CIMA - IPS

List 6 items to consider when writing an IPS for a client who has a Defined Benefit Plan.

1. Accumulated Benefits 2. Cash outlay requirements 3. Projected benefit obligation 4. Assumed future rate of return (discount rate) 5. The relationship between the assets and liabilities 6. The plan sponsor's free cash flow and funding strategy

The IPS accomplishes the following four basic tasks:

1. An overview of a plan's delegation of authority and responsibility among the various decision-making groups, including trustees, staff, actuary, administrator, consultant, and money managers. The roles of each of these groups also must be clearly identified. 2. A delineation of the sponsor's definition of the primary investment policy components, i.e., cash-flow requirements, asset allocation, and diversification. 3. A description of the sponsor's strategy with respect to each investment policy component, i.e., percent of equities, percent of bonds, investment objectives, and guidelines to the managers. 4. An explanation of the sponsor's rationale underlying the choice of investment strategies.

What 7 pieces of information should the manager be given directly when implementing a plan with an IPS?

1. Background information on the assets 2. Future fund and cash-flow projections 3. Specific investment objectives 4. Policies related to the voting of proxies 5. Portfolio guidelines 6. Reporting requirements and reviews 7. Evaluation and modification methodologies

In an IPS, types of return objectives include the following:

1. Inflation rate of x% 2. A published index, including income ≥ x% 3. Special index reflecting a chosen risk-reward preference 4. An evaluation comparable to other accounts having similar objectives 5. A goal to preserve portfolio value sufficient to avoid a plan deficit 6. A total return sufficient to stabilize contributions at x% of payroll

List 6 examples of objectives that may be included in an IPS:

1. Minimize risk of sharp delines 2. Maximize returns through capital appreciation 3. Generate a certain level of current income 4. Achieve full funding (assets or exceed liabilities) 5. Reduce contributions 6. Acquire sufficient assets for education or retirement

An IPS in broad terms, addresses the following 9 issues:

1. Return requirements and expectations 2. Variability of future returns 3. Risk tolerance 4. Time horizon 5. Diversification 6. Asset allocation 7. Assignment of responsibilities 8. Performance expectations and account review 9. Control procedures

The role of the IPS is to: (3)

1. facilitate internal and external communication of the investment policy. 2. ensure continuity of policy during periods of turnover within a sponsor's organization. 3. provide a clear baseline against which to review proposed policy changes.

Studies suggest that more than ____ of the variability of returns is due to asset allocation.

90%

What are the 3 stages of life for an investor?

Accumulation, Preservation, Distribution

As a general rule, how often should an IPS be reviewed and signed?

Annually

Conducting ____ analysis establishes the parameter's of available investment choices.

Capital Market Expectations

As a general rule, who should always have an IPS?

Fiduciary

Objectives are ____, Guidelines are ____, and Policies are ____

Goals, precise restrictions, courses of action

Restricting tabaco stocks from a manager's portfolio is an example of a policy, guideline, or objective?

Guideline

Capital Preservation, Capital Appreciation, Current Income, and Total Return are examples of ____ in an IPS.

Investment Objectives

Establishing an IPS is an art. The only science is basic ____.

MPT

Is the permissible allocations to stocks and bonds an objective or a policy?

Policy

Rebalancing protocol should be communicated through the IPS as ____ to be followed under specific rules and constraints, or as ____ to be followed by the manager.

Policy, Guidelines

The minimum and maximum permissible investment in equity securities is an example of ____ in an IPS.

Risk tolerance

The actuarial interest rate is an inappropriate investment return objective for most pension plans. It is a rather arbitrarily chosen value used to estimate a pension plan's liability. A possible exception is ____, where the actuarial rate might be the return that keeps the promised benefit in line with the promised contribution.

Taft-Hartley plans

Personal goals and objectives are sometimes skipped when optimizing a portfolio because optimizations provide scenarios for allocating assets to achieve the best expected returns for a given level of risk, but say nothing about ____.

The "right" level of risk.

Instead of using standard deviation for risk, IPS language may state risk as ____

range of acceptable losses.

Draw the table for Types of General Characteristics of Investors:

see IPS reading, page 7

Draw the table for Sample Definition of Need and Possible Benchmarks:

see IPS reading, page 9