Proposal to launch an an asset management business

Proposal to launch an an asset management businessGeorge ParkanyiAsset Management Company (AMCo)(placeholder name)ImagineA compound annual rate of return of over 15-20 years,consistently,without leverage.25%from?the global financial marketsThen imagine …The wealth management business you could build with25%Consider that …Equities (STOCK MARKET) over the past century have grown in the order of 8-10% per year total-return from economic growth, inflation, and re-invested dividendsThe majority of asset managers over the long term UNDERPERFORM the market –because of fees, trading, mandate restrictions, and short-term performance pressureThe implication …In the asset management businessis a huge COMPETITIVE ADVANTAGE25%Over 20 years …$1,000,000 @10% grows to $6,727,500$1,000,000 @25% grows to $86,736,200So who can do 25%?You, I, and a committed team of owners at usingREAPTMAsset Management CompanyREAPTM?Relational-portfolio structureEquity-securities holdingsAllocation-decision processProgram-the overall systemTM-our proprietary edgeSkeptical? …Why would WE be able to separate 25% from the markets when most trained money managers can only dream of doing that?Research …Randomized simulation REAPTMalgorithm “manufactures” a specific compounding effectHundreds of test runs paint a clear statistical picture of expected returnsRates of return can be forecast based on one proprietary easy-to-measure metricTesting with historical stock price dataConfirms simulationsTest resultsRandomized simulation (20 year) lowest return was 13% annual compound rate of return (ARR)highest was 35% ARRthe predominant mid-range was 22%-28% ARRHistorical back-testing (20 years)Confirms simulated ARR’sModel portfolio since Nov 2004$1M invested in 60 stocks 1 NovUp 50% to date vs 23% (S&P500)TaxesAll comparisons are before taxesCompoundingIs unimpaired in non-taxable accountsIs unimpaired in tax-deferred accountsIs unimpaired in a low-tax jurisdiction (offshore)Can be mostly preserved with modestapplication of margin in taxable environmentOK, so then how does it work?The specifics are proprietary but it involves a unique portfolio structure thatdrives the compoundingreduces riskis highly scalable without compromising performancereduces operating costsa unique trading algorithm thatprovides specific buy, sell and trade size instructionsis easy to administerlends itself to automationPassive-aggressive investing …Random market energy$REAPTM-portfolio setup (researched)-buy/sell decisions (systematic)-trade size decisions (systematic)-timing (systematic)=25% (ish) long-termcompoundingSellBuyActual trading –2 yearsKids’ education savings plan accountSince 1 Nov 2004Cash account -no leverageUp 56% vs 23% (S&P500) as of 1 Nov 2006 –total increase, not compoundedAfter currency loss of 15% (securities are all U.S.)Extra currency conversion losses on trades because registered account has to be in CADAbout 4% dividend income includedIn USD terms, performance more like 72%The business edge1 –The REAPTMalgorithmSuperior compounding beats the indices and most competition2 –The portfolio structureAccommodates very large portfolios ($100M’s through $ billions)a key for large institutional clientsdirectly addresses the liquidity problems large portfolios normally facesize does not impair performance!For asset-allocation and balanced portfolioscan combine equities, debt instruments, convertibles, currencies, precious metals, and commoditiesMore defensive than indices in bear marketsimportant risk management featuremultiple diversification featuresThe catch -timeBy definition, all business models based on compounding take timeWarren Buffett is not a multi-billionaire because of “quits hits”, short-term thinking, or a desire for short-term resultsThe BusinessAsset Management Company (AMCo)How it makes moneyEarns fees on assets under managementGrowth of client assets (that 25%) grows the feesCapital gains and fees from the proprietary houseaccount End objective –AMCo IPO in 7 years The meansEarn trusttrack recordperformance-based fee structureSolid governanceSpread the wordReferralsHigh Net-worth Individuals (HNI’s)Institutional contactsSales program -institutionsLow-risk entryOffer try-and-buy vehiclesThe key to successObtaining clients to increase assets under managementGrowing the assets with the modelTrack record3 VehiclesAMCoHouse account = actual/model portfolioAMCoshareholders Investment Club (CLUB)Institutional TAB account (client try and buy)Each vehicleTrack monthly Net Asset Value (NAV)CLUB and TAB participants can withdraw at any time at the prevailing NAV price(AMCohouse funds are vested in the corporation and part of the corporate assets)Performance criteria for feesClients only pay AFTER they are ahead in absolute terms 10% annually compounded, ANDthe S&P500 annually compoundedBenchmark is the greater of these two valuesFee structurePerformanceFeeX+1%.5%X+2%1.0%X+3%1.5%X+4%2.0%>X+4%Paid up for yearFees are charged from the total absolute % increase of REAPTMless the total absolute % increase of the benchmark + prior feesWhere the benchmark total % increase is x …ExampleYearS&P50010%/yrREAPTMFee18.0%10.0%11.0%.5%216.0%21.0%15%.0%30%33.1%16%.0%415%46.4%52%2.0%572%61.0%85%4.0%** Recovered retro-actively –max 2% per yearTry and BuyTwo separate accounts for prospective institutional clients (US & Canada)Institutions place a small trial investment in the respective TAB accountVery low riskExperience what theirclients wouldTarget market …Other asset management firmsBanks, brokerages, mutual funds, ETFsPension fundsFoundations, trusts, endowment fundsInsurance reservesGovernment fundsSocial safety-nets; entitlement programsIndividualsHigh-net-worth per current rules (e.g. $250K and higher)NOT the general public for regulatory reasonsAvoids expensive retail cost structureFirst ClientMeAMCowill manage my family RSP and RESP accounts, as a clientWhy?I use the model now anywayCompany has at least one client on the books to startWalk the talkAMCo Capital StructureOne class of voting common shares5 Managing Shareholders5 x 1100 shares @USD $10 = USD $55,000Up to 45 Founding shareholders 4500 shares @USD $10 = USD $45,000Minimum 100 shares; maximum 1000 shares eachTotal capitalization10,000 shares @USD $10 = USD $100,000Use of fundsUSD $30,000 –expenses (otherwise interest-bearing)UDS $70,000 –house account invested with the modelCost structureLow cost-structure culture for maximum return to shareholdersNo salaries, fees, bonuses, options etc.Shareholders provide “sweat equity” –no one has to give up “day-job” until a major client is landed$30,000 expense account for Professional feesSales costsOther directly related cost as may be applicableAdditional future expenses to be funded from fee income within an approved budgetHow AMCoshareholders make moneyCapital growth of AMCo+ any dividends or distributionsOpus Investment Club capital growth, income, and distributionsonly open to AMCoshareholdersencouraged but optional participationAMCocan optionally manage a portion of shareholders’ own personal assets (like me)Client referral fees30% of total fees AMCoearns from referred clientsAMCoIPO at a significant multiple to net asset value –THE BIG PAY-OFF if everything goes according to planWhy the Investment Club?A vehicle for shareholders to do the 25% program directly with their own personal assetsCannot market to the public, but CLUB OK CLUB emulates an AMCoclient, (and will become one at the $250,000 threshold)Provides a needed track record for marketing to the big clients -therefore MUST FOLLOW THE MODEL to the tee!Separate CLUB accounts for Canada and for US if there is a significant mix of residency among AMCoshareholdersMonthly Net Asset Value calculations will allow new money (lump sum or monthly) to go into the account (and out) at the correct pro-rata NAV valueObtaining clientsReferrals, referrals, referralsKeep costs lowBased on trust /relationshipsManaging shareholders expected to meet with potential HNI /institutional clients as opportunities present (e.g if visiting a city anyway)Founding shareholders introduce such clients to management, who will close the saleAll AMCoshareholders can earn a commission against client fees for clients they bring inShareholder incentive30% of all fee revenue earned by AMCofor clients brought in by the shareholderMust personally introduce the prospect to the management team Acceptance of client subject to approval by management to ensure compliance with laws (e.g. money laundering etc…)For as long as AMCohas the clientRisk managementKeep personal investments modest until the operating model –both investments AND relationships –prove to work smoothlyThe model calls for staying fully invested –the account WILL go down with the rest of the market for a period of time (but is designed –and tests –to outperform the general market with inherent defensive properties)Don’t use money that may be imminently needed for other purposes –AMCoworks long-term.CLUB funds are not vested or lockedbelong to the member, and can be withdrawn at any timeShareholder/member protectionI will run the model, have trading authority, provide accounting, and calculate NAV’s (with a non-related managing shareholder as a backup)All accounts will be with a bank-sponsored discount brokerTwo othershareholders (managing treasurer + any other non-related shareholder) will co-sign all cheques and authorize shareholder funds withdrawalsAll members will be able to log into accounts in which they have an interest, with viewing (but not trading) authorityNAV’s will be based on account values less approved expenses incurred outside the account –as agreed and applicable. Client protectionClients will hold accounts with a third partyAMCowill simply manage the trading according to the model, and invoice the client for feesAMCowill not have deposit or withdrawal access to client assets –only trading authorityMy backgroundBSC Physics (that was some bizarre math)Rocket scientist (developed satellite control system software at Telesat Canada –also sales and sales management)30 years in the financial marketsStockbroker for a time 1980-82 at BacheHave traded, stocks, options, and commodities extensively (the latter two are tough) since 1976It’s a passion“Numbers guy” and I’ve done the mathMany years consulting –proposals and telecom technologyEntrepreneur previously –ran a small manufacturing and export business from 1997 through 2001 -$4M revenues in peak year –closed profitably and gracefully for lack of future prospectsAMCois the next business …What I’d like you to do …Provide a non-binding letter of interest indicatingInterest in managing or founding subscription (managing is designed to maximize client acquisition potential and maintain integrity of the business and the model –active managing participation is expected)How many shares of AMCo you wish to subscribe (lots of 100, maximum 1000 –1100 min/max if managing)Investment club participation interest –lump sum (minimum $1000) and/or monthly (minimum $100 /mo)Contact InformationGeorge Parkanyigparkanyi@hotmail.comRemember …25%