while ago by answering the third column of the “What I know Chart”. This
will only require you 3 minutes to answer. Enjoy!

Part II. What I know chart.

What I know Questions What I learned
What is a policy statement?
What is meant by portfolio
management process?
What are the steps in portfolio
management process?

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6

Exercise
Part III. True/False. Write Y if the statement is True, and N if otherwise.

______1. Constructing a policy statement is an instrumental tool that will assist the investor understand his
or her needs better as well as assist an advisor or portfolio manager to mishandle clients’ funds.

______2. Policy statement is mainly the responsibility of the portfolio manager.

__ ____3. Constructing a policy statement also creates a substandard by which to judge the performance of
the portfolio manager. COU
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__ ____4. All investment decisions are based on the policy statement to ensure that these decisions are
inappropriate for the investment. ULE
______5. Long term investment performance isn’t determined by asset performance.

______6. Portfolio management typically requires at least a graduate degree in business, economics, or
finance.

______7. Each financial advisory firm should strictly follow a standard statement format.

______8. There is a universally agreed upon asset allocation.

______9. It is the duty of financial advisor to report all investment cost.

______10. Portfolio managers may be called investors.

Part IV. Using this template, develop your own investment policy statement.

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6

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Here’s your guide on how to make your own IPS. RSE
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GOALS: ULE
● What are your investing goals?  (Retirement? College savings?)
● Which goal should take priority?
● When do you want to reach each goal?  (What’s your target end date?)

Current Investments:
● Type of account (Bank Savings, brokerage, etc.)
● Allocation
● Balance

Investment Strategy:
● What is your preferred asset allocation? (For example, 70% equity/30% bonds.)
● When will you change your asset allocation? (For instance, before retirement, you might switch to a
more conservative allocation.)

Monitoring:
● Performance
● Allocation
● Costs/fees
● Ratings 
● Goals and benchmarks

Assessment

Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com
 MODULE WEEK NO.6
Google Classroom

Reflection

● What other information you need to know before constructing a policy statement
with your portfolio manager?

● Do you believe that policy statement is mainly the investor’s responsibility and not of
the portfolio manager?

Resources and Additional Resources

● Analysis of Investment and Management of Portfolios by Keith C Brown and Frank
K Reilly (Textbook)
● Investment Analysis and Portfolio Management by Japhur (Online Book)
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Noel Q. Formoso
Assistant Professor lV
formosonoel1003@gmail.com