I just read an article that will be included in the proceedings of the GIPS Standards Annual Conference that was held in San Francisco this past September. The proceedings are scheduled to be published in March. The article is available on the CFA Institute website. I highly recommend the article to anyone who advises clients whose investment objectives include a spending policy.
Stephen Campisi, CFA, Director of Institutional Investments at Bank of America Merrill Lynch, gave a presentation that advocates presenting performance focused on the spending goals of the client. The cornerstone of the presentation is a notional portfolio that reflects the spending and portfolio growth objectives (e.g spending policy of 5% of portfolio value + portfolio growth equal to inflation) from the portfolio. This notional portfolio is then compared with the performance of a benchmark portfolio (reflecting investment allocation policy) and the actual portfolio experience. The difference between the notional portfolio and the benchmark portfolio is attributable to market conditions, over which the client, advisor, and money managers have no control. The difference between the benchmark portfolio and the actual portfolio can be credited to the decisions of the investment team. The article presents several tables and charts that can be used to present the data in simple client friendly manner.
This focus on the client's objectives is consistent with the theme of Charles Ellis' Investment Policy: How to Win the Loser's Game. While the performance figures are nice, and actually have a lot of information, ultimately performance is only a means to the goal of spending, be it college expenses for a child, pension payments to retirees, or support payments for a charitable organization. Meeting those specific objectives over a reasonable time horizon can, and should, be the greatest measure of success. Excess return is cocktail party fodder.
Showing posts with label Investor Communications. Show all posts
Showing posts with label Investor Communications. Show all posts
Tuesday, February 8, 2011
Friday, February 4, 2011
Walton Elm Creek Ranch Investor Communications
I received an email from Walton Elm Creel describing a transaction that is taking place. Basically, a Real Estate Investment Trust is being formed as a subsidiary of Walton Elm Creek Ranch Development LP, the units of the Elm creek Ranch project offering that were designed for qualified fund investors. The REIT is being formed in order to shield the qualified investors from Unrelated Business Taxable Income (UBTI). All of this was a part of the original business plan, and outlined in the PPM. Most importantly, investors do not need to take any action.
Qualifying as a REIT requires a minimum number (100) of shareholders. The partnership is to be the sole common shareholder, so the REIT is distributing one preferred share to each of the largest investors in the development partnership. The preferred share has a par value of $500 and carries a cumulative, non-compounded preferred dividend of 6%. The investors that are receiving the preferred shares will have their capital accounts in the partnership reduced by $500. The remainder of theses investors' capital, as well as the capital of those investors that are not receiving preferred shares, will continue to accrue their 10.5% preferred return. Thus, while the investors receiving preferred shares will acquire an advantage in terms of preference in return of capital, that capital is but a small portion of the total capital invested (<1%), and the preferred return is 450 basis points less than the preferred return on the remaining capital.
Walton has prepared a letter to investors which was attached to the email. While pretty readable, it still has some thick language plus it includes a copy of the partnership agreement. Advisors can count on those clients who are invested in the development fund to call for support. As I see it the two biggest points to make are 1) This is all a part of the business plan, and is taking place to safeguard the tax advantages of qualified plan investing, and 2) no action by investors is necessary.
Qualifying as a REIT requires a minimum number (100) of shareholders. The partnership is to be the sole common shareholder, so the REIT is distributing one preferred share to each of the largest investors in the development partnership. The preferred share has a par value of $500 and carries a cumulative, non-compounded preferred dividend of 6%. The investors that are receiving the preferred shares will have their capital accounts in the partnership reduced by $500. The remainder of theses investors' capital, as well as the capital of those investors that are not receiving preferred shares, will continue to accrue their 10.5% preferred return. Thus, while the investors receiving preferred shares will acquire an advantage in terms of preference in return of capital, that capital is but a small portion of the total capital invested (<1%), and the preferred return is 450 basis points less than the preferred return on the remaining capital.
Walton has prepared a letter to investors which was attached to the email. While pretty readable, it still has some thick language plus it includes a copy of the partnership agreement. Advisors can count on those clients who are invested in the development fund to call for support. As I see it the two biggest points to make are 1) This is all a part of the business plan, and is taking place to safeguard the tax advantages of qualified plan investing, and 2) no action by investors is necessary.
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