Portfolio Planning Investment Policy

This a drafted document between a portfolio manager and the client. The document specifies the general rules and policies that the manager must abide by. The document provides the general investment goals and objectives of a client and describes the strategies that the manager will use to meet those objectives. It guides by indicating whether a fund manager is making good use of provided funds or not (Government Finance Officers Association, 2016) The Trustee Act 2000 Section 15 (2) (a) states that a trustee may not authorize an agent to exercise their asset management functions unless a policy statement has been prepared to indicate how those functions should be used (Legislation National Archives, n.

d) The trustee Act 2000 Section 22 (2) (a) and (b) states that a trustee that has been given the authority to use the asset management fees has the duty to decide if there is a need to revise or replace the existing policy statement (Legislation National Archives, n.d)

Investment Objectives

A fund manager should have knowledge about the investment goals of a client, whether they are investing for capital growth or income.

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This is necessary so that a correct mix of assets can be used to reach that goal (Anthony Ward, 2016). Marketing Business News (n.d) states that investors who are interested in investing for capital growth will need policies that indicate a capital growth strategy that aims to maximize capital appreciation. This strategy will be directed at investing in high risk securities with high expected returns, assets with long investment horizons.

The policy will also allow churning of assets and investments in growth stocks. Investors who aim for income appreciation will require policies that strategize low risk and income growth asset allocation. It is the responsibility of the portfolio manager to invest in securities that are suitable towards the client's objectives (Susan Lassiter-Lyons 2018).

The Trustee Act 2000 Section (1) (1) (a) states that the trustee must direct special care and skill to circumstances involving the trust in regard to any special knowledge or experience that he has or holds himself out as having( Legislation National Archives (n.d)). Constraints When an investment policy is being drafted it is important to include investment constraints of a client. There are four main investment constraints are liquidity constraints, Legal constraints, Time Constraints and Tax constraints (P. Saravanan, 2016). Risk Profile A risk profile is the assessment of an individual's risk appetite.

It is also estimates risks that are exposed to organizations or individuals from activities, policies and strategies of a portfolio. It is guides portfolio managers in determining the most suitable asset allocation for clients (John Spacey 2017).The process of investment decision requires a Portfolio manager to understand a client's attitude towards risk. Time scale, client objectives and attitude towards investment risk will be guide to selecting the most suitable portfolio (Anthony Ward, 2016).

Investment Objectives  Risk Tolerance Attitudes to Risk and Potential investments Income Risk Averse ‚§ They are more accepting to low risk investment that generate low levels of income ‚§ Less accepting of high yield bonds and equities Neutral ‚§ They aim to have a balanced portfolio that has potential for growth ‚§ They are more accepting of high yield bonds Loving ‚§ Prefer more assertive strategies that encourage higher income ‚§ Exposure to high yield bonds and equities is considerably important Income and Capital Growth Averse ‚§ Aim to maximize income and growth is not a substantial objective ‚§ High risk investments such equities will take up a very small percentage of their portfolio ‚§ Not willing to churn assets for growth Neutral ‚§ Maximization of both income and growth is essential ‚§ Equities will occupy a substantial percentage of the portfolio Loving ‚§ Willing to implement long investment horizon ‚§ Equities are largely concentrated in their portfolioCapital Growth Averse ‚§ They will seek maximum growth if there is very little risk‚§ They are reluctant to churn assets for capital growth Neutral ‚§ Capital growth for them is essential because it balances their portfolios‚§ May consider asset churning Loving ‚§ Equities may occupy the whole portfolio ‚§ Will implement long investment horizons to achieve a more aggressive strategy ‚§ They are open to asset churning‚§ Will invest in capital growth stocks Regular Monitoring Regular monitoring of portfolios is important and it is necessary to set specific dates whereby the portfolio will be assessed and revalued to determine whether the portfolio is still adhering to the set objectives. It is also important to help determine if the client is still in the most suitable asset class and to make sure that assets invested in are generating required returns (Rob Griffin, 2011). The trustee Act 2000 Section 22 (1) (a) states that while the agent continues to act for the trust, the trustee must monitor arrangements set for the agent and if the arrangements are being abided by (Legislation National Archive (n.d)).The Trustee Act 2000 Section 23 (1) states that the trustee will not be held responsible for any act or default of the agent unless the trustee has failed to comply with the duty of care applicable to him (Legislation National Archives (n.d)). Risk Management The Economic Times (n.d) defines risk management as the process of identifying, analysing potential financial risks that may affect the value of a portfolio and finding ways of mitigating those risks. Markowitz Model IFCM.CAPITAL (n.d) states that the H.M Model is also called the Mean-Variance Model' because it is concerned with standard deviation and expected returns of various portfolios. It guides fund managers in the selection of the most suitable portfolio by comparing different portfolios of given assets. Diversification and Correlation Diversification is a risk management practice that combines different assets within a portfolio. The procedure assumes that a combination of different securities will produce higher returns and have less risk than one separate asset on its own (Antoine Briffa, 2017). Negative correlation suggests that when the price of a security in a portfolio increases, the price of another asset is decreasing. Low correlation is preferred because if one investment is affected the other one will be insignificantly affected especially if the objective of investor is to minimize risk (Antoine Briffa, 2017). DerivativesCorporate financial institute (n.d) defines Derivatives as a contract between two or more parties that have linked their value to the value of a selected security or a set of securities. Derivatives are mainly used to hedge against any significant decrease in the value of a portfolio and to determine the price of the underlying asset.Immunisation This is a risk mitigation strategy that considers the period of assets and liabilities and it helps institutions and investors to minimise the influence of interest rates on the value of their portfolios. Insurance Business Jargon (n.d) defines insurance as the agreement between two parties whereby one takes on the responsibility of compensating damage caused by the other party in exchange the insured party has to pay a monthly charge called a premium.