[PORTFOLIO MANAGEMENT]

1.0

INTRODUCTION

The economic decline from 2008 created a global financial crisis and new low margin
records affected the Dow Jones and S&P stock exchanges. For example, as incredible as it may
look, financial advisors were impacted terrible and their professional advices were jeopardized
by uncertainty from the investors, which led advisors to analyze closely this unpredicted
situation.
Financial investment companies such as OHagan Securities were not immune to the
financial crisis consequences and were swamped with the phone calls from investors in need to
know what will happen to their investments, what action to take promptly and how to trust the
market again. Regardless of the age, amount invested or range in income of the investors, they
all had a common denominator that was easy to understand but difficult to alleviate, the
overwhelming fear. Rudy Wong, a financial investor working at OHagan Securities confronted
this difficult situation in which he could establish certain plans and strategies to alleviate the
emotions of the investors but in the other hand, he was confronting a reality he had no control
over it.

[PORTFOLIO MANAGEMENT]
2.0

OBJECTIVE

The objective of this case study is to identify the life cycle stages of the Rudy Wongs
client and how it will affected in their financing. Before preparing a financial plan it is important
to be aware of the current life cycle phase that clients are in because the phase will determine the
financial perspective that they need to have towards asset, liabilities, investment and insurance.
The financial community have identifies the three distinct financial phases that the clients will go
through in their life. These phases are typically based on age, marital status, dependents, income
level and net worth. Each of these phases has its own set of ratios for income and expenses as
well as how clients investment portfolio should look.
The second objective is to evaluate the clients details before we decide the best way
for Rudy Wongs clients. This is important because it will determine the suitable strategies for
each clients and what types of investment policy or strategies that portfolio manager have to use.
Investment policy is a drafted between a portfolio manager and a client that outlines general
rules for the manager. This statement was provide the general goals and objective of a client and
describes the strategies that the manager should employ to meet these objective.
The third objective is to give an opinion or advice for each client. We should decide
the best to assure each of clients by communicating logical arguments based on our portfolio
management expertise and analysis, by managing emotions and attempting to re-establish our
clients faith in the market or by both methods. Besides that, we also need to re-examine the
investment strategy that we have developed for each client and recommended whether they
should stay with current strategies or make a changes.
2

[PORTFOLIO MANAGEMENT]
3.0

INVESTMENT STRATEGIES AND ADVICE FOR RUDY WONGS CLIENT

3.1

Bob Miller
The first client of Rudy Wong based on case is Bob Miller. Bob Miller is 42 years old.

He also single and did not have dependent. He works as a teacher in elementary school. He gets
or receives the annual salary of $50,000. Based on the info that had we can say that Bob Miller is
in or on the consolidation phase or other name is conservation and protection phase. Based on
case, state that Bob miller had high exposure to the Canadian oil and gas sector including Suncor
stock. Bob Miller had insisted on allocating a sizeable portion of his portfolio to Canadian oils
and gas stock. Also, Bob Miller had recently invested 70 per cent of his portfolio in equities.
Despite, Rudy Wong warning him on multiple occasions that these stocks were subject to great
cyclical vitality and Rudy Wong believe that the cyclical nature of these investment means that
Bob Miller should be remain the patiently invested notwithstanding the current downturn as the
global economic inevitable recovery should lead to surge in oil and gas and equity market more
generally. So Bob Miller needs to do or make some changes on their asset allocation which most
importantly see and determine the performance of his portfolio.
Based on case, Bob miller wanted to retired on age 65 years old. So, before or on the
age he wants to achieve the sufficient growth of the investment that he makes 23 years before
retiring from elementary school. Bob miller is indicated in his decision-tree that he will capable
of withstanding big losses in one year and would remain faithful to long-term investment
strategy. The asset allocation mix served as the core strategic overlay to provide a benchmark
before any market timing positioning of securities since he did not married and not dependent to
be cover yet. So, being the single person means Bob Miller need to reserves low of cash in hand

[PORTFOLIO MANAGEMENT]
and also low liquid of asset. So, Bob Miller should be a little more conservative way to guarantee
its right path to a long term portfolio. Besides that, based on case Rudy Wong advice Bob Miller
to recover or recuperate or do something to cover the loss such losses where the Canadian oil and
gas sector including Suncor which fell from a high of $72 on May 20, 2008 to $27 on March,
2009 that cause the investor loss of $45 per share in the oil and gas sector.
In order to generate Bob Miller money or cash on his retired age we as group want
recommendation one of strategy that Bob Miller or Rudy Wong can use on his client. The
strategy is Diversification where in this strategy is we try to reduce our risk by selecting the
different types of instruments that we have in one portfolio. Using this strategy Bob miller can
increase or tying to maximize the loses that might be happened in different types of instruments
of investment. This is because he recently has invested 70 per cent of his money in equity. We as
group, recommend to him to use asset allocation or use different types of instruments of his
investment as a way to diversify the investment that Bob Miller had. If Bob Miller constants use
their own strategy they will suffer big loss if the instruments that he uses loss. This is because not
all the investment moves in the same direction, the same time and also the same of the degree. In
additional, Bob Miller asset allocation has a significant effect if he does not change or include
enough risk in his portfolio. This is because the investment could not earn big returns and his
goal to retire comfortably is not reached. So, using the asset allocation and diversification
strategy is closely related to realize the asset allocation process. But in order to follow the phase
in the live cycle Bob Miller must create a portfolio that containing both stocks and bonds in
which investors can rely on a conservative of 55 percent oil and 30 percent in bonds, 10 per cent
in real estate and another 5 per cent in cash. But in this case, we recommended Bob Miller

[PORTFOLIO MANAGEMENT]
conservative on 50 percent of oil (stock) 50 per cent in bond. This is because it can provide an
opportunity and the time to re-evaluate the adequate growth.

LATE THIRTY AND EARLY FORTIES

STOCK
BONDS
CASH
REAL ESTATE

Based on the case, Rudy Wong thought that Bob Miller was a good example of
someone who experienced swing in his emotions that were often reflected in overall market
sentiment. Another view of Rudy Wong, he estimates that his client has a potential action as form
of illusion of control where client mistakenly believe that they can make their own trading or
own decision to make profit and to get more return from the portfolio that Bob Miller have now.
But, the client often takes granted about the risks of doing so. So, in order to refuse of Bob Miller
decision making Rudy Wong must take over the decision that Bob Miller wants to do seriously
and try to understanding what actually want he do. Another way is Bob Miller and Rudy Wong
must be or create a good understanding each other in order to do the diversification of Bob

[PORTFOLIO MANAGEMENT]
Miller investments to face the economic downtown in year 2008. It because, on the financial
crisis happened, Rudy Wong can establish a good communication to do a good condition
planning and also new strategies to reduce the Bob Miller emotions even he know that Bob
Miller always complained of watching business news channels on television and being consumed
with fear as a result of the steady stream of pessimistic forecasts by commentators. It because if
Rudy Wong not understand and look what his client need and also calm down the emotional of
his client he will suffer a bad reputation and his firm will reduce of client in the future because
they want generate their money to use in the retirement age or in the future.
Lastly, based on the concept of risk and return, we can say that who that invest in the
higher risk the probability to get the high return are high. But the investor must ready and bear
with the risk that will happen. It because not all high risk investment will get the high return,
some of them will suffer big loss. In case of Bob, he must take the high risk to potentially get
high return to his use in retirement age. In this strategy we use diversification. Because the return
of a portfolio is weightage average of return from its holdings, the volatility is not. Volatility is
measured by standard deviation and volatility of portfolio is a function of the volatility of each
holding and the correlations between these investments. So using the standard deviation we can
see the risk that we will involve. High standard deviation means high risk and also high return.
So, Bob Miller should have made decision to take into their portfolio the investment that will
give him high return to his use the money in the retirement age. In order to make investment we
recommended Bob Miller to do investment with high risk like stock, bond and other investment
that will give him high return.

[PORTFOLIO MANAGEMENT]

3.2

Mary Swanson
Mary Swanson was a retired professor from the University of British Columbia (UBC)

who in 2008 transferred her UBC pension to O Hagan Securities. She was generally nonemotional decision maker. Rudy Wong want make small tactical adjustment to her portfolio
while maintaining the overall asset allocation and growth strategy. He also want to shifting funds
from government to corporate bonds which seems to provide a more compelling risks adjusted
return outlook. For Mary Swanson to continue to follow her long term investment strategy, Wong
would have to make reasonable arguments.
Based on Swanson case, life cycle stages that are suitable for her is gifting and distribution
phase. This is the third financial life cycle phase which is usually achieved in the late 50s and
early 60s. This phase occurs when they realize they can spend money on things they never
thought possible. For example, spending money on extravagant vacation and purchasing a luxury
home. People in this phase are also very aware of the financial risks and have established
security against losses. Its same with Swanson, where she concerned with global financial crisis.
This shows that her investment objective is to achieve total return. So, Mary Swanson is on in
this phase.
Besides that, Swansons portfolio had been composed of 60% equities and 40% bonds and
was valued at greater than $1 million. On the equities side, the portfolio consisted of mix large,
medium and small-cap stocks. On the fixed income side, it was made up of corporate bonds and
Guaranteed Investment certificates (GICs).

[PORTFOLIO MANAGEMENT]

Asset llocation

Equities
40%

Bonds
60%

For inflation hedging purpose, 5% of funds were allocated to gold and addition 5% were
allocated to real estate in Canada, which had not been significantly affected by crisis in the
United States. Swanson had no short term liquidity needs.
Rudy Wong had make a decision that Swanson must transfer funds from equities to cash
as the capital gains that Swansons equity position had accumulated over time had been eroded
during the stock market drop. Wong believes that stocks would rebound and Swanson would then
be forced to buy in at a much higher price if she were to switch back from cash to equities.
Perhaps Swanson might alternatively be interested in taking a slightly bigger position in
gold. So, I suggest investment guide recommend asset or saving allocation for Swanson is stocks
25% bonds 50%, cash 10% and real estate 15%.

[PORTFOLIO MANAGEMENT]

Asset Allocation

15%

25%

Stocks
Bonds

10%

Cash
Real Estate

50%

On this phase, Swanson can enjoy leisure activities but also guarding against major health
costs.
Cash (10%) - Money market fund or short term bond fund (average maturity 1 to 1.5 years)
Bonds (50%) zero coupon Treasury bonds, no-load GNMA funds, or no load high grade bond
fund, some treasury inflation protection securities (5% of portfolio).
Stocks (25%) - Primarily high quality U.S stocks with some representation of smaller growth
companies.
Real Estate (15%) Portfolio of REITs.

[PORTFOLIO MANAGEMENT]
3.2.1

Investment Policy Statement

An investment policy statement (IPS) is a statement which has explanation about

general investment goals and objectives of a client. It also has the strategies that will be used by
manager to fulfill the goals and objectives. Asset allocation, risk tolerance and liquidity should
have in IPS. But in this case, advisor at OHagan were compensated using a blend of all three,
depending on the objectives of the account such as asset allocation, security selection and market
timing.
3.2.1.1

Asset allocation
The asset allocation decision is the choice among these broad asset classes. It also an

implementation to balance the risk with reward by adjusting each asset in an investment portfolio
based on the investment horizon, goals and risk tolerance. In Swanson case, as an advisor Wong
want Swanson to shifting funds from government to corporate bonds which seemed to provide
more compelling risk adjusted return outlook. Besides that, Wong wants to invest in gold.
3.2.1.2

Security selection
Security selection is the process which the investor chooses the securities to fill in a

portfolio when the asset allocation was established. The factor that we see is risk and return.
Security selection is one of the ways to make profit in the portfolio. For Mary Swanson, she must
divide her investment to bond more than investments in equity.
3.2.1.3

Market timing
Market timing is a theory that where the firms want to invest. In case of Mary Swanson,

she must fianc her investment more in debt instruments.

10

[PORTFOLIO MANAGEMENT]
3.2.2

Recommendation

For Mary Swanson case, basing decision on her profile, I suggest:

i)

The asset can be used to invest in something that has highly marketable such as invest in
gold. Since she is a non-emotional decision maker so she does not afraid to take risks.

ii)

As Swanson is spending her retirement life, there is no high need for capital appreciation.
Therefore, the weight for allocation of fund in equity can be reduced and invested more
in bonds.

iii)

Besides that, Mary Swanson does not allowed to convert all her investment to cash in
order to protect her from the growing inflation rate. For this, certain of her investment
must consist of equity shares. Thus, investment in both risk free and risky asset required.

iv)

Mary Swanson does not allow changing Treasury bond to corporate bond in a situation
where many companies are failing down.

11

[PORTFOLIO MANAGEMENT]
3.3

Jack and Kelly Klein

Jack and Kelly Klein is one of the Rudy Wong`s clients. The Klein was regular

investors with an objective to save for retirement and to achieve high growth for their investment
fund. This can show that they are highly concerned with capital appreciation. However, they did
not have lot of assets. As they retirement in 30 years away, it can be inferred that they are in
accumulation phase and their liquidity needs high. In addition, they also have the long-term time
horizon.
Accumulation phase is the first cycle phase and it generally starts around the age of 20
and can last until the age of 50. This phase more focuses on the creation and building up of assets
and maximizing the net worth. It`s important to note through that typically people starts out this
phase with limited excess cash, high level of debt, and a low net worth. Jack and Kelly Klein are
in this phase shall not to concern with risk associated with the financial planning. For the
example, when they in 25 years old and still single may believe that they do not need life
insurance. Someone that involve in real estate investment may not be concern with protecting
their assets and themselves from liability. So that, I suggest that Jack and Kelly Klein are more
suitable in this phase.
Besides that, The Klein is highly exposed to the equities as they invested 85% and
15% in equity and bonds respectively, but their portfolio value decline more than 50% since July
2008. The significant proportion of their investment in equities show that they tempted to faced
with the high risk. Other than that, they also suitable of having the long term investment type.
Klein also becomes nervous when the stock price was fluctuating sharply in their investment
type (equity).

12

[PORTFOLIO MANAGEMENT]

Assets Allocation

15%
Equities
Bonds

85%

In order to show Jack and Kelly Klein that a market low might provide them an
opportunity to invest more money in equity, lowering investment cost and potential gains in
future, Rudy Wong should make decision on their profile, the clients are long-term investors but
cannot be affected by the financial downfall. The client should make a little modification in the
allocation of assets should be made to reflect 65% in equities and 35% in bonds. Also Rudy
Wong should advise to stick to the long term investment since their current assets are in mix,
they still have the chance of lowering their overall investment cost.

13

[PORTFOLIO MANAGEMENT]

The chart below will show clearly about the asset allocation of Jack and Kelly Klein.

Assets Allocation

Equities

35%

Bonds
65%

3.3.1

Recommendation

In case Jack and Kelly Klein there are four recommendations.

For the first, looking to their economic condition is that not sound, they should
invested significantly with high proportion in their equity which is ore riskier that bond if we
compared. Then, it is more imperative for them to get the lower proportion in the equity`s
investment types.
The second recommendations are, they should diversify their portfolio to mitigate the
risk. In investment, we cannot run from risk because the high risk, high returns. Klein can
14

[PORTFOLIO MANAGEMENT]
allocate some investment in to the gold which can be considers as safe investment. In addition,
investing in gold, also considers as wise decision during the time of the investment.
The third recommendations are, they also can invest in the dividend fund and Treasury
bond. This is because; these types of investment can avoid the market volatility. In addition,
these types of investment also can help them to control the inflation rate risk.
Last but not least, when looking to their period of time to doing the investment, they
have the long-term time horizon. In this case, they should be more patience to face with the
economic downfall. It will be stable after a few years time of period. Other than that, they should
not be more nervous or get panic when the price of the equity is falling significantly.
As a conclusion for the Jack and Kelly Klein, they should more alert on the capital
appreciation is their main objective. The recommendation that investing in gold would be the
best decision according to the economic condition. Besides that, Klein also can change their time
horizon to the short-term investment. By changing the time horizon, Klein should invest in the
investment that will give them fairly consistent dividend.

15

[PORTFOLIO MANAGEMENT]

3.4

Herb and Bard Nichols

Base on the study of Herb and Barb Nichols profile and lifestyle, we found that they

are both 50 years old married couple, and have calm temperaments personality. They also had
just inherited $100,000 and not sure how to invest their funds. They had some short term
liquidity needs, but had solid incomes so they did not need to allocate funds in cash. So, by
understanding their case and situation, Wong had suggested they allocate 75 per cent in equities
and 25 per cent in bonds and would get the money in 10 years.
But through all the suggestion there are few problems that the clients were not agreed
with. First is the taxation issue, they also not willing to change investment strategy and had bias
thinkers towards terms of trends. When the stock market continued to fall, the Nichols feared the
trend would mean stocks could fall to zero. So, in that case, basing decision on their profile,
Herb and Barb Nichols have short-term needs with high-risk tolerance and recommendation of
75 per cent in equities and 25 per cent in bonds should be the most appropriate strategy. Also,
Wong should do as previously done, show them the next ten years average return to regain
confidence and move beyond their bias. But beside the strategies given by Wong, there are a few
suggestion and recommendation which also very effective way to persuade the Nichols to giving
up his bias.

16

[PORTFOLIO MANAGEMENT]

3.4.1

Strategies

3.4.1.1

Conservation and Protection Phase

First strategy based on Herb and Barb Nichols issue is they should consider on the

financial plan at the conservation and protection phase. This second financial phase begins at the
stage of life where they have enough assets to protect and it is all about protecting the wealth
they have created. Same with the clients situation, where they had just inherited $100,000 and
wanted to grow their money while had to protect it well. This phase can start as early as your late
30s and usually lasts throughout your 40s and 50s and perfectly matched with the Nichols
because both of them are 50 years old.
The real determining factor when this stage begins is once people begin to have assets
they feel are worth protecting. So that is why Nichols does not have to worry about changing
their investment strategy if they follow the phase directly in line. Besides, this phase is usually
characterized by an increase in cash flow, assets, and net worth, while the use of debt starts to
decrease.
But as usual, as more assets are accumulated, the individual becomes more risk
adverse for such when Nichols had a bias towards thinking feared that the trend of market fall,
would mean stocks could fall to zero too. They are concerned with loosing what theyve already
accumulated. For sure, it is not. This is normal situation because people in this phase are usually
more aware of financial risks, for example loss of a job, loss of life, and even disability.

17

[PORTFOLIO MANAGEMENT]
Therefore, the Nichols should take precaution throughout the awareness by known the phase
deeply in managing their financial plan strategies. Besides, they should think more on saving for
retirement and possibly their childrens education.
3.4.1.2

Spending Strategy
Second strategy is through the phases in investors life cycle. They should consider the

third phase of life cycle which is the spending phase during which the individual is no longer
working and is living on the income and capital accumulated over many years of saving and
investing is finally distributed to the owner and beneficiaries which are matches to the Nichols
situation. During this phase, capital preservation is paramount, although investing for growth is
still a critical though less important. Besides, loss of capital owing to investment in higher risk
assets is not acceptable to the investor in this phase. Asset allocation will mainly be skewed
towards Govt. Bonds and securities yielding regular income just like Wong suggestion to invest
their cash in dividend bonds in order to lessen the Nichols tax burden. Unlike in previous
phases, where investing towards some goal was the primary concern, the spending phase places
emphasis on preserving one's wealth as an income supplement and ultimately passing that wealth
along to future generations. Then, we are sure this phase is directly related to the Nichols cases.
But still, if there is pro, there is also a con. In practical terms, the spending phase is the
most difficult to navigate, as market fluctuations, interest rate movements, inflation, tax law
changes and a host of other potential pitfalls can throw a monkey wrench into even the best laid
of plans. As such, whereas one might have skated through with a do it yourself approach during
the accumulation phase and consolidation phases, seeking out the help of competent attorneys,
accountants and fee which is only financial planners is critical in ensuring sound strategy.

18

[PORTFOLIO MANAGEMENT]
Besides, during the spending phase of a person's life, income may decrease
substantially, but this likely coincides with a decrease in expenses. That is because children are
usually no longer dependent on their parents in the spending phase, and major assets such as
mortgages may be paid off. Herb and Barb Nichols can also spend their life full of traveling,
relaxing and enjoying retirement and this is the principle goals of someone living in their
spending phase.

3.4.2

Recommendations

Figure1: The Life-Cycle Investment Guide

Age: Mid-Fifties

stocks
bonds
cash
real assets

The figure illustrates the lifestyle of investors by recommended assets or savings

allocations. As from the pie chart above, Herb and Barb Nichols are in the mid-fifties life cycle
investment stage. As Wong suggested earlier, he mention that they should allocate 75 per cent in
equities and 25 per cent in bonds and it would be 10 years until they needed the money. So we
19

[PORTFOLIO MANAGEMENT]
recommended that they will mitigate the risk if the money is divided sort of referring to the pie
chart given. Furthermore, the Nichols did not need to allocate their funds in cash and had some
short term liquidity needs, but had solid income already. This division of financial management
will be suitable if they wanted to grow their money and had can accept less risk. We highly
recommend that they should follow the suggestion. In addition, no matter what the Nichols
lifestyle are, they must start thinking about retirement and the need for income protection.

4.0

CONCLUSION

As a conclusion, an investment advisor assist with the entire process from designing
plan of finance to post closing administration, as well as projects not involving bonds. An
advisor such as Wong in the attempt to add values should provide independence and objectives.
He should provide long-term commitment to clients, also understanding the issuer and its needs.
Also advisors should act as wealth managers and behavioral coaches, providing discipline and
experience to investors who need it. This way advisor would add value and gain trust from
investors.
Rudy Wong should execute the recommended strategies immediately, upon agreeing
with his clients, in order to minimize the risk on their investment in response to the financial
crisis. In addition, the financial advisor shall maintain good observance of the market and apply
the best market timing when revising the portfolio. Besides that, the modifications have in
common a defensive investment strategy to preserve the capital and have little tolerance for
downside risk. The overall strategic approach is to prevent portfolio volatility investors.
20

[PORTFOLIO MANAGEMENT]

5.0

REFERENCES

Investopedia (2015). Investment Policy Statement. Retrieved November 11, 2015 from
http://www.investopedia.com/terms/i/ips.asp
Mitchell, M. (2012, July 5). What Are The 3 Life Cycle Stages And How They Affect Your
Finances? Retrieved November 11, 2015 from http://www.topfinanceblog.com/what-arethe-3-life-cycle-stages-and-how-they-affect-your-finances/
Reilly, F.K & Brown, K.C. (2012). Investment Analysis & Portfolio Management (10th ed.).
Ohio: Thomson South-Western.
Rogers, J. (2010). Rudy Wong, Investment Advisor. The University of Western Ontario, London

21