How to use real estate as an investment vehicle

Terry Coyne, SIOR, CCIM, Executive Vice President, Grubb & Ellis

Real estate as an investment can take many forms. For example, you can buy an apartment building or a retail store and collect the rent, or you can own the building in which you work and rent it to yourself for tax purposes.

“You can choose to either invest in a company’s debt through stocks or in the actual real estate that houses the company,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis.

He says the investment market for real estate is growing across the country and now is a great time to get involved because interest rates on loans are so low.

“The best way to affect the return on your investment is to get the lowest interest rate you possibly can get on your loan. The higher the interest rate, the higher the return needs to be for you to break even on your investment, but interest rates are really low right now,” Coyne says.

Smart Business spoke with Coyne about how to use real estate as an investment vehicle.

What should someone know before investing in real estate?

It is important to understand that real estate is illiquid. If you expect to get out of an investment in less than three to five years, real estate is not for you. You have to gauge your liquidity threshold.

The investment’s illiquid position also means that it can be tougher to price than other assets — your investment could be worth more or less the moment after you buy it.

If you have a need for a short-term investment, real estate is not an investment for you. However, if you tend to overreact to market fluctuations, real estate investments can keep you from selling early because it is more difficult to sell your investment.

What types of real estate investments are available?

There are several, and you need to examine which asset class best suits your position — office, industrial, retail, multifamily housing, land, mini storage or medical. Each one has its pros and cons.

Office property investments take a lot of capital because you will likely need to suit the office space to accommodate each tenant. Industrial properties don’t take as much capital and are often a simpler deal.

Medical property investments are all the rage now because it is almost quasi-retail and location becomes important. However, it is expensive to build out and it is difficult to move.

Investing in land can be the more challenging of the real estate investments because it is incredibly illiquid. If you choose to invest in land, you had better have a long time horizon and be prepared for the laws to change on you. You have to be patient and smart if you are buying land.

Mini-storage is akin to investing in a business — part real estate investment and part business investment. Similarly, owning an apartment building is a business investment. Before you make an investment in this type of property, you should know what you are getting into.

Buying the building that houses your business is more of a tax play. When you are buying and leasing to yourself, the rent is taxed at a lower rate than income. However, as the landlord and tenant, you can’t call someone to fix a problem. But if you take care of the property and take advantage of the property tax claims, you could offset your lease payments.

You could also invest in real estate through the stock market by investing in a real estate investment trust (REIT). This gives you some exposure to real estate investing but with the liquidity you find with stock. It is a good way to learn about the market before making a more illiquid investment and can serve as a halfway step to investing in a physical building.

What else should you consider before choosing a property?

After you have determined the liquidity risk and asset class, select the area in which you’d like to make the investment and set your budget. Once you have gone through these initial steps, find someone who is an expert in the asset class, location and price point you’re working with to help you find the right investment. Choose a broker from a national firm, as that person will be able to help you compare investments from across the country.

What are the risks associated with real estate investment?

Just as you have determined your liquidity threshold, you also have to decide your risk threshold. You are buying a physical asset, and if you’re paying two or three times what it costs to replace it, you had better make sure that the credit of the tenant is worth it.

A very good, credit safe investment tends to have a high cost per square foot that is much higher than the replacement cost. But if you have a low-credit tenant that goes bankrupt, you’ll be stuck with a building that needs significant capital to improve, and you may not be able to find another tenant to take the space. So what you’re really investing in is the credit of the company.

As an investor, the more responsibility that you put on the tenant, the less you are involved. The best deal for a landlord is triple net, in which case the tenant pays the real estate taxes, building insurance and maintenance. However, the triple net leases tend to be more expensive for the tenant. The opposite of this is a gross lease, in which case the landlord pays for all property charges and maintenance.

Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or [email protected]

Insights Real Estate is brought to you by Grubb & Ellis

Corporate investment in U.S. start-ups rises 16 percent in second quarter: report

SAN FRANCISCO, Thu Sep 20, 2012 – Corporate-backed venture groups invested $2.1 billion in the quarter ended June 30, up 16 percent from the same period in 2011, underscoring the continued allure start-ups hold for their more established competitors.

The corporate-backed funds invested in some 118 companies in the United States, according to a report released on Thursday by consultancy CB Insights, with internet companies winning almost one-third of the cash.

Healthcare and the automotive/transportation sectors each took 20 percent.

Most deals involved co-investors from traditional venture capital firms such as First Round Capital, Index Ventures, and Sequoia Capital.

Big companies like to invest in start-ups to keep an eye on potential new technologies and players in their fields. Financial gains are typically are less important than the strategic insights the bigger companies gain.

What to look for in an advisor

Joseph R. Ramey, CPA, Senior Manager of Accounting Tax Services, Zinner & Co. LLP

When becoming a business owner, trustee or beneficiary of a trust, or executor of an estate, there comes a time when seeking out a professional advisor is necessary. But where do you even begin to find that right advisor with all the necessary attributes?

In most situations, for example becoming a trustee, executor or business owner, an advisory team is needed because the specialties of each advisor are unique. There are several common qualities to look for in any advisor that will be the perfect fit for your team.

Smart Business spoke with Joseph R. Ramey, CPA, a Senior Manager of Accounting Tax Services at Zinner & Co. LLP, about the qualities you should look for.

Technical Strengths and Credentials

These qualities are fairly straightforward, and typically an advisor will display their credentials and area(s) of specialty on their website. When evaluating their technical expertise, look at their speaking engagements and for articles written in the specialty areas that are important to your situation and background. For example, if you just became an executor of an estate, you want to find an attorney that not only focuses on estate and probate, but also speaks on the topic and has authored articles in that area. Lastly, it is also important to note any professional groups or boards in which they participate; this will help in understanding how current they are in what is going on in their specialty.

Referrals

The best way to start looking for an advisor is by talking with your family and friends who may know or currently have trusted advisors. If your close circles of acquaintances are able to refer someone they work with, then you will have more comfort in knowing how that advisor will work with you as well. Another good referral source is your own current advisors from other professions. For example, if you are in need of an investment advisor, contact your accountant or attorney and see if they have a recommendation for you.

Personality

Sometimes the most important quality to evaluate and assess in an advisor is their personality. The most technically sound professional may not be the right fit because of differences in personalities. Always meet face-to-face with a potential advisor and evaluate how they speak with you and how you feel when you talk with them. If you walk away scratching your head trying to figure out what they were talking about, they may not be the right advisor for you.

At Zinner & Co., we maintain a vast network of professionals in various fields and are always able to recommend an advisor that will work best with you. Our Exclusive Service Provider Program (ESP) is a group of the “best of the best” advisors in their respected fields, which allows us to deliver a pre-screened list of quality referrals to our clients based on their specific needs.

Joseph R. Ramey, CPA, is a Senior Manager of Accounting Tax Services at Zinner & Co. LLP. Reach him at (216) 831-0733 or [email protected]

How to utilize master limited partnerships as a high yield, growth-oriented investment

John Micklitsch, CFA, Director of Wealth Management, Ancora Advisors LLC

Is there a pipeline in your investment future? Master limited partnerships (MLPs) are a type of publicly traded holding structure employed widely in the natural resources energy infrastructure space, which includes pipelines, storage facilities and anything in the transportation chain, from the wellhead to the market consumer.

“Yield-starved investors are dying for ideas, so here’s an idea of a niche asset class that has high current income, growth potential and some tax-deferred characteristics,” says John Micklitsch, CFA, director of wealth management with Ancora Advisors LLC. “They bring some diversification to a portfolio because they have a low correlation with stocks and bonds, and they have the potential to hold up well in an inflationary environment because they are a hard asset and their distributions are growing.”

Smart Business spoke with Micklitsch about the advantages of MLPs and why this might be a smart investment for you.

How do MLPs work?

MLPs trade on major stock exchanges such as the New York Stock Exchange or NASDAQ like any corporate stock, but instead of being a common shareholder of a corporation, you are a unitholder in a limited partnership. Like stocks, there are no liquidity or minimum purchase requirements. Some MLP examples include Kinder Morgan Energy Partners (KMP) and Energy Transfer Partners (ETP).

Ninety percent of a MLP’s income must derive from natural resources production, transportation or storage, real estate, dividends or interest income. As it turns out, the majority of publicly traded MLPs are in the natural resources production, transportation and storage sectors. Basically, the government decided in order to have a strong energy infrastructure in this country, it would give companies participating in that infrastructure a subsidy by not taxing them, provided they distribute their income out to unitholders.

Why are they potentially attractive investments?

MLPs have the highly sought after characteristics of strong current income and future growth potential. The business model is very predictable and simple to follow, as MLPs are paid fees, based on long-term contracts, for the natural resources that go through their pipelines or storage facilities. Generally, midstream MLPs take no ownership of the underlying commodity and therefore have little or no exposure to commodity price volatility. This fee-based, steady income stream allows them to pay out high distributions.

The Alerian MLP Index, which represents the universe of publicly traded MLPs, showed yields above 6 percent as of June 30. Comparatively, utilities were around 4.1 percent, real estate investment trusts near 3.9 percent, the Dow Jones Industrial Average was 2.7 percent and the S&P 500 was 2.2 percent.

In addition, MLPs are predicted to grow because energy production is transforming due to the technological breakthroughs associated with horizontal drilling and the exploration and production of the country’s shale resources, known as fracking. Whether the newfound natural gas and oil is consumed in this country, as is likely, or exported, those resources are too valuable to sit in the ground and will find their way to market to the benefit of these volume-based infrastructure providers.

The distributions a given MLP would be able to pay are expected to grow 5 to 7 percent over the next several years. When added to current yields, you could be talking about potential low double-digit returns.

What else might impact MLP performance?

Many people are currently worried about inflation, but MLPs are hard assets. In addition, their distributions, which are not fixed and are expected to grow, stand a better chance of preserving people’s living standards in an inflationary environment.

When purchased directly, there are some potential tax-deferral benefits for investors, making MLPs and the income they produce potentially a tax-advantaged asset. However, it is important to work with an adviser to find the best ownership fit for you, direct or through a fund, as both have certain considerations.

One other advantage the MLP universe has exhibited in the past is a relatively low correlation with both the stock and bond markets, making them a good diversification tool. For example, in 2008 and 2009, MLP prices fell, but importantly, MLPs not only met their distributions but many of them continued to increase those distributions. MLP business models are very resilient to economic and commodity volatility.

What does the future look like for these investment vehicles?

The future is extremely bright for MLPs based on domestic energy production, led by this horizontal drill, shale/fracking revolution and simple demographics. The aging population will be starved for yield; interest rates are at an all-time low. MLPs’ combinations of high current yield plus distributions that should keep pace with inflation put them in a very attractive position for the key baby boomer demographic over the next five to 15 years.

In addition to yield-starved individual investors, institutions — endowments, foundations, defined benefit plans — are becoming more aware of MLPs and their benefits. Institutions could increasingly become involved in the MLP space over the next decade as they search for sources of return that allow them to hit their long-term actuarially driven targets. Even though they face the hurdle of unrelated business taxable income, it can be solved by a variety of ownership structures.

What should investors remember about MLPs?

MLPs are a very interesting asset class that’s growing in stature and awareness, due to the attractive combination of high current yields and growth potential of distributions, but MLPs do have several nuances that make their incorporation into your overall portfolio best accomplished with the help of an experienced adviser well versed in the space.

 

John Micklitsch, CFA, is the director of wealth management with Ancora Advisors LLC. Reach him at (216) 593-5074 or [email protected]

Insights Wealth Management & Investments is brought to you by Ancora

How investors should approach today’s volatile markets

John Micklitsch, Director of Wealth Management, Ancora Advisors LLC

Volatility in the marketplace can have a significant impact on investors’ accounts and psychology.

But while many people think of volatility as a negative, there is an upside, says John Micklitsch, CFA, director of wealth management at Ancora Advisors LLC.

“For those who are still accumulating and investing in the market on a regular basis, volatility to the downside can create buying opportunities and the ability to buy shares on weakness,” says Micklitsch. “However, if you’re at a point in your life where you’re done adding to your account, volatility can be very frustrating and emotionally challenging.”

Smart Business spoke with Micklitsch about why the markets are so volatile right now and how to approach the market in this environment.

What is volatility?

Like everything there is a technical and a practical definition of volatility. To most people, however, volatility is a change in the value of their investment accounts from one measurable period to the next. Generally speaking, volatility is associated with risk.

Why are today’s markets so volatile?

It goes back to the globalization of the world economy. It used to be that what happened in a small country such as Greece, stayed in Greece. But today, everything is linked. Financial institutions hold sovereign bonds to facilitate worldwide trade and then hedge positions with other global financial institutions and incur counterparty risk. Corporations generate earnings from all over the world and now investors can trade in just about any market with the click of a mouse or tap of a smartphone. It’s all linked and it is in our face all the time with the 24 hour news cycle. For a long time, globalization has been a good thing, but lately it seems we are only as strong as the weakest link. Add in the uneasiness associated with huge, unresolved global debt levels and you can begin to see why markets have been so volatile.

Is volatility the new normal for investors?

Volatility in many ways, is the norm for now. We are in a period of relatively low returns in both the equity and fixed income markets due to sluggish economies. Buy and hold investors are frustrated. As a result there is tremendous pressure on managers to generate returns for clients with many now resorting to trading in an attempt to generate returns. There are inverse and leveraged vehicles that allow investors to turn risk ‘on’ and ‘off’ in their portfolio throughout virtually every minute of the day. Until we get sustained improvement in the economy this in and out activity is going to be the norm. The IRS and brokers will be happy, but it is less clear how investors will fair.

How should investors approach a volatile market?

The best way to approach today’s volatility, like anything, is to have a plan. Every investor should know how much of their portfolio they want to have in a given asset class and the potential volatility of their overall asset allocation. Then, when volatility soars they can dial into that plan to see just how much their actual allocations have deviated from their target percentages and whether reallocating or rebalancing is necessary. By having that plan in place, a touchstone if you will, investors are more likely to stay the course, as opposed to falling into that ‘just sell everything’ mentality. We think it is best to work with a financial professional to create long-term targets that are appropriate for your risk tolerance and your stage in life because they have the tools to help you model risk.

How often should that plan be reviewed?

The plan should be a living, breathing reflection of your goals and objectives at any particular moment in time. You should work closely with your advisers to update them on your changing risk profile and needs. If your risk profile changes and it is not reflected in your investment allocation, your portfolio might be more volatile than is appropriate. That could lead to making poor decisions at a market cycle bottom or in a period of particularly high volatility. Taking a few minutes to regularly review your plan can reassure you just enough to avoid making a 100 percent move to the sidelines, because then the challenge becomes deciding when to get back in, an error that could compound the situation.

What advice would you give to investors in this market?

There is a tendency for people to find safety and security in a stock market characterized by high prices. Although it is counterintuitive, the lower the stock market goes the safer it becomes from a margin of safety standpoint.

To reverse that basic decision-making apparatus and embrace lower prices is really the key to long term investing success. The only time volatility is not something to take advantage of is when you are done accumulating shares. At that point in life, you should probably have a more conservatively positioned portfolio that is not as highly impacted by market swings. All of this can seem overwhelming, which is why it is important to work with a professional adviser who can help you plan for and manage volatility in your portfolio.

John Micklitsch, CFA, is the director of wealth management, as well as an Investment Advisor representative, of Ancora Advisors LLC, an SEC Registered Investment Advisor. Reach him at (216) 593-5074 or [email protected]

Insights Wealth Management & Investments is brought to you by Ancora

Wells Fargo’s play for prime brokerage prompts skepticism

As Wells Fargo becomes a bigger player in the investment banking game, not everyone is a fan.

Moody’s Investors Service, the rating agency, raised concerns on Monday about the bank’s recent move outside its comfort zone of consumer lending. Moody’s directed criticism at the bank for stepping into prime brokerage, calling the bank’s recent acquisition of the midsize company Merlin Securities “credit negative.”

Wells Fargo agreed to buy Merlin last month for an undisclosed sum, making it the last of the nation’s biggest banks to enter prime brokerage, the lucrative business that caters to hedge funds and other big investors. Prime brokers provide a broad array of services, including cash management, execution of leveraged trades and securities lending.

Moody’s expressed concern the Merlin takeover “signals that Wells Fargo intends to expand its” investment banking business. “Though Merlin is small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services,” Moody’s said in the report.

Fitch, one of Moody’s top competitors, offered a softer interpretation of the deal. While Wells Fargo “may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature,” Fitch said last week.

In a statement, Wells Fargo defended the deal and challenged the Moody’s assessment.

AT&T making big investment in home monitoring

NEW YORK, Mon May 7, 2012 – AT&T Inc. is making a big investment in a nationwide wireless home monitoring service that could potentially add $1 billion to its annual revenue as part of the No.2 U.S. mobile operator’s ongoing effort to expand beyond cell phones.

It is planning a service called “Digital Life” to monitor homes for everything from water damage to burglaries and to let customers remotely do things like adjust temperature or unlock doors, using an Internet connection.

The service, of which AT&T will start trials this year, involves sensors and cameras linked to a central home system that connects wirelessly to AT&T monitoring centers, said Glenn Lurie, the AT&T executive spearheading the project.

Lurie said, in an interview with Reuters ahead of the CTIA wireless show in New Orleans, where AT&T will announce the plan Monday, that AT&T is hiring “lots of people” to support the service.

He did not want to set a specific revenue target for the business but said he sees it as one of AT&T’s largest revenue growth opportunities, “if not the largest,” with “very significant” incremental growth” in 2013.

“When you’re a company like AT&T … you look at opportunities that are billion-dollar opportunities,” Lurie said. “Obviously to grow our business at any level, when you’re a $130 billion plus company, you have to look for significant opportunities. We view this as a significant opportunity.”

Lurie, who has already grown AT&T’s emerging-device services into a $1 billion business, said the industry is ripe for growth, as only 20 percent of U.S. homes have security systems.

How arbitrage can benefit the portfolios of high-net-worth individuals

Brian Hopkins, Portfolio Manager, Ancora Advisors, LLC

Arbitrage is a trading technique that has been around for decades, but it’s not one that most investors have heard of.

However, in today’s economy, it can be a smart investment, says Brian Hopkins, portfolio manager at Ancora Advisors, LLC.

“Warren Buffett employed this strategy for decades with his short-term bond money, until Berkshire got so big that he couldn’t do it anymore,” says Hopkins. “It has been a smart money strategy for decades.”

Smart Business spoke with Hopkins about arbitrage and how it can benefit an investor’s portfolio.

What is arbitrage?

Arbitrage can take two forms. One is purchasing a security with a known value in the future trading at a discount to that value after adjusting for the risk free rate. Another is when two securities with virtually identical characteristics trade at different prices. An arbitrageur can purchase the cheaper security and sell short the more expensive security and wait for the two securities to reflect their intrinsic value.

One example of this is merger arbitrage, a strategy employed when a company is being purchased by another company. Typically, there is a six-month window between when a merger is announced and when the deal finally closes. Often, during that six-month period, the stock of the company that is the target of the takeover will trade at a discount to final value because the large mutual funds are not concerned about making that incremental couple percent and decide to sell. As a result of this selling, the market price of the target company may be less than the final transaction price. At this point, an arbitrageur can step in and buy the shares of the company being acquired.  The bet is that the deal will close and the spread between the market price and the takeover price will close to zero.

Another arbitrage example is when you take advantage of the mispricing of different securities that relate closely to one another. For instance, a number of companies have two classes of common stock. One will be voting stock and one is nonvoting stock and they both trade on an exchange. They have the same economic rights in terms of dividends, cash flows, proceeds in a sale etc. so they are identical except for the voting rights. Typically the share class with the higher voting rights trades at a steady, predictable premium to the nonvoting class.

For a variety of reasons, there can be times where temporarily the steady, predictable spread widens or maybe even inverts. In that scenario, the arbitrageur buys the less expensive stock and shorts the more expensive stock. An arbitrageur would then wait for the two classes of shares to come back to the normal premium/spread relationship. This strategy has limited risk because you are only betting that the historical relationship between the two share classes will restore itself.

Is this strategy one that investors can pursue on their own?

I would advise against it. An arbitrageur will run several screens to identify opportunities, using technology that feeds in pricing data for different types of securities and the relationships between them. There is quite a bit of manpower that goes into identifying and researching those opportunities and managing overall portfolio risk.

Why is now a good time to consider this strategy?

Historically, the risk of arbitrage strategies as measured by standard deviation has been in line with the risk of the bond markets. Our feeling is that the bond market right now does not offer investors much in the way of return on capital. Fixed income investors are losing purchasing power because the yields on many bonds today are less than the rate of inflation. This is where an arbitrage strategy can come in as a complement to fixed income only portfolios.

Arbitrage has historically outperformed bonds and inflation, and we think will do so again in the future. In the current environment, we believe it represents a good way for conservative investors to diversify their sources of return away from fixed income only.

In terms of the environment for public company merger activity, there is a significant amount of cash sitting on the balance sheets of corporations, and we think that cash may be deployed in part in mergers and acquisitions. This creates a good environment for arbitrageurs because the more mergers the higher the spreads and therefore the rate of return. More deal supply in the market widens spreads and adds upside to the strategy.

What is the risk profile of this strategy?

There is some risk, but the risks of the stock market are much higher. The strategy has only been down twice in the past 22 years. Both occurrences happened in the worst years of the recent bear markets. In 2002, this strategy as measured by the HFRI Merger Arbitrage Index was down 1 percent in a horrible year for the stock market. In 2008, one of the worst years for the market since the Great Depression, the strategy was down 3 percent, giving you a reasonable idea of what can happen in the most difficult of potential environments. Following each of those down years, the strategy bounced back and returned in the double digits the following year, leaving merger arbitrage investors up over the two-year period. The strategy has had numerous years of double-digits returns since the early ’90s, typically in years when merger activity was high.

What role should this strategy play in an investor’s portfolio?

It should be a portion of the portfolio, and investors should view it as an allocation to their fixed income portfolio.

An attractive element is that the correlation between this strategy and fixed income is very low. As a result, as you add a merger arbitrage strategy, the volatility of your fixed income portfolio should decrease.

Brian Hopkins is a portfolio manager at Ancora Advisors, LLC (an SEC Registered Investment Advisor). Reach him at (216) 825-4000 or [email protected]

Insights Wealth Management & Investing is brought to you by Ancora

How an Investment Policy Statement can help keep your business on course

John E. Comello, CFA, Senior Vice President, Chief Investment Officer, First Commonwealth Advisors

With no sign that the volatility in today’s marketplace is going to change any time soon, organizations need to focus on long-term investment goals and objectives to avoid making imprudent decisions based on short-term fluctuations.

An Investment Policy Statement (IPS) can keep an organization on track, serving as a roadmap for the organization and its investment manager(s). An effective IPS outlines the responsibilities of the parties involved and defines the investment strategy based on the objectives and constraints of the organization.

“Having a well-structured Investment Policy Statement in place provides direction from an investment strategy perspective and can add a lot of value in volatile times,” says John E. Comello, CFA, senior vice president and chief investment officer for First Commonwealth Advisors.  “It is a living, breathing document that should be reviewed at least annually to ensure that the investment strategy remains appropriate given the potential changing needs of the organization. Markets evolve, as do client circumstances, so this document should adjust to changes that may impact the organization and its investment strategy.”

Smart Business spoke with Comello about the components of an effective IPS and how to get the process started.

How can an IPS benefit an organization?

If structured properly, an IPS provides a systematic approach to documenting the investment objectives and constraints of an organization. An IPS is customized and should articulate the investment goals of the organization and formalize an investment strategy to achieve those goals. This document is especially important today, as volatile markets can result in rash investment decisions. An IPS can help refocus an organization on its long-term investment goals. It can also help an organization administer the portfolio through the departure of key personnel or board members. An IPS spells out the responsibilities of the parties involved and provides all parties with a mechanism to understand what the investment strategy is, and why it is in place.

What key components should an IPS include?

There are six key elements, starting with clear identification of the assets that will be governed, as well as specific language addressing the roles and responsibilities of all parties involved. This might include defining the role of a board-assigned finance committee, a CFO or an investment committee.

Second, the IPS should identify the primary investment goal(s) of the organization. Third, it should document investment constraints that would influence the investment strategy of the portfolio. For example, understanding how long the assets are to be invested, if there are liquidity needs, understanding tax, legal or regulatory issues tied to the assets and understanding any unique circumstances or preferences that the organization would like taken into consideration are critical.

After outlining investment constraints, an IPS should define the institution’s overall risk and return objectives. With return objectives, institutional investors tend to have specific obligations or spending policies that help determine the required rate of return. Factors such as the expected rate of inflation or estimated fees tied to the management of the assets should also be taken into consideration.

Regarding the identification of risk tolerance, acknowledgment that the portfolio will be exposed to risk is prudent. The IPS should address both the organization’s ability and willingness to take risk. A review of the goal(s), constraints and return objectives of the portfolio can provide a basis for determining the ability of the organization to take risk.

However, conversations with representatives from the organization are needed to determine the willingness to take risk and to identify potential disconnects between the risk/return profile of the organization. If it is requiring a high rate of return but is not willing to assume a comparable level of risk, that needs to be rectified prior to moving forward.

Fifth, the IPS should define the asset allocation policy, defining the portfolio’s broad asset allocation targets and ranges, as well as the targets and ranges of eligible sub-asset classes. This should support the goals, constraints and risk and return objectives documented in the IPS.  Finally, it should address accountability and risk management issues, identify the frequency of the portfolio review process and establish consistent and reliable benchmarks to help evaluate the investment performance of its manager(s). The organization may also specify risk metrics to review. For example, the IPS may require that, during a review, the hired manager provide a review of the allocation mix of the portfolio to ensure compliance with the stated asset allocation policy, or inclusion of manager attribution information.

Who should be involved in creating an IPS?

The organization needs to clearly define the individual or committee/board responsible for overseeing development. If the responsible person does not have the experience or expertise to create an IPS in house, seek out assistance from a financial institution that can help construct the document. Also, because there may be legal considerations tied to an IPS, it could be prudent to include legal counsel.

The hired investment professional will need a thorough understanding of the organization’s circumstances, which will most likely require time and an open dialogue with representatives of the organization to ensure the appropriate language is embedded into the IPS.

What review measures should be in place to ensure the IPS stays relevant?

An IPS should evolve if the objectives and constraints of the organization change over time. Review document no less than annually to ensure relevancy. During reviews, any changes in the organization’s circumstances should be noted and discussed to determine what, if any, adjustments are needed.

Ultimately, the investment strategy identified in the IPS needs to address the changing circumstances of the organization and accommodate its investment goals.

John E. Comello, CFA, is senior vice president and chief investment officer of First Commonwealth Advisors. Reach him at (412) 690-4596 or [email protected]


Yahoo co-founder Jerry Yang resigns; had been under fire

SAN FRANCISCO  ―Yahoo Inc. co-founder Jerry Yang has quit the company he started in 1995, appeasing shareholders who had blasted the Internet pioneer for pursuing an ineffective personal vision and impeding investment deals that could have transformed the struggling company.

Yang’s abrupt departure comes two weeks after Yahoo appointed Scott Thompson its new CEO, with a mandate to return the once-leading Internet portal to the heights it enjoyed in the 1990s.

Wall Street views the exit of “Chief Yahoo” Yang as smoothing the way for a major infusion of cash from private equity, or a deal to sell off much of its 40 percent slice of China’s Alibaba, unlocking value for shareholders.

Shares of Yahoo gained 3 percent in after-hours trade.

“Everyone is going to assume this means a deal is more likely with the Asia counterparts,” Macquarie analyst Ben Schacter said. “The perception among shareholders was Jerry was more focused on trying to rebuild Yahoo than necessarily on maximizing near-term shareholder value.

“It certainly seems things are coming to a head as far as realizing the value of these assets.”

Yang, who is severing all formal ties with the company by resigning all positions including his seat on the board of directors, has come under fire for his handling of company affairs dating back to an aborted sale to Microsoft in 2008.

Yang’s exit comes roughly a month before dissident shareholders can nominate rival directors to Yahoo’s board.