The Investment Portfolio should be managed in a manner which is consistent with the philosophy of the Investor and reflects the unique purpose for the Investment Portfolio. This IPS is the governance instrument for the investment of those funds entrusted to the Investor. The basic tenets under which the portfolios will be managed include the following:
(1) Modern Portfolio Theory, as recognized by the 1990 Nobel Prize, Harry Markowitz, will be the primary influence on the portfolio structure and subsequent decisions. The underlying concepts of Modern Portfolio Theory include:
Investors are risk averse. The only acceptable risk is that which is adequately compensated for by potential portfolio returns. The portfolio as a whole is more important than an individual security. The appropriate allocation of capital among asset classes (stocks, bonds, cash, etc.) will have more influence on long-term portfolio results than the selection of individual securities. Investing for the long-term becomes critical to investment success because it allows the long-term characteristics of the asset classes to surface. For every risk level, there exists an optimal combination of asset classes that will maximize returns. A diverse set of asset classes will be selected to help minimize risk. The proportionality of the mix of asset classes will determine the long-term risk and return characteristics of the portfolio as a whole. Portfolio risk can be decreased by increasing diversification of the portfolio and by lowering the correlation of market behaviour among the asset classes selected. (Correlation is the statistical term for the extent to which two asset classes move in tandem or opposition to one another).
(2) Investing globally helps to minimize overall portfolio risk due to the imperfect correlation between economies of the world. Historically, investing globally