1. Introduction and summary of IPS Investor Policy Statement (IPS) is a document drafted between a fund manager and a client that outlines major terms and conditions for the manager managing the portfolio. This statement provides the general investment goals and objectives of a client and the strategies that would be adopted by the manager to meet those objectives. IPS includes specific information pertaining to asset allocation, risk tolerance, and liquidity requirements. In the current case, Anderson is the client and James is acting as a wealth manager on behalf of Australian Wealth Professionals (AWP).
The IPS would state Anderson’s investment objective which would then determine his portfolio allocation, his annual returns in today's dollars given a certain rate of inflation. It could also include what the individual wants to leave behind to loved ones when he dies. There are 4 essential parts of an IPS which are as follows: a) Required ReturnIt is imperative for investors to actually translate their return objectives in to an actual defined statement quantifying their returns in ASX or percentage terms. For instance, Anderson’s portfolio should be designed such that it would earn his a certain return over and above the inflation rate of 2% with an orientation towards growth (capital appreciation). b) Risk ToleranceRisk tolerance refers to risk capacity and risk propensity.
“Capacity” relates to financial circumstances such as a person’s net worth, income needs, and lifestyle requirements. On the other hand, “Propensity” relates to the investor’s willingness to contemplate the possibility of very large losses in the short term in pursuit of higher returns in the longer term. c) Time HorizonTime Horizon refers to is a situation for which the investment is being designed.
Events like college education, starting a business, buying a vacation home or retiring could determine the approximate time horizon for the investor. Here, Anderson is middle-aged looking for saving for his retirement which is a long-term objective. d) Liquidity needsLiquidity needs are also a part of IPS based on future events. It would show how the required income stream could vary up or down. IPS sets out investment aspirations in a policy format which further clarify the decisions to be taken for the investor’s portfolio. 2.
Objectives [should not exceed 1 page] a. Returns required by the investor. This should be calculated using IRR on annual net cash flows. Please ensure nominal pre-tax returns, and hence an appropriate inflation rate should be used. b. Risk Tolerance of the investor. This should be analysed by evaluating Willingness and Ability to take risks. Risk objectives should also be considered by evaluating any downside risk (VaR) objectives established by the client. If such a requirement was not provided than you need to establish one for the client and justify it.
3. Constraints [should not exceed ½ page] a. Liquidity requirements of the investor. Both anticipated (on an annual basis) and unanticipated liquidity requirements should be clearly stated and included in the cashflows. These should be mentioned in percentage terms as well as in dollar terms.