2. Why do we do what we do @ ARIAN Capital?
Because we want to help investors to build their wealth over time
• We have the know-how to achieve this objective
• As this is our full-time occupation, we are at a distinct advantage
over the individual because as a team, we can pool bits of data
and convert them into meaningful information that will help us
to make investment decisions on behalf of our clients
• We are able to use our resources to offer attendant scrip and
other yield management services
3. Accumulation Phase Consolidation Phase Spending and Gifting
Phase
25 55 65 85
75
35 45
The rise and fall of Personal Networth over a Lifetime
Net Worth
Age
4. Asset Allocation: The process of deciding how to distribute an
investor’s wealth among different countries and asset classes for
investment purposes
Asset Class: An asset class is comprised of securities that have
similar characteristics, attributes and risk/return relationships. An
example of a broad asset class is “bonds”, which can be divided
into smaller classes like Treasury Bills, corporate bonds and high
yield bonds.
GENERALLY, HIGHER COMPOUNDED RETURNS TEND TO
ACCRUE TO INVESTORS WITH THE LARGER EXPOSURES
TO RISKY ASSETS
Fundamentals/Preliminaries
5. Equities- 40%
Fixed Income- 32%
Specialist
Investments- 8%
Cash- 2%
Real Estate-18%
Investible Funds
Asset Allocation: An Example
6. Investible Assets: Refers to liquid assets such as
cash, jewelry etc.
Net Worth: Refers to the balance between your
Assets and your Liabilities
Pure Income: Refers to your gross income
Income Type Grouping
The RELEVANT income IS NET WORTH- It forms
a more REALISTIC AND PREDICTABLE basis for
measuring investible funds
7. No serious investment plan should be started until a
potential investor has adequate income to cover living
expenses and a safety net, should the unexpected occur
How individuals structure their financial plan should be
related to their:
1. Age
2. financial status
3. future plans
4. risk aversion characteristics, and
5. needs
Financial Planning Principles
8. • Liquidity Constraints
• Time Horizon
• Tax Concerns
• Legal and Regulatory
• Unique Circumstances
Investment Constraints
9. POLICY STATEMENT
Focus: The Investor’s short-term and long- term
needs, familiarity with capital market history, and
expectations
MACROECONOMIC EVALUATION
Focus: Examine current and projected
financial, economic, political and social factors.
These will help inform us about short and long-
term possibilities to use in constructing a
specific portfolio
IMPLEMENTATION
Focus: Construct a portfolio that meets the
investor’s needs at minimum risk levels
FEEDBACK LOOP
Focus: Monitoring and updating the investor’s
needs, environmental conditions, and
evaluating portfolio performance
The Portfolio Management Process
10. • The Policy Statement is a road map. In it, investors specify the types
of risk they are willing to take and their investment goals and
constraints.
• All Investment decisions are based on the policy statement to
ensure that they are appropriate for the investor. Hence, a carefully
constructed policy statement determines exactly what kind of assets
to be included in a given investor’s portfolio
• Because of lifecycle needs, the policy statement is typically
reviewed and updated periodically
The Policy Statement
11. Return
•Comes in the form of cashflows attached to the
purchase of a security. Examples include dividends,
coupons/interest income
•Different securities for different reasons may also
provide opportunity to the investor to benefit from
capital appreciation
Our business is to continually seek out opportunities
to maximize return for our clients. Usually, the better
our performance the higher the reward. To achieve
this, certain principles are important to grasp
12. Compounded Annual
Returns: 1981-2004
Before Taxes and
Inflation
After
taxes
After taxes and
Inflation
After
inflation
(only)
Common Stocks 12.36% 9.83% 6.52% 8.98%
Long Term Govt Bonds 11.23% 8.38% 5.12% 7.88%
Treasury Bills 6.20% 4.48% 1.33% 3.46%
Municipal Bonds (etc) 6.00% 6.00% 2.81% 2.81%
Source: CFA Institiute
Real Investment Returns After Taxes and Costs
Assumptions: 28% tax rate on income, 20% on capital appreciation. Compound rate was 3.1% for full period
14. Capital Preservation - The need to MAINTAIN CAPITAL. The return
should, at a minimum, be equal to the inflation rate. With this
objective, an investor simply wants to preserve his existing capital.
Capital Appreciation - The need to GROW CAPITAL. To accomplish
this, the return objective should be equal to a return that exceeds
the expected inflation. With this objective, an investor's intention
is to grow his existing capital base.
Current Income -The need to CREATE INCOME FROM THE
INVESTOR'S CAPITAL BASE. With this objective, an investor
needs to generate income from his investments.
Total Return - The need to GROW THE CAPITAL BASE through
both capital appreciation and reinvestment of that appreciation.
Return Requirements
16. An investor’s risk tolerance can be affected by many factors:
Age– an investor may have lower risk tolerance as they get
older and financial constraints are more prevalent.
Family situation – an investor may have higher income needs
if they are supporting a child in college or an elderly relative.
Wealth and income – an investor may have a greater ability to
invest in a portfolio if he or she has existing wealth or high
income.
Psychological – an investor may simply have a lower
tolerance for risk based on his personality
Factors Affecting Risk Tolerance
17. Risk and Return- Markowitz Portfolio Theory
Harry Markowitz (1952,1959) propounded that a single asset or
portfolio of assets is considered to be efficient if no other asset or
portfolio of assets offers higher expected return with the same (or
lower) risk or lower risk with the same (or higher expected
return)
He used variance, or standard deviation of expected returns
returns to measure risk
Variance is a statistical measure of the dispersion of returns
around the expected value whereby a larger variance indicates
greater dispersion. The more the dispersion, the greater the
uncertainty of returns
18. Probability
Possible rate
of return (%)
Expected
return
0.35 0.08 0.0280
0.30 0.1 0.0300
0.20 0.12 0.0240
0.15 0.14 0.0210
E' (R) 0.1030
Computing Expected Return for An Individual Asset
19. Weight (W!)
(% of Portfolio)
Expected
Security
Return (R!)
Expected
Portfolio
Return
(W! X R!)
0.20 0.10 0.0200
0.30 0.11 0.0330
0.30 0.12 0.0360
0.20 0.13 0.0260
E' (Rport) 0.1150
Computing Expected Return for a Portfolio of Risky Assets
