investment policy statement
DESCRIPTION
TRANSCRIPT
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Table of Contents
Executive Summary: .................................................................................................................................. 2
Purpose: .................................................................................................................................................. 2
Client’s Portfolio Profile (Fi360, Inc., 2012): ....................................................................................... 3
Client’s Non-Retirement Asset Allocation Matrix: .............................................................................. 3
Target Breakdown: ................................................................................................................................. 4
Legal Oversight and Policy Fiduciary: ................................................................................................. 4
Legal Oversight: ................................................................................................................................. 4
Policy Fiduciary: ................................................................................................................................. 4
Statement of Objectives ............................................................................................................................ 5
Background: ............................................................................................................................................ 5
The objectives of the portfolio are: ...................................................................................................... 5
Time Horizons: ........................................................................................................................................ 6
Risk Tolerance: ....................................................................................................................................... 6
Performance Expectations: ................................................................................................................... 6
Duties and Responsibilities ....................................................................................................................... 7
Founder and Firm Advisors: ................................................................................................................. 7
Investment Advisor: ............................................................................................................................... 7
Exhibit 2: Asset Class Guidelines ............................................................................................................ 7
Rebalancing of Strategic Allocation (%): ................................................................................................ 8
Implementation ........................................................................................................................................... 9
Exhibit 4: Monitoring – Benchmarks ........................................................................................................ 9
Monitoring – Watch List Criteria for Various Fund Assets ................................................................. 10
Asset’s Expenses (where qualified): ................................................................................................. 10
Asset’s Performance: ........................................................................................................................... 10
Asset’s Risk: .......................................................................................................................................... 10
Asset’s Operations (where qualified): ............................................................................................... 10
Investment Policy Review ....................................................................................................................... 11
Portfolio Rebalance and General Status Update for July 5, 2012: ............................................... 13
Final Assessment and Conclusion: Rebalancing Status Update for August 2, 2012 ................ 16
Appendix – Capital Market Inputs .......................................................................................................... 25
Appendix A: Assumptions, Methodologies, and Financial Models ................................................... 35
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Executive Summary:
Purpose:
This investment portfolio is “client-specific (i.e., high-end individual, consolidation-phase
investor)” and is designed to optimize moderately-aggressive to highly-aggressive investment
strategy a duration of no fewer than 10 years, but no greater than 25 years, for which includes
the 25th year of the portfolio agreement. In order to maximize desired performance ratios, this
agreement (referred to as the Investment Policy Statement) between Mr. Giancarlo Peccadillo
(Client) and Msverde Capital Asset LLC (Capital Asset Managing Entity) is prescribe exclusively
of global diversifiable assets comprised and categorized in the following general assets
allocation classes: U.S. Cash and Cash Equivalents, U.S. and Foreign Government and U.S.
and Foreign Corporate Bonds, U.S and Foreign Mutual and Exchanged-Traded Funds, U.S. and
Foreign Preferred and Common Stocks, U.S. and Foreign Real Estate, and U.S. and Foreign
Commodities. The short-term, primary objective for said client is to continue current
accumulation of capital investment under the existing portfolio plan with slow to medium rapid
integration and phase in to Msverde Capital Asset’s proposed Strategic III Non-Retirement
Target plan. The long-term secondary objective is to be substantially financially viable enough to
move smoothly from consolidation phase to spending phase of the proposed plan, with most, if
not all, personal expenditures - including discretionary - during the entire course of the client’s
retirement phase, remunerated by interest-bearing, or dividend-bearing, fixed income. All
underlying capital assets (referred to here as “principal”) will continue under the proposed
Strategic III Non-Retirement plan with the sole purpose of maximizing overall investment
portfolio value for pass-through inheritance purposes. Interest/dividends generated by these
underlying principal assets will be extracted and distributed into alternative investment
instruments (e.g., bond funds, ETF, REITS, short-term MMAs, Convertible Roth IRAs, etc.) in
full compliance and satisfaction of Mr. Peccadillo and his preferred and accepted list of
approved custodians addendum to this agreement.
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Client’s Portfolio Profile (Fi360, Inc., 2012):
Client Name: Giancarlo Peccadillo Client Type: Individual - Executive Client Subtype: Private Investor, Non-Retiree: Age 34 Fiduciary Standard of Care: Registered Investment Advisers (RIA), under the auspices of
Investment Advisers Act (IAA) of 1940 and the U.S Securities Exchange Commission (SEC)
and the International Organization of Securities Commissions (IOSC)
State of Domicile: CA Tax Id: N/A Current Assets: $1,000,000 Modeled Annualized Return: 8.5%; Expected 10-Year Cumulative Range: 50% – 130% 1-Yr Loss Limit (Worst case scenario): -2.7% "Safe Harbor" Compliance Options: U.S. – EU Safe Harbor, U.S. – Switzerland Safe Harbor,
and the Asia Pacific Economic Cooperation Privacy programs, all under the guidance of the
U.S. Department of Commerce (DOC) and the Federal Trade Commission (FTC)
Client’s Non-Retirement Asset Allocation Matrix:
Exhibit 1: Asset Allocation Matrix Non-Retirement Goals Matrix
Your Time Horizon
3-5 Years 6-10 Years 11+ Years
Yo
ur
Ris
k
To
lera
nce
Higher Strategy 2 20% cash 40% bonds
40% stocks
Strategy 3 10% cash 30% bonds
60% stocks
Strategy 5 100% stocks
Moderate Strategy 1 30% cash 50% bonds
20% stocks
Strategy 2 20% cash 40% bonds
40% stocks
Strategy 4 20% bonds 80% stocks
Lower All Cash 100% cash
Strategy 1 30% cash 50% bonds
20% stocks
Strategy 3 10% cash 30% bonds 60%
stocks
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Target Breakdown:
Non-Retirement Target Spectrum (Functionally Aggressive): Strategic III 6 to 10-
Year Plan
General Asset Allocation Composition Matrix (Non-Subdivided): Cash = 10%;
Bonds = 30%; Stocks = 60%
Legal Oversight and Policy Fiduciary:
Legal Oversight:
“This Investment Policy Statement should be reviewed by an attorney knowledgeable in this
specific area of the law. Any change to this policy should be communicated in writing and on a
timely basis to all interested parties. If any term or condition of this Investment Policy Statement
conflicts with any trust and/or plan document, the document shall control, as long as such term
or condition is consistent with the law.”
Policy Fiduciary:
1. Written language in the IPS should clearly state and clarify the client and advisor’s
guidelines, goals and objectives, expectations, and dispositions regarding all of the portfolio
assets.
2. Reasonable and consistent open communication between client and all parties should be
strongly engaged in all investment decisions.
3. A continuum of performance analyses should sustain and subsist, ensuring proper portfolio
rebalancing at appropriate timing to maximize short- and long-run returns.
4. Full compliance with and adherence to all applicable laws and governing rules and
regulations instituted by various local, state, federal, and international ruling parties that
could adversely or favorably influence portfolio performance.
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Statement of Objectives Background:
Msverde Capital Assets (aka, “MCA”) was established on September 12, 2001. Since
then, the firm has far exceeded returns on investments which has outpaced most in its industry
and also has outperformed effectively well leading global indices. Currently, with total
investment capitalization held at $36 billion, the firm has enjoyed a five-year cumulative average
anywhere between 85% - 110% return on investments for its clients. Even in a down market,
reinvestment proceeds from poorly performing assets have delivered one-year PORR
(profitability on reinvestment replacement) returns of 11%, which approaches the historical 12-
14 percent annual rates of return overall portfolio performance during the past few recessive
years. The firm is confident, as will be clearly outlined and describe in this IPS, that upward
market trends are steadily accelerating and that future market conditions should begin to regain
virility.
The primary mission objective for this personal investor portfolio is long-term growth.
The construction of this IPS was designed by the founder and his team of subcommittees
encompassing a wide range strategic investment policies for which all decision makers deem as
the decisive and appropriate investment process. This structural process which is consistent
with all other forms of investment portfolios generated by the firm provides various asset classes
under different tactical management options for the sole purpose of maximizing diversification to
attain optimal peak portfolio performance that is in line with expected portfolio risk and return.
The objectives of the portfolio are:
To effectively manage the purchasing power of the investor’s current assets and all of his or
her future contributions congruently with inflation.
To sustain the highest degree of programs and services which can only be achieved through
the reinvestment of adequate portfolio total return and new contributions that counteract cost
hikes and extension of existing program.
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Under reasonable and acceptable levels of risk, maximize portfolio return.
Ensure the control of effective and efficient asset allocation predicated on overall IPS total
return initiative that corresponds in full concurrence explicitly with an adjustable contribution
schedule that remains potentially susceptible for realized positive returns.
Time Horizons:
The investment guidelines are based upon an investment horizon of greater than five
years. The portfolio's strategic asset allocation is also based on this long-term perspective.
Short-term liquidity requirements are anticipated to be highly relevant and should be covered by
partial proceeds from the sale of underperforming assets during asset allocation rebalancing
activity (Fi360, Inc., 2012).
Risk Tolerance:
Msverde Capital takes into account that some risk must be assumed to attain preferred
rate of return for the Portfolio. Therefore, to effectively respond to this risk assumption
associated with uncertainty and sudden negative fluctuations within any given market, we have
constructed a risk-tolerance methodology to assure proper counteractive measures are in place
to mitigate both short-term and long-term losses. Based on current preliminary analysis of the
suggested assets proposed, we calculated that a 1-yr. aggregate loss on returns for the
Portfolio should be held at -2.7% (Fi360, Inc., 2012).
Performance Expectations:
In accordance to our calculations which assumes and falls under our strict risk tolerance
methodology, the desired investment objective is to achieve an annualized long-term rate of
return for the Portfolio that is at least 7.59%. The target rate of return for the Portfolio has been
based upon the assumption that future real returns will approximate the long-term rates of return
experienced for each asset class in the IPS. In reiteration, we recognize that market
performance varies and a 7.59% expected annual rate of return which assumes uncertainty
related to business risk, geopolitical risk, risk associated with acts of God and human events,
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risk pertaining to fiscal and monetary policy adjustments, and precedent of economic anomalies
may not generate returns consistent with our targeted goal of greater than 7.59%. As illustrated
in Exhibit 4 these qualifying benchmarks will serve as complementary performance measures to
gauge and assess individual assets and overall Portfolio performance on a quarterly basis over
time (Fi360, Inc., 2012).
Duties and Responsibilities Founder and Firm Advisors: As fiduciaries under the portfolio, the primary responsibilities of the founder and advisors are: 1. Prepare and maintain this investment policy statement
2. Prudently diversify the portfolio’s assets to meet an agreed upon risk/return profile.
3. Prudently select investment options
4. Control and account for all investment, record keeping and administrative expenses
associated with the portfolio
5. Monitor and supervise all service vendors and investment options
6. Avoid prohibited transactions and conflicts of interest
Investment Advisor:
The Investment Advisor serves as an objective, third-party professional retained to assist
the Mr. Giancarlo Peccadillo, the “Client,” in managing the overall investment process. The
Advisor, a representative under management for Msverde Capital Assets, the “Employer,” is
obligated to carry out the responsibilities and guidelines prescribed in in the previous section in
accordance to the Asset Class Guideline matrix illustrated below (Fi360, Inc., 2012).
Exhibit 2: Asset Class Guidelines
Cash and Cash Equivalents
U.S. and Foreign Stocks
U.S. and Foreign Bonds
U.S. and Foreign Real
Estate
U.S. and Foreign Commodities/Futures
Money Market:
Large Cap Individual
Mid Cap Individual
Small Cap
Government Notes: Intermediate-Term:
Government
Real Estate Individual
Precious Metals and Minerals
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Individual Treasuries: Long-Term:
Certificates of Deposits:
Large Cap Preferred
Mid Cap Preferred
Small Cap Preferred
Corporate Investment-Grade: Intermediate:
Corporate Investment-Grade: Long-Term:
REITS
Oil and Natural Gas
U.S. Treasury Bills (T-Bills) Funds:
Large Cap ETF
Mid Cap ETF
Small Cap ETF
Exchanged-Traded Funds:
Mutual Funds:
Rebalancing of Strategic Allocation (%):
The percentage allocation to each peer group may vary depending upon market
conditions. Please reference the allocation table (Exhibit 3) below for the lower and upper limits
for each peer group. When necessary and/or available, cash inflows/outflows will be deployed in
a manner consistent with the strategic asset allocation and allocation ranges of the portfolio. If
there are no cash flows, the allocation of the portfolio will be reviewed quarterly. If the
committee judges cash flows to be insufficient to bring the portfolio within the target allocation
ranges, the committee shall decide whether to effect transactions to bring the allocation of
portfolio assets within the arbitrary threshold ranges (Fi360, Inc., 2012).
Exhibit 3: Strategic Allocation Rebalancing Matrix Peer Group – Stocks Strategic Allocation Lower Limit Upper Limit
US Large Cap (Individual) 9.0% 8.0% 12.0% US Mid Cap (Individual) 3.5% 2.5% 5.5% US Small Cap (Individual) 1.5% 1.0% 2.0% Foreign Large Cap (Individual) 2.0% 1.5% 2.5% Foreign Mid/Small Cap (Individual)
0.5% 0.5% 1.5%
Preferred Stock (Individual) 7.0% 6.0% 9.0% Exchanged-Traded Funds 16.5% 16.0% 19.5% Mutual Funds 10.0% 8.0% 12.0%
Peer Group – Bonds Strategic Allocation Lower Limit Upper Limit US Government Long-Term Bond
1.0% 0.5% 1.5%
US Government Intermediate Bond
1.0% 0.5% 1.5%
US Government Short-Term 5.0% 4.0% 8.0% Foreign G-Intermediate-Term Bond
0.5% 0.0% 1.5%
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Foreign G-Short-Term Bond 0.5% 0.0% 1.5% US Corporate Long-Term Bond 1.0% 0.5% 1.5% US Corporate Intermediate Bond
1.0% 0.5% 1.5%
US Corporate Short-Term 4.0% 3.5% 7.5% Foreign C-Intermediate-Term Bond
0.5% 0.0% 1.0%
Foreign C-Short-Term Bond 0.5% 0.0% 1.0% Peer Group – Real Estate Strategic Allocation Lower Limit Upper Limit
US Real Estate (Residential/Commercial)
3.0% 1.5% 6.5%
International Real Estate (Residential/Commercial)
1.0% 0.5% 1.5%
US Exchanged-Traded Funds (Residential/Commercial)
3.5% 3.0% 7.0%
International Exchanged-Traded Funds (Residential/Commercial)
1.5% 0.5% 3.0%
US REITS 4.5% 4.0% 8.0% Foreign REITS 1.5% 1.0% 2.0%
Peer Group – Commodities Strategic Allocation Lower Limit Upper Limit Precious Metals and Minerals 4.0% 0.0% 8.0% Oil and Gas 4.0% 2.5% 6.5%
Peer Group – Cash and Cash Equivalents
Strategic Allocation Lower Limit Upper Limit
MMA, CD, and Cash 12% 10% 14%
Implementation
Management of each portfolio asset should be conducted by a (1) registered portfolio
adviser, (2) preferred banking institution, (3) preselect, corporate-approved insurance company,
and (4) registered investment company.
Exhibit 4: Monitoring – Benchmarks
Peer Group – Stocks Benchmark Peer Group – Real Estate Benchmark
Common Large Cap (Individual) Common Mid Cap (Individual) Common Small Cap (Individual) Preferred Stock (Individual) Exchanged-Traded Funds
NYSE, NASDAQ, S&P 500, Nikkei, DAX, CAC,
Real Estate (Individual) REITS
US Dow Jones Real Estate, FTSE EPRA/NAREIT, Guggenheim Real Estate
Peer Group – Bonds Benchmark Peer Group – Commodities Benchmark
Long-Term Bond Intermediate Bond Short-Term
Barclays Capital Aggregate Bond, Merrill Lynch Domestic Master, Salomon Smith Barney World Government Bonds,
Gold Silver Oil and Gas
Dow Jones-UBS Commodity, World Bank Commodity, Goldman Sachs Commodity, S & P Commodity, Rogers International
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J.P. Morgan Emerging Markets Bond
Commodity, AMEX
Monitoring – Watch List Criteria for Various Fund Assets
Financial advisor’s termination decisions for underperforming investment options cannot
be made exclusively by standardized formulas. All fund options listed on the Portfolio’s “Watch
List” in Exhibit 6 must be periodically analyzed on a quarterly cycle to evaluate current returns
as they are compared and contrasted against both intermediate- and long-term historical
returns. Msverde Capital recognizes that unforeseen short-lived market anomalies may occur
and significantly impact a fund performance, and, therefore, these events are taken into
consideration during the Watch List evaluation process. The following 4 criteria are critical
components used during the termination evaluation process (Fi360, Inc., 2012):
Asset’s Expenses (where qualified): Portfolio Mean Expense Ratio - Active Management (qualifying mutual funds): Not to exceed 1.025% Asset’s Performance: 10 Year Average Return (@ 10% growth rate): 48.49%
5 Year Average Return (@ 7% growth rate): 19.64%
3 Year Average Return (@ 7% growth rate): 17.15%
1-Year Average Negative Threshold Limit: -2.7%
Asset’s Risk: Standard Deviation: 5.60% Asset’s Operations (where qualified): Inception Date (mutual funds): No fewer than 10 years in existence Manager Tenure (mutual funds): At least 7 years
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Investment Policy Review
Current Status: Period 5/22/2012 through to 8/02/2012
Graph 1: Portfolio Performance Overview Snapshot, As of August 3, 2012
Graph 2: First Quarter Portfolio Overall Performance Results against Selected Indices:
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
5/2
2/2
01
2
5/2
9/2
01
2
6/5
/20
12
6/1
2/2
01
2
6/1
9/2
01
2
6/2
6/2
01
2
7/3
/20
12
7/1
0/2
01
2
7/1
7/2
01
2
7/2
4/2
01
2
7/3
1/2
01
2% Y
ield
Msverde Capital Assets vs. Selected Indices: Period 5/22/2012 through 8/02/2012
Msverde Capital-HPY
S&P 500-HPY
DJIA-HPY
DASDAQ-HPY
Nikkei 225-HPY
DAX-HPY
Russell 2000-HPY
FTSE 100-HPY
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Graph 3: Msverde Stock-Trak Portfolio Performance Overview: May 1 to June 25, 2012 (Stock-Trak, Inc., 2012)
The previous chart shows MCA’s performance for the period indicated has correlated, in
large part, systematically with price movements from a few of the world’s leading indicators.
Because of this parallel market efficiency between the client’s portfolio and those indexes, it will
enable the client’s primary adviser to increase active management activity for strategic
diversification purposes, ultimately mitigating overall portfolio risk. As of August 3, the projected
annualized average return for the portfolio is 14.23%. The current standard deviation has been
estimated at 5.60%. Assuming an annual risk-free rate (RFR) of 2.75%, utilizing the Sharpe
Ratio model (defined as S = Portfolio Average Return minus RFR divided by Portfolio Standard
Deviation) which measures average returns per unit of risk. The higher the ratio, or multiple,
means the greater probability that the portfolio is properly diversified and thus has eliminated
unsystematic risk that is associated with those factors involved with each individual asset. After
calculation was executed, the current Sharpe Ratio is 2.01, which is favorable.
To explain and illustrate the combinative effects of risky assets to risk-free assets (e.g.,
Treasuries, Municipals, etc.), the adviser calculated the estimated return for the portfolio by
adding the product of the weight of the risk-free asset and the product of expected return of the
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portfolio and 1 minus the weight of the risk-free asset. For the period ending July 5, the E (R
port) was estimated at 3.94%, while the E (R port) for the period ending August 3 was estimated at
minus 10% at 3.84%. The decline in return can be attributed to both underperforming large cap
common stock and instability in commodity prices, specifically precious metals, which saw a
depreciable decrease in value of the assets.
This concludes the opening portion of this status report overview for the current
positioning of the investment portfolio. The information provided in subsequent pages will first
outline the various components in the investment policy statement (IPS) between the client and
Msverde Capital Asset and describes and explains processes and procedures taken to
maximize investor’s return through active management and rebalancing techniques. (It should
be noted that although improvements in overall portfolio performance can be enhanced by
active management, due to the unpredictable nature of the global marketplace and
corresponding risk factors caused by abnormal or unanticipated adverse events, average
annual returns might not fulfill desired expectation.)
The report is divided into two segments (or periods): The first extending from May 22,
2012 to July 5, 2012 – Portfolio Rebalancing and General Status Update - and the second
beginning on July 6, 2012 and ending on August 3, 2012 – Final Assessment and Conclusion:
Rebalancing Status Update. All statistical analyses were conducted using data and information
from May 22 to August 3.
Portfolio Rebalance and General Status Update for July 5, 2012:
Project Phase Objective: The primary purpose of this exercise is to execute a thorough mid-
term assessment of the candidate’s investment portfolio to analyze overall performance and to
determine if any part of the investment portfolio fails to meet satisfactorily all criteria and
requirements stipulated in the investment portfolio original policy statement. The results in this
analysis report only covered various samplings of the overall investment portfolio, due to limited
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data key to performing proper statistical and analytical work used in the report. (Please
observe and review appendix for supporting materials.)
The specific assets used in the samplings that were used to provide a non-
comprehensive yet functional progress report are individual U.S. and foreign common stocks,
U.S. and foreign preferred stocks, and real estate stocks. Assets performances (i.e., % annual
rate of returns) were compared against selected benchmark indices (on a percentage points
based), such as the NYSE, NASDAQ, S&P 500, Nikkei, Deutsche Boerse (DAX), and London
Stock Exchange (LSE). In the aforementioned graph (Graph 3) of this report illustrates
Msverde’s overall portfolio performance during the firsts segment from a period spanning May 1,
2012 to June 25, 2012. Subsequent graphs (Graphs 2 and 3) in the appendix demonstrate a
few of the leading indexes’ overall performances for the same period, with NYSE used as the
base index.
First preliminary assessment of the report in the early stages of the asset selection
process and initial performance phase did see some favorable appreciable outcomes in the
candidate’s portfolio, which based most decision-making on a priori experience, visual trending
based on various analyst graphs and reports, and various forecast assumptions such as change
in future political climates, current momentum economic indicators in consumer spending
behavior, known historical indicators that typically are progenitors of improvements in the
economy such as an uptick in average home prices and commercial real estate, decline in gold
and oil prices, strengthening U.S currency rates against developed and developing economies,
an appreciable shift in interest rates, and a few others. These risk multi-factors served as the
basis for early portfolio selections.
The main sample that will be discussed in this report to give one an idea what
procedures are taken into account to evaluate each peer group of the portfolio and to determine
where, if any, asset re-allocation or rebalancing will be required to maximize overall
performance through those adjustments will focus on the performance of preferred stocks. The
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five stocks used for the data and statistical analyzes were BBC Capital II 8 1/2 (BBXT) -
NASDAQ: Non-Convertible, Taylor Capital GRP 9 (TAYCP) - NASDAQ: Non-Convertible, ING
GROEP 7 3/8% PE (IDG) - NYSE: N/A, Popular Cap TR I 6.1 (BPOPN) - NASDAQ GS: Non-
Convertible, and Deutsche Bank Cap FDX 7.35 (DCE) - NYSE: Non-Convertible.
Although the major of the stocks have performed well in this peer group, two specific
stocks stood out as underperforming assets – indicated by listed symbol BBXT and TAYCP -
during the period, which can be explained by the negative correlation coefficients described in
the multiple regression chart (see Appendix: Figure No. 1). 81.18% of the variability in NYSE
index volume is explained by the variations in the stock prices for the preferred stocks. This
statistical relationship is substantial enough to proceed to step two of the rebalancing evaluation
phase for preferred stocks to determine which ones would be considered for sale in order to cut
losses and use the proceeds to investment in more favorable assets.
After graphing a regression scatter line fit plot (see Appendix: Figures 3-7), the results
clearly show both a neutral and negative linear line relationship against the benchmark index
(NYSE) with the two assets in question. Furthermore, when one view the correlation coefficient
between the assets themselves (see Appendix: Figure No. 2) and compare the strongest
relationships with those reflected in the scatter plots, there little surprise that preferred stocks
IDG and DCE not only have a significantly strong positive correlation coefficient relationship of
0.604869 (a strong positive correlation coefficient of 0.759098 occurs between BPOPN and
IDG) but each closing price line fit, in addition to BPOPN’s, slope is positive and moves sharply
upward. It is recommended that both BBXT and TAYCP preferred stock should be sold.
For the purpose of this non-comprehensive report, it is important to state that the
sampling used in this report for the period May 22, 2012 through to July 1, 2012 is typical of the
general financial techniques used for the investment portfolio overall comprehensive and
complete data and statistical analysis. Please that this report includes spreadsheet attachments
to supplement the information disclosed in the report.
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Final Assessment and Conclusion: Rebalancing Status Update for August 2, 2012
For the past three months, beginning on May 6, 2012 and ending on August 2, 2012, the
overall performance of the investment portfolio containing 132 assets performed reasonably well
in which current economic conditions are less than favorable for investors coupled with marginal
activity that is commonly associated with lower peak periods in summer months.
As of the close of business on August 2, overall return on the investment portfolio was
modestly less than 3% (see Graph 1 and Graph 2 Index Comparison) for the three-month
period, which would be annualized to 12%, if all things remain constant and prudent allocation
readjustment is made. Yet, however, when slow-growth market activity is considered and all
risk factors directly and indirectly affecting and impacting global economies, the portfolio has
generated a significant Sharpe ratio, which is indicated of the portfolio’s full diversification and
its ability to spread risk associated with underperforming (% returns) assets equitably
throughout the portfolio in order to optimize overall performance in returns. Once further
rebalancing occurs and underperforming assets are eliminated, following thorough and
complete analysis, the client should recognize a sharp appreciable climb in overall performance
and better-than-industry returns.
Currently, after reevaluating the results of underperforming assets – which are listed in
the chart below (Exhibit 6) – and executing the company’s standard pass/fail asset retainment
procedure, the following decisions were made:
Exhibit 6: Underperforming Assets Chart Investment Portfolio Underperforming Assets
U.S. Individual Stocks –
Large Cap
CMG GD SYK DBK UPS
U.S. Individual
Stocks – Mid Cap
DAL BCR ABM IRM LLL
U.S. Individual
FXCM IBKC ISH LCC
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Stocks – Small Cap
Real Estate PSB WRE
Commodities DVN PTR
1. Including the presence of abnormal negative returns during the period of interest, all of the
underperforming assets did not exceed the portfolio’s annualized negative return threshold
of -2.7%. Therefore, as a result, all underperforming assets will be retained and held.
2. Both Chipotle (CMG) and Deutsche Bank (DBK) were the only two assets to approach the
threshold the closest of the assets at -1.75% and -1.175%, respectively (see Graph 4). It is
recommended by MCA’s lead adviser that they should be categorized as “pending
concerns” in perpetuity until performance either improves or loss is sustained for the full
duration of the year. If the latter, the assets will be sold and eliminated from the portfolio
and all subsequent proceeds from the sale will be strategically used to replace those assets
in the same class, unless abnormal circumstances prevails which will command alternative
usage of allotted proceeds.
3. As is standard procedure for all assets subject to a watch-list status, to ensure the integrity
and optimal maintenance of the client’s portfolio is upheld to the highest degree, all
underperforming assets will carefully be monitored and routinely evaluated. The following
series of graphs provide an illustration of the performance yield for each major asset class
for the time period stretching from May 9 to August 3.
4. If it is determine that an underperforming asset(s) is viewed to have forward-looking intrinsic
value through observation and evaluation of favorable base-line core fundamentals (i.e., BV,
ROA, Inventory Turnover, Receivable Turnover, Revenue-to-Employee, Acid Test, Current
Ratio, Operating and Profit Margins, etc.), then MCA prescribes the incorporation of hedge
utilization through multiple put-call parity operations to capture potential profits from
declining prices that could offset poor performing assets.
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The two most volatile asset classes were real estate and commodities (see Graphs 7
and 8). To avoid long-term losses, it is recommended that both classes are observed closely
and that a first-degree contingency plan be drafted and attached to the IPS as an addendum.
Aside for momentary price fluctuations in the earlier stages of the period for underperforming
assets, U.S. Large Cap, Mid Cap, and Small Cap stock experienced very minor average price
swings, which is reflected in Graphs 4, 5, and 6. But as mentioned before, Graphs 7 and 8 for
real estate and commodities, respectively, display huge signs of volatility, demonstrated by wide
price change intervals for the same period.
Graph 4: Underperforming Assets – Large Cap
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Graph 5: Underperforming Assets – Mid Cap
Graph 6: Underperforming Assets – Small Cap
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Graph 7: Underperforming Assets – Real Estate
Graph 8: Underperforming Assets – Commodities
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It should not come to any surprise that when one observes the correlation coefficient
table below, it becomes obvious that many of the higher correlations (for the purpose of this
report, r ij > 60%) are noticeable mainly between assets from the real estate and commodity
classes. For example, according to the chart below (Figure 1), DVN (Devon Energy) and PTR
(PetroChina) and PSB (PS Business Parks) and WRE (Washington REIT) and not only strongly
correlated among themselves but with other underperforming assets whose annualized returns
approaches the IPS’s lower return limit of -2.7%. These among other trends, if adequately
monitored, will help preempt both possible short-term and long-term disruption in overall
performance, as rebalancing becomes pivotal in the eradication of poorly performing assets.
Figure 1: Correlation Coefficient for Underperforming Assets
22
Graph 9: Underperforming Assets – Commodities
Closing Comments and Remarks:
In reiteration, all things being considered, the portfolio has performed well and should
reveal substantial increases in higher limit returns, as market corrections continues to improve
in various global economies. There are already noticeable signs from recent increases in
capital expenditures by several Fortune 500 companies, as confidence begins to heighten and
new projects begin to emerge. Since a majority of the larger enterprises either serve or sponsor
smaller business entities, the reciprocating effects of these actions will definitely improve market
conditions and investors should begin seeing positive residual ramification from this and other
such-similar economic drivers. Henceforth, forward momentum generated by an acceleration in
commercial and consumer spending should build a better platform for profitability and higher
rates of return. Once these events engage, MCA advisers are prepared and position to
23
implement the phase II strategic rebalancing plan to better respond to aggressive growth and
capitalize immediately on the opportunities that belies a healthier marketplace. MCA is
committed and dedicated in offering premium service for its clients, because they deserve it.
Hereby, MCA affirms that the information contained within this report has been validated
and approved by MCA executive committee and lead adviser, in accordance to the company’s
bylaws and laws of local, state, and federal governing bodies. To the best of knowledge, all
information pertinent to the investor’s right for full disclosure and for which is stipulated within
this investment policy statement (IPS) and performance report has been clearly stated,
communicated, and explained to the investor, including but not limited to auxiliary functions and
corresponding costs such as standard management and maintenance fees, commissions, etc.
MCA is obligated to provide premium investment service and to use its expertise to develop,
design, and implement various strategic methodologies in its analysis to assuage or eliminate
risk entirely through countermeasure such diversification, hedging, etc., that will maximize
profitability and overall portfolio performance. Lastly, it should also be duly noted that the
investor nor its adviser may or may not be able to anticipate or predict uncertainty and those
events which may or may not adversely affect overall performance of the IPS and should take
into account this risk assumption during the length of the contract.
Prepared by: Signature
Msverde Capital Assets, LLP, MCA®
MCA Advisors 10 Coventry Place Suite 2001 Fairfax CA 94930 Name Position Signature M. Scott Green, President
24
Reference
Dow Jones & Company, Inc. (2012). Wall Street Journal: Marketdata. Retrieved May 26, 2012,
from http://online.wsj.com/mdc/public/page/marketsdata
Dow Jones & Company, Inc. (2012). Wall Street Journal: Marketdata. Retrieved May 26, 2012,
from http://online.wsj.com/mdc/public/page/marketsdata
Fi360, Inc. (2012). Home: Resources. Retrieved May 26, 2012, from
http://www.fi360.com/main/contact.jsp
MarketWatch, Inc. (2012). Research. Retrieved May 26, 2012, from http://www.marketwatch.com/
Mergent.com (2012). Mergent Online Search. Retrieved May 26, 2012, from http://0-
online.mergent.com.library.ggu.edu
MorningStar, Inc. (2012). Investment Research Center. Retrieved on May 26, 2012, from
http://0-library.morningstar.com.library.ggu.edu/
NASDAQ, Inc. (2012). NASDAQ OMX: Quotes and Research. Retrieved May 26, 2012, from
http://www.nasdaq.com/
OneSource Information Services, Inc. (2012). OneSource.com: Company Summary Report.
Retrieved May 26, 2012, from http://0-online.onesource.com.library.ggu.edu
ProQuest, LLC. (2012). ProQuest: Statistical Datasets. Retrieved May 26, 2012, from
http://www.lnstatistical.com/Main.jsp;jsessionid
Standard & Poor’s (2012). S&P Capital IQ: NetAdvantage. Retrieved May 26, 2012, from
http://0-www.netadvantage.standardandpoors.com.library.ggu.edu
Standard & Poor’s Financial Services LLC. (2012). Home: Quotes. Retrieved May 26, 2012,
from http://www.standardandpoors.com/home/en/us
Stock-Trak, Inc. (2008-2012). Stock-Track: My Portfolio. Retrieved May 22, 2012, from
http://www.stocktrak.com/private/account/portfolio.aspx
Yahoo, Inc. (2012). Yahoo Finance. Retrieved May 26, 2012, from http://finance.yahoo.com/
25
Appendix – Capital Market Inputs
Investment Portfolio Preferred Stocks Statistical Analysis: Multiple Regression
Figure No. 1:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.81179897
R Square 0.659017568
Adjusted R Square
0.600227494
Standard Error 183.7415896
Observations 35
ANOVA
df SS MS F Significance F
Regression 5 1892247 378449.5 11.20967 4.43248E-06
Residual 29 979068.2 33760.97
Total 34 2871316
Coefficients Standard Error
t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
Intercept 1970.565681 10759.78 0.183142 0.855961 -20035.6613 23976.79 -20035.7 23976.79
BBXT Closing Price
209.4672066 300.513 0.697032 0.491333 -405.150788 824.0852 -405.151 824.0852
TAYCP Closing Price
-375.4413719 163.1446 -2.30128 0.028755 -709.1096 -41.7731 -709.11 -41.7731
IDG Closing Price 216.7847172 73.4962 2.949605 0.006234 66.46811488 367.1013 66.46811 367.1013
BPOPN Closing Price
476.467875 194.6116 2.448301 0.020639 78.44244899 874.4933 78.44245 874.4933
DCE Closing Price
-81.52681605 102.5406 -0.79507 0.433033 -291.245887 128.1923 -291.246 128.1923
Figure No. 2:
Preferred Stock Correlation
BBXT Closing Price TAYCP Closing Price
IDG Closing Price
BPOPN Closing Price
DCE Closing Price
BBXT Closing Price 1 TAYCP Closing Price
0.205774147 1
IDG Closing Price -0.181410973 0.385325 1 BPOPN Closing Price
-0.251875729 0.250434 0.759098 1
DCE Closing Price -0.062307723 0.353889 0.604869 0.399495 1
26
Figure No. 3:
Figure No. 4:
y = -463.74x + 27834 R² = 0.0328
y = -463.74x + 27834 R² = 0.0498
12000
12200
12400
12600
12800
13000
13200
13400
32.4 32.5 32.6 32.7 32.8 32.9 33 33.1
Do
w J
on
es
Ind
ust
rial
Ave
rage
(US)
Clo
se $
BBXT Closing Price
BBXT Closing Price Line Fit Plot
Dow Jones Industrial Average(US) Close $
Predicted Dow Jones IndustrialAverage(US) Close $
Linear (Dow Jones Industrial Average(US)Close $)
Linear (Predicted Dow Jones IndustrialAverage(US) Close $)
y = 25.316x + 11999 R² = 0.0004
y = 25.316x + 11999 R² = 0.0006
12000
12200
12400
12600
12800
13000
13200
13400
25 25.2 25.4 25.6 25.8 26 26.2
Do
w J
on
es
Ind
ust
rial
Ave
rage
(US)
Clo
se $
TAYCP Closing Price
TAYCP Closing Price Line Fit Plot
Dow Jones Industrial Average(US) Close $
Predicted Dow Jones IndustrialAverage(US) Close $
Linear (Dow Jones Industrial Average(US)Close $)
Linear (Predicted Dow Jones IndustrialAverage(US) Close $)
27
Figure No. 5:
Figure No. 6:
Figure No. 7:
y = 262.98x + 6531.4 R² = 0.4993
y = 262.98x + 6531.4 R² = 0.7577
12000
12200
12400
12600
12800
13000
13200
13400
20.5 21 21.5 22 22.5 23 23.5 24 24.5
Do
w J
on
es
Ind
ust
rial
Ave
rage
(US)
Clo
se $
IDG Closing Price
IDG Closing Price Line Fit Plot
Dow Jones Industrial Average(US) Close $
Predicted Dow Jones IndustrialAverage(US) Close $
Linear (Dow Jones Industrial Average(US)Close $)
Linear (Predicted Dow Jones IndustrialAverage(US) Close $)
y = 825.73x - 5199.6 R² = 0.5218
y = 825.73x - 5199.6 R² = 0.7918
12000
12200
12400
12600
12800
13000
13200
13400
21 21.2 21.4 21.6 21.8 22 22.2
Do
w J
on
es
Ind
ust
rial
Ave
rage
(US)
Clo
se
$
BPOPN Closing Price
BPOPN Closing Price Line Fit Plot
Dow Jones Industrial Average(US) Close $
Predicted Dow Jones IndustrialAverage(US) Close $
Linear (Dow Jones Industrial Average(US)Close $)
Linear (Predicted Dow Jones IndustrialAverage(US) Close $)
y = 222.87x + 7103.1 R² = 0.091
y = 222.87x + 7103.1 R² = 0.1381
12000
12200
12400
12600
12800
13000
13200
13400
23 23.5 24 24.5 25 25.5
Do
w J
on
es
Ind
ust
rial
Ave
rage
(US)
Clo
se $
DCE Closing Price
DCE Closing Price Line Fit Plot
Dow Jones Industrial Average(US) Close $
Predicted Dow Jones IndustrialAverage(US) Close $
Linear (Dow Jones Industrial Average(US)Close $)
Linear (Predicted Dow Jones IndustrialAverage(US) Close $)
28
Exhibit No. 1:
Portfolio Asset Allocation Classification: July 5, 2012
Asset Class Average Returns
(%), As of July 05, 2012
Asset Class Standard
Deviation (%), As of July 5, 2012
Standard Deviation from
Asset Class AM - Upper Limit
Standard Deviation from
Asset Class AM - Lower Limit
Common Stocks: US Large Cap (Individual):
4.78% 7.13% 11.90% -2.35%
Common Stock: US Mid Cap (Individual):
4.14% 5.59% 9.74% -1.45%
Common Stock: US Small Cap (Individual):
4.35% 6.32% 10.68% -1.97%
Common Stocks (Individual): Foreign
6.73% 11.49% 18.22% -4.76%
U.S. and Foreign Exchange-Traded Funds (ETFs):
5.92% 0.98% 6.90% 4.94%
U.S. and Foreign Preferred Stocks: 2.85% 2.87% 5.73% -0.02%
U.S. and Foreign Mutual Funds: 2.40% 1.84% 4.24% 0.55%
U.S. and Foreign Government Bonds:
0.22% 1.81% 2.03% -1.59%
U.S. and Foreign Corporate Bonds: 0.56% 2.64% 3.20% -2.08%
U.S. and Foreign Real Estate: 7.99% 8.99% 16.99% -1.00%
U.S. and Foreign Commodities: 0.68% 7.39% 8.07% -6.72%
Portfolio Average Returns (%) - as of July 05, 2012:
3.69%
Standard Deviation Figure (In Green) is an AM of All Asset Classes:
5.19% 8.88% -1.50%
Graph 1:
29
Graph 2: DJIA versus S&P 500 Performance Overview: May 1 to June 25, 2012
30
Graph 3: DJIA versus NASDAQ Performance Overview: May 1 to June 25, 2012
31
Graph 4: Asset Class Standard Deviation
Graph 5: Asset Class Segmentation Performance Report
32
Exhibit No. 2:
Portfolio Asset Allocation
Classification: August 3, 2012
August 3: Asset Class Average Returns (%)
Asset Class Standard Deviation (%), As of
August 3, 2012
Asset Class Standard Deviation (%), As of
August 3, 2012 - Upper Limit
Asset Class Standard Deviation (%), As of August 3, 2012 - Lower Limit
Common Stocks: US Large Cap (Individual):
5.90% 7.13% 13.02% -1.23%
Common Stock: US Mid Cap (Individual):
4.52% 9.77% 14.29% -5.25%
Common Stock: US Small Cap (Individual):
-2.42% 9.64% 7.23% -12.06%
Common Stocks (Individual): Foreign
7.57% 9.88% 17.44% -2.31%
U.S. and Foreign Exchange-Traded Funds
(ETFs): 7.93% 1.62% 9.55% 6.31%
U.S. and Foreign Preferred Stocks:
4.13% 3.05% 7.18% 1.07%
U.S. and Foreign Mutual Funds:
4.26% 2.35% 6.60% 1.91%
U.S. and Foreign Government Bonds:
-0.24% 1.15% 0.91% -1.39%
U.S. and Foreign Corporate Bonds:
0.51% 2.45% 2.96% -1.94%
U.S. and Foreign Real Estate:
6.73% 7.95% 14.68% -1.23%
U.S. and Foreign Commodities:
0.25% 6.57% 6.82% -6.32%
Portfolio Average Returns (%) - as of
August 3, 2012: 3.56%
Standard Deviation Figure (In Green) is an
AM for All Asset Classes:
5.60% 9.15% -2.04%
33
Graph 6
7.13%
9.77%
9.64%
9.88%
1.62%
3.05%
2.35%
1.15%
2.45%
7.95%
6.57%
5.60%
Common Stocks: US Large Cap (Individual):
Common Stock: US Mid Cap (Individual):
Common Stock: US Small Cap (Individual):
Common Stocks (Individual): Foreign
U.S. and Foreign Exchanged-Traded Funds (ETFs):
U.S. and Foreign Preferred Stocks:
U.S. and Foreign Mutual Funds:
U.S. and Foreign Government Bonds:
U.S. and Foreign Corporate Bonds:
U.S. and Foreign Real Estate:
U.S. and Foreign Commodities:
Standard Deviation Figure (In Green) is an AM for All…
Asset Class Standard Deviation (%), As of August 3, 2012
Common Stocks: US Large Cap (Individual):
Common Stock: US Mid Cap (Individual):
Common Stock: US Small Cap (Individual):
Common Stocks (Individual): Foreign
U.S. and Foreign Exchanged-Traded Funds (ETFs):
U.S. and Foreign Preferred Stocks:
U.S. and Foreign Mutual Funds:
U.S. and Foreign Government Bonds:
U.S. and Foreign Corporate Bonds:
U.S. and Foreign Real Estate:
U.S. and Foreign Commodities:
Standard Deviation Figure (In Green) is an AM for All Asset Classes:
34
Graph 7:
Graph 8:
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Asset Class Mean Returns Comparison: July 5 vs. August 3
July 5: Asset Class Average Returns (%) August 3: Asset Class Average Returns (%)
35
Appendix A: Assumptions, Methodologies, and Financial Models
Formulas: See Attachments
One-PageFormulaSheetForMid-Term.docx
One-PageFormulaSheetForFinal.docx