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  1. 1. Investments and Asset Management Workshop AFOA 2005 Conference <ul><ul><li>By Keith Martell, B.Comm, CA, CAFM </li></ul></ul><ul><ul><li>Chairman </li></ul></ul>
  2. 2. Agenda <ul><li>Short-term vs. long-term investment decisions </li></ul><ul><li>Investment & Risk </li></ul><ul><li>The First Step? – Developing a Plan </li></ul><ul><li>Investment Advisors, Managers and Administration </li></ul><ul><li>Asset Classes - What are the Options? </li></ul><ul><li>Risk & Return - A healthy balance? </li></ul><ul><li>Liquidity </li></ul>
  3. 3. Term of the Investment <ul><li>The intended use of funds and the time till the funds will be spent will determine to a great extent the options for investing. </li></ul><ul><li>Cash intended to be used in operations or for disbursements in one year or less are normally managed through cash management vehicles </li></ul><ul><li>Cash held for terms longer than one year or which have trust terms and conditions are open to more investment options and considerations </li></ul>
  4. 4. Cash Mgmt Considerations <ul><li>Interest rate – higher returns increase the interest income. </li></ul><ul><li>Liquidity – how fast can you redeem investment to meet the cash needs of operations </li></ul><ul><li>Fees – what management and other fees apply </li></ul><ul><li>Integration with your operating accounts – can amounts deposited be easily managed to meet operating cash requirements </li></ul>
  5. 5. Managed Funds <ul><li>Funds managed for a longer term or funds in Settlement Trusts or Perpetual Funds have very different considerations. </li></ul><ul><li>The rest of this presentation will concentrate on these issues related to asset management. </li></ul>
  6. 6. Investment & Risk <ul><li>What are Investments? </li></ul><ul><ul><li>Property or another possession acquired for future financial return or benefit. </li></ul></ul><ul><ul><ul><li>There are many classes of investment assets </li></ul></ul></ul><ul><ul><ul><li>Risk and Return vary between classes of assets </li></ul></ul></ul><ul><ul><ul><li>Examples of asset classes include; </li></ul></ul></ul><ul><ul><ul><ul><li>Cash & Money Market Funds (e.g.. term deposits, GIC’s) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bonds (Fixed Income) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Publicly Traded Shares (Equity) </li></ul></ul></ul></ul>
  7. 7. Investment & Risk <ul><li>What are some of the risks of investing? </li></ul><ul><ul><li>The possibility of suffering harm or loss; </li></ul></ul><ul><ul><li>Volatility; </li></ul></ul><ul><ul><li>Variability of returns from an investment; </li></ul></ul><ul><ul><li>The chance of nonpayment of a debt/bonds. </li></ul></ul><ul><li>Risk is more than Loss, risk is also Uncertainty. </li></ul>
  8. 8. The First Step? <ul><li>The first step to increased return and decreased risk is to have a PLAN </li></ul><ul><li>You don’t build a multi-million dollar building without a Blueprint . </li></ul><ul><li>Don’t build a multi-million dollar investment fund without a PLAN. </li></ul>
  9. 9. A Good Investment Plan <ul><li>Establishes goals and priorities; What is the money for? </li></ul><ul><li>Determines your need for security of Principle & Cash Flow/Spending Requirements </li></ul><ul><li>Includes the selection of an Investment Policy Advisor </li></ul><ul><li>Develops a clear Investment Policy </li></ul><ul><ul><li>Asset Allocation and Time Frame </li></ul></ul><ul><ul><li>Spending Policy </li></ul></ul><ul><li>Establishes a process for Selecting an Investment Manager </li></ul><ul><li>Selects Custodians/Trustees/Evaluators </li></ul>
  10. 10. A Really Good Investment Plan <ul><li>Is followed </li></ul><ul><li>Is usually not developed by an Investment Manager </li></ul><ul><li>Is reviewed annually for changed circumstances </li></ul><ul><li>Is reassessed in the medium term (every 5 years) </li></ul><ul><li>Doesn’t change with every change in Leadership </li></ul><ul><li>Is based on the needs of the beneficiaries and should be understood by them </li></ul><ul><li>Includes a plan for regular reporting to beneficiaries </li></ul>
  11. 11. Developing a Spending Policy <ul><li>A spending policy is important because trustees often face conflicting objectives: </li></ul><ul><ul><li>Meeting today’s spending needs and maintaining the permanence of a Trust Fund for future generations. </li></ul></ul><ul><ul><li>For example: </li></ul></ul><ul><ul><ul><li>If we start with $100 today </li></ul></ul></ul><ul><ul><ul><li>And the trust earns a 3% return every year ($3 income) </li></ul></ul></ul><ul><ul><ul><li>And the trust spends the $3 earned every year </li></ul></ul></ul><ul><ul><ul><li>In 20 years the Trust still has $100 capital </li></ul></ul></ul><ul><ul><ul><li>But with inflation, the $3 earning have much lower purchasing power. The trust has lost ground in real terms. </li></ul></ul></ul>
  12. 12. Establishing a Time Frame <ul><li>The investment policy depends greatly on the time frame of the trust investments: </li></ul><ul><ul><li>If 50% of the trust is to be used for land purchases in the next year, liquidity and low volatility are critical </li></ul></ul><ul><ul><li>If the trust assets are to remain in perpetuity for the benefit of future generations, protection of capital in the long term and maximizing return to protect real spending power is critical </li></ul></ul>
  13. 13. Good Advisors <ul><li>Increases the likelihood of higher returns </li></ul><ul><li>Reduces the risk of trustees </li></ul><ul><li>Results in increased return for beneficiaries </li></ul>
  14. 14. Investment Policy Advisors <ul><li>An Investment Policy Consultant provides: </li></ul><ul><li>Independent third party measurement and return reconciliations </li></ul><ul><li>Monitoring manager compliance with investment policy </li></ul><ul><li>Analysis of new investment vehicles and ideas </li></ul><ul><li>Monitoring of changes in managers’ personnel, ownership, etc. – an independent review </li></ul><ul><li>Knowledge of custodial suppliers </li></ul><ul><li>Independent Review of Investment Policy and Asset Mix </li></ul><ul><li>An update of current events in the markets and the investment community </li></ul><ul><li>Assistance with manager searches and transitions </li></ul>
  15. 15. Investment Policy Advisors <ul><li>An investment policy advisor is critical because: </li></ul><ul><ul><li>They don’t offer cookie cutter approaches </li></ul></ul><ul><ul><li>Helps you avoid the wrong solution! </li></ul></ul><ul><ul><li>Understand your issues and help you solve your problems </li></ul></ul><ul><ul><li>They are independent of the the Asset Manager, therefore they offer solutions to your issues, they don’t force fit your issues into the solutions they sell </li></ul></ul><ul><ul><li>Clients come first and all solutions must fit client needs </li></ul></ul>
  16. 16. Investment Managers <ul><li>Institutional asset management typically starts with funds in excess of $5 million </li></ul><ul><li>The cost of asset management decreases with the size of the portfolio </li></ul><ul><li>Good asset managers consistently earn returns in excess of the markets </li></ul><ul><li>Trust assets of less than $5 million typically are managed by retail asset managers and brokers. The fees charged by these retail managers can be 3 to 4 times higher than institutional managers </li></ul>
  17. 17. Investment Managers <ul><li>Investment Policy Consultants will assist in finding Asset Managers that meet your needs and can sometimes attract managers to take on accounts that they would normally not consider (below their target size for customer accounts) </li></ul><ul><li>Many of the best Institutional Asset Managers are firms that the average person would not recognize </li></ul>
  18. 18. Investment Administration <ul><li>Administrative tasks for the fund protect you from losses and fraud and can play a role in compliance with the Trust agreement </li></ul><ul><li>These roles include Asset Custodian, Corporate Trustee or Performance Measurement </li></ul><ul><li>These roles are almost always performed by parties other than the Asset Manager </li></ul><ul><li>They can serve critical roles as gate keepers, protecting the trustees and the beneficiaries </li></ul>
  19. 19. What Are The Investment Options? <ul><li>Which Asset Classes will meet your spending policy needs and match your tolerance for risk ? </li></ul><ul><ul><li>Consider all available asset classes </li></ul></ul><ul><ul><li>Seek good independent advise in developing an asset mix policy that meets your needs. </li></ul></ul><ul><ul><li>Don’t take advise from someone that sells ONE asset class. </li></ul></ul><ul><ul><li>It is absolutely amazing how often they recommend what they sell! </li></ul></ul>
  20. 20. Investment Classes <ul><li>What are Money Market Investments ? </li></ul><ul><ul><li>Cash equivalents </li></ul></ul><ul><ul><li>T-Bills, Banker’s Acceptance, Corp. Paper </li></ul></ul><ul><ul><li>Term of maturity less than one year </li></ul></ul><ul><ul><li>Often zero coupon, discount to maturity </li></ul></ul><ul><ul><li>Issued by governments, banks & corporations </li></ul></ul><ul><ul><li>Often seen in mutual fund form </li></ul></ul><ul><ul><li>Low volatility, Low return </li></ul></ul>
  21. 21. Investment Classes <ul><li>What are Bonds ? </li></ul><ul><ul><li>Debt instruments: a promise to repay principle with interest </li></ul></ul><ul><ul><li>Term of maturity more than one year </li></ul></ul><ul><ul><li>Issued by governments, banks & corporations </li></ul></ul><ul><ul><li>Can be asset backed (Mortgage), or guaranteed (GICs) </li></ul></ul><ul><ul><li>Low to moderate volatility, Low to moderate return </li></ul></ul>
  22. 22. Investment Classes <ul><li>What are Real Return Bonds ? </li></ul><ul><ul><li>Debt instruments: a promise to repay principle with interest </li></ul></ul><ul><ul><li>Term of maturity more than one year </li></ul></ul><ul><ul><li>Issued by governments (low number of issues) </li></ul></ul><ul><ul><li>They are guaranteed to keep pace with increases in the Consumer Price Index </li></ul></ul><ul><ul><li>Low to moderate volatility, Low to moderate return </li></ul></ul>
  23. 23. Investment Classes <ul><li>What are Income Trusts ? </li></ul><ul><ul><li>A pool of income producing assets </li></ul></ul><ul><ul><ul><li>Oil Commercial Real Estate </li></ul></ul></ul><ul><ul><ul><li>Natural Gas Electrical Power Plants </li></ul></ul></ul><ul><ul><li>Managed like a business </li></ul></ul><ul><ul><li>Income is distributed to trust unit holders </li></ul></ul><ul><ul><li>Preferential tax treatment </li></ul></ul><ul><ul><li>Exchange traded </li></ul></ul><ul><ul><li>Moderate volatility, Moderate return </li></ul></ul>
  24. 24. Investment Classes <ul><li>What are Common Stocks ? </li></ul><ul><ul><li>Ownership of a corporation </li></ul></ul><ul><ul><li>May distribute earnings to shareholders in the form of dividends </li></ul></ul><ul><ul><li>Voting rights in the control of the corporation </li></ul></ul><ul><ul><li>Exchange Traded </li></ul></ul><ul><ul><li>High volatility, High return </li></ul></ul>
  25. 25. Investment Classes <ul><li>What are Mutual Funds ? </li></ul><ul><ul><li>A pool of various types of investments held by a number of different people </li></ul></ul><ul><ul><li>Professionally managed for a fee (often a high fee) </li></ul></ul><ul><ul><li>Many different investment styles and asset allocation models </li></ul></ul><ul><ul><li>Volatility and return vary, depending on the asset allocation </li></ul></ul><ul><ul><li>Not usually exchange traded </li></ul></ul>
  26. 26. Investment Classes <ul><li>What are Index Linked Notes ? </li></ul><ul><ul><li>Debt instruments: a promise to repay </li></ul></ul><ul><ul><li>Term of maturity more than one year </li></ul></ul><ul><ul><li>Guaranteed by an issuer (Federal, Provincial governments or Banks) </li></ul></ul><ul><ul><li>No defined coupon or yield </li></ul></ul><ul><ul><li>Return determined by the performance of an underlying asset or index </li></ul></ul><ul><ul><li>Moderate volatility, Moderate return </li></ul></ul>
  27. 27. Consistent Behavior <ul><li>Follow the plan </li></ul><ul><li>Detach yourself from emotional market forces </li></ul><ul><li>Investment management, like golf, can be a game of inches. Always striving for the mile long drive can be very costly to your game. </li></ul><ul><li>Consistency is the key to success </li></ul>
  28. 28. Risk and Return <ul><li>Risk vs . Return </li></ul><ul><ul><li>Cannot discuss return without addressing risk </li></ul></ul><ul><ul><li>Risk should be managed not avoided. </li></ul></ul><ul><ul><li>Higher Return = Higher Risk </li></ul></ul><ul><ul><li>Risk measured in terms of volatility of expected return </li></ul></ul><ul><ul><li>Time horizon critical </li></ul></ul><ul><ul><li>Most of a portfolio’s return is attributable to asset allocation e.g.. Stocks vs. Bonds vs. Cash </li></ul></ul><ul><ul><li>Return Maximization – Modern Portfolio Theory Concept </li></ul></ul>
  29. 29. Risk Tolerance <ul><li>Risk tolerance is a measure of your willingness to accept investment risk in exchange for higher potential returns. Risk is the uncertainty of earning your investment returns and is measured by the volatility of investment returns. </li></ul>
  30. 30. Return for Taking Risk Compound Rates of Return to Dec. 31 st 2003 1 Year 3 Years 5 Years 7 Years Short Term Income Fund (Cash) 3.18% 3.79% 4.52% 4.52%   Canadian Bonds 6.00% 6.11% 6.01% 6.62% Real Return Bonds 12.66% 8.51% 10.25% 8.62% High Yield Bonds 13.06% 9.48% 5.56% n/a   Cdn Blue Chip Equity 20.37% 5.58% 11.83% 14.06% Cdn Dividend Equity 23.03% 9.39% 15.45% 16.91% US Large Cap Equity (C$) 6.96% -2.52% 1.91% 12.47%
  31. 31. One Asset Leads to Volatility
  32. 32. Investment Allocation Policy Sample Investment Policy Guidelines   Asset Class Minimum Neutral Maximum   Cash and Equivalents 0% 10% 50% Canadian Bonds 40% 50% 80% Real Return Bonds 0% 10% 20% High Yield Bonds 0% 5% 10% Total Cash & Fixed Income 60% 75% 90%   Canadian Equity Blue Chip Style 5% 10% 15% Dividend Style 5% 10% 15% U.S. Equity U.S. Large Cap Style 0% 5% 10% Total Equity 15% 25% 35% Sample for a low risk and volatility tolerance portfolio – Often typical of a First Nations trust.
  33. 33. Liquidity <ul><li>The quality of being readily convertible into cash with little or no loss of value. </li></ul><ul><li>Different asset classes have entirely different levels of liquidity </li></ul><ul><li>Money market instruments are most liquid while real estate assets are typically the least liquid. </li></ul>
  34. 34. What Is Risk? Risky Is Dealing With Someone Who Has Not Earned Your Trust. Risk is explaining to your community you lost the capital in their trust. Risk is having to lower the transfer from the Trust to the community spending account.
  35. 35. A Complex Process <ul><li>The process of prudent and responsible asset management is not an easy process. </li></ul><ul><li>There are significant risk to Trustees of making mistakes, whether intentional or simply a result of poor decisions or the selection of poor advisors or managers </li></ul><ul><li>Poor decisions will reduce the resources available for the people they were intended to serve. </li></ul>
  36. 36. Conclusion <ul><li>Professional Asset Management is complex, but reduces the risks for Trustees and increases the returns to your beneficiaries </li></ul><ul><li>It is not a simple process and requires discipline and patience </li></ul><ul><li>Consolidation or pooling of funds could have significant benefits for all Trusts, large and small </li></ul><ul><li>Consolidation requires cooperation and shared goals </li></ul>