Institutional Consulting Services Presentation Investment Management Services Presented by: FA, Title ADDRESS CITY, STATE ZIP PHONE
Table Of Contents Section 1 Introduction/Facts About Prudential Section 2 Executive Summary - Primary Consulting Services Section 3 Investment Policy Section 4 Strategic Asset Allocation Section 5 Investment Manager Identification & Selection Section 6 Investment Performance Monitoring & Review Section 7 Custody & Prime Broker Services... 2
Introduction Since 1976 Prudential Securities, a Prudential company, has provided investment management consulting services to a diverse clientele of sophisticated investors, including employee benefit plans, endowments, foundations, public pension funds, Taft-Hartley Plans, and high net worth individuals. During this time we have assisted our clients in areas of Investment Policy Development and Review, Asset Allocation, Investment Manager Search and Selection and on-going Performance Evaluation. Our philosophy focuses on objective, qualitative research and evaluation and then incorporates the relative quantitative aspects pertinent to the task at hand. Assisting Prudential Securities in providing these services is Investment Management Consulting Services (IMCS), of Prudential Investments, which is a Prudential business. IMCS has corporate home offices in Newark, New Jersey and twelve regional offices located throughout the country. Prudential Securities provides its investment management consulting services through specialists located in many of the approximately 300 Prudential Securities branch offices worldwide. Internationally, our services are offered in Europe, Asia and Latin America. In aggregate, Prudential Securities and its affiliates employ a talented team of full time investment management consultants and marketing professionals who specialize in the investment management consulting field. 3
Facts About Prudential Prudential Financial was founded as the Prudential Friendly Society by John Fairfield Dryden in Newark, New Jersey, in 1875. Prudential Financial s famous Rock logo has long been one of America s best-known icons. It s a symbol of the strength and trust that millions of Americans have placed in us to help them meet their most important financial goals. Prudential Financial is one of the largest financial services institutions in the world, serving more than 15 million individual and institutional customers in the United States and in over 30 foreign countries, offering a broad range of financial products and services. Prudential Securities Incorporated is a full-service brokerage firm headquartered in New York City. The firm's basic business is to advise and serve the investment needs of individuals and selected institutions. A global securities firm, Prudential Securities conducts securities brokerage, capital markets, and consultative services. With approximately 300 retail, commodity and institutional sales offices in the United States, Prudential Securities has over 17,500 employees, including almost 5,000 Financial Advisors as of December 31, 2002. As of December 31, 2002, Prudential Financial had total assets under management and administration of approximately $555 billion, consisting of: - total assets under management (including assets in our general and separate accounts, mutual funds and wrap-fee products) of approximately $373 billion, and - additional assets administered, primarily in securities brokerage and bank custodial accounts, of approximately $182 billion. At December 31, 2002, our Investment Management and Advisory Services segment managed approximately $288 billion of our $373 billion of total assets under management as follows: - $80 billion in retail customer assets, including mutual funds and variable insurance and variable annuity products - $85 billion of institutional customer assets and - $123 billion of general account assets Based on assets under management, Prudential Financial was the 11 th largest institutional asset manager worldwide as of December 31, 2002. Prudential Financial, Inc. common stock began trading on December 13, 2001 on the New York Stock Exchange under the symbol "PRU." Securities products and investment advisory services are offered through Prudential Securities, 199 Water Street, New York, NY 10292. Prudential Securities is a Prudential company. 4
Primary Consulting Services (Executive Summary) 1.) Investment Policy Statement Creating a Statement of Investment Policy is one of the most critical steps in the investment planning process. The investment policy statement consists of investment guidelines that are tailored to a client based on their specific investment needs and objectives. Numerous "key considerations" must be analyzed when formulating a custom policy statement. These include, but are not limited to, the client s actuarial needs, the client s liabilities, liquidity requirements, ability and willingness to assume risk, targeted rate of return, income demands and investment time horizon. Upon examination of these elements, a written policy statement sets forth the intended objective for the management of the client s assets and establishes a series of goals and guidelines by which to measure its investment progress. Selection of an appropriate allocation among asset classes (stock, bonds, cash etc.) is a crucial by-product of this process. 2.) Strategic Asset Allocation Once there is a clear understanding of the client s needs, the next step is to determine the appropriate combination of investment alternatives. An asset mix should reflect the client s liquidity requirements, income needs, time horizon, investment objectives and tolerance for risk. Prudential Securities employs a risk-driven asset allocation model which can assist the client in identifying an appropriate asset mix (defined as a favorable or efficient combination of asset classes offering the highest reward potential within a given level of risk). Several studies have concluded that the lion's share (94%) of a client s investment long-term growth potential is attributable to its allocation profile among stocks, bonds and cash 1. In view of this, we go to great lengths to help ensure each of our clients are efficiently deploying their assets before any considerations are made regarding which organization is qualified to manage their money. 1 Determinants of Portfolio Performance II: An Update, Brinson, Gary P.; Singer, Brian D.: and Beebower, Gilbert L., Financial Analysts Journal, May-June, 1991. Past performance is no guarantee of future results. Individual investor results will vary. 5
3.) Manager Identification & Selection Frequently, a client's existing manager(s) already possesses the ability needed to effectively manage an account. However, resource constraints and limited staffing often restrict the amount of time a manager can devote to "big picture" issues such as investment policy development and strategic asset allocation design. Typically, a manager is hired solely for his/her expertise in identifying superior investment opportunities. Our services complement these abilities by aiding managers in examining and identifying our clients' specific needs and circumstances to help ensure an appropriate asset mix. On occasion, of course, it may be worthwhile to change or add to a client's present universe of investment managers. Our databases provide information on approximately 1,000 investment managers. With the assistance of our Investment Management Research Division (IMR), we can apply various screening processes, involving both qualitative and quantitative measures, to objectively identify manager candidates that maybe suitable for a client s objectives. These screens are discussed more thoroughly in the Manager Identification & Selection section. 4.) Performance Evaluation & Review Once a client's objectives, goals and guidelines are reflected in the Investment Policy Statement, an appropriate asset allocation strategy is selected, and manager selection is completed, it is then necessary to objectively evaluate the performance of the investment manager(s) through a formal review system. Much of this process is computer intensive and requires specific mathematical aptitude. Experience has taught us however, that clients typically have neither the time nor inclination to become performance analysts. As a result, our Investment Management Consulting Services Consulting (IMCS) has developed its own in-house performance measurement capabilities, enabling it to simplify and customize report findings into comprehensible terms. IMCS uses these capabilities in providing services to Prudential Securities. Even non-technical readers find the reports affecting their accounts to be clear, concise and meaningful. The performance evaluation report is customized to the client s specific goals and objectives, is flexible in its format, and offers a wide variety of charts and graphs. Conclusion The consulting services we provide are comprehensive. For institutional investors we offer access to consultative investment expertise, which might otherwise be too costly to staff in-house. Our review process is designed to relieve clients of the burden of day-to-day responsibility for coordinating and communicating with investment managers. We feel our clients can make better use of their time and resources by concentrating on the bigger issues confronting them such as: overall portfolio performance and risk, individual manager performance and risk, and the long-term goals and objectives the client seeks to achieve. 6
Investment Policy If you don t know where you are going, you will wind up somewhere else Yogi Berra Prudential Securities assists clients in the development and review of an Investment Policy Statement. Its purpose is to clearly define those issues which are of significant importance to the client, including but not limited to: Liquidity Requirements Retirement Benefit Payments Target Inve stment Returns Trends in Plan Demographics Income Requirements Actuarial Assumptions Risk/Return Attitudes Plan Expenses Initially, we may conduct an analysis of the information affecting the overall investment portfolio, beginning with communication, documentation and other information relating to the investment of assets. Further, the analysis may include such things as a review of the existing funding status, the current investment structure, cash flows, future funding commitments, asset growth and historical performance. External factors may also be evaluated such as the behavior of the capital markets and the relationship between risk and return which can help provide clients with the necessary understanding and foundation to determine realistic views on the key elements of sound investment policy. These key elements range from risk tolerance, targeted rates of return on an absolute and relative basis, asset classes that the client has deemed appropriate (i.e. U.S. stocks and bonds, international stocks and bonds, real estate and venture capital) to minimum and maximum asset class exposure, number of investment managers and other investment considerations. The information analysis serves as the basis for developing quantifiable, practical objectives, goals and guidelines for the fund. By assisting the client in deciding on these issues, the results may then be incorporated, consistent with the client s documents (if applicable), into the client s Investment Policy Statement. 7
Key Components of the Investment Policy Statement: States Role of the Responsible Parties in the Investment Process States Responsibilities of the Investment Manager in the Investment Process Clearly States the Investment Objectives of the Fund Explicitly Describes the Investment Goals of the Fund Specifies Acceptable Asset Classes Defines Asset Allocation Policy Delineates the Risk Tolerance of the Fund ( Liquidity, Quality) Outlines Time Horizon for Achieving Goals Provides Clear Method to Review Progress In summary, the written Investment Policy Statement is an important tool for providing clients with realistic expectations of investment performance and a means for judging the quality, as well as quantity, of the portfolio results. If a client is managed by investment boards or committees, the members may change over the years. The Investment Policy Statement, however, can remain a constant and may also serve as a valuable training tool for newly appointed members. Of course, the Investment Policy Statement should be reviewed periodically to ensure that all policies and guidelines remain appropriate over time. And last but not least, the Investment Policy Statement provides the client s investment managers with a clear understanding of the portfolio s goals, objectives, and guidelines to which the manager agrees to adhere to and be evaluated by. 8
Strategic Asset Allocation A study by Gary P. Brinson determined that more than 91% of the variability of returns across time is attributed to asset allocation decisions (or class selection). Even more specifically, William F. Sharpe showed us that within just the equity portion of the mix, manager style selection attributed to 90% of the return. Market Timing 1.8% Security Selection 6.7% Asset Allocation Policy 91.5% Introduction Asset allocation as discussed here is a long-term policy decision. This is also referred to as strategic asset allocation. It first defines which broad asset classes are to be represented in a portfolio and, secondly, the fraction of a total portfolio which, under normal conditions, should be invested in each asset class. This policy should be a culmination of the following: the portfolio's purpose, (i.e., defined benefit pension plan), its investment objectives (i.e., preservation of capital) and the named fiduciary s determination of risk acceptable to the plan. Review of Plan Characteristics (Defined Benefit Plans) Defined benefit pension plans may have objectives and concerns linked to the liabilities they have promised the plan beneficiaries. Such objectives may include: (1) to recognize pension liabilities-- real and contingent-- as prospective benefits are earned by participants; (2) to avoid the plan sponsor's financial burden to cover disbursements on a pay-asyou-go basis; and (3) to build up assets so that sufficient funds are available when benefits come due. As a result, analysis of the fund's liabilities and the named fiduciaries attitude toward risk and return helps to determine overall "risk tolerance" and the ensuing selection of an appropriate asset mix policy which is stated in the investment policy and becomes the foundation for the overall plan. 9
Asset Allocation and Diversification: It is extremely important to understand that diversification of asset classes does not reduce risk if a common factor, such as interest rates, affects the asset categories similarly. Asset categories whose values gain/decline in tandem are said to be "positively correlated" and may not, in combination, reduce portfolio risk. Structuring a portfolio with a mix of asset classes whose return characteristics exhibit low even negative correlation to each other, however, does help manage overall account risk. An example of two asset categories which tend to be negatively correlated are domestic equities and international equities. Since different countries have dissimilar economic policies, legal structures, industrial patterns and attitudes towards consumption and saving, the common factors affecting their financial markets are small. As a result, rising inflation and interest rates in the U.S. do not necessarily affect foreign market returns as they do domestically. This "decoupling of returns" enables negative performance in one asset category to be buffeted by positive performance from another, thereby helping to manage an account's risk of loss and smoothing out the total portfolio s performance returns. Prudential Securities provides analysis and identification of different asset class combinations to enable the named fiduciary to position the fund s assets for maximum growth potential while maintaining an acceptable exposure to risk. A successful asset allocation study accomplishes the following: Assists in the Selection of Long-Term Asset Mix Policy Identifies Asset Classes for the Client to Invest in Develops Targets for Capital Market Performance Identifies Efficient Portfolios Of Various Asset Classes Evaluates Risk/Return Tradeoffs and Probabilities of Attaining Goals 10
Investment Manager Identification & Selection A client may decide to identify and select a new investment manager due to one of many reasons such as the addition of a new asset class (i.e., adding international stocks) or because a current investment manager is being replaced. To identify investment managers for our consulting clients, Prudential Securities uses a comprehensive screening process developed to objectively identify manager candidates that are suitable for the allocation. Prudential Securities believes the process should incorporate and stress both qualitative and quantitative factors when searching for and selecting new investment managers for a client. Step 1: Development of Manager Search Criteria Information culled during the investment policy and asset allocation phases is used first to establish specific quantitative criteria for evaluating potential candidates. Then, various qualitative measures are addressed to round out the search. Qualitative factors include screens such as total assets under management, experience and qualifications of the investment professionals, stability of key personnel within a firm, stability of the firm s clients, ownership of the firm and geographic location. Step 2: Manager Screening Process Once these criteria are established, they are applied to our database of approximately 1,000 investment managers. Our multiple screening process considers only those investment managers with verifiable track records that conform to current performance standards (AIMR or IMCA), while maintaining a risk exposure consistent with the client s investment policy statement. When we assist the client in this process, we are attempting to complement and not duplicate management styles within the overall portfolio, our extensive manager evaluation process further allows us to compare return histories of potential manager candidates with those of the clients s existing stable of investment managers. Step 3: Review of Remaining Managers Upon completion of the screening process, we construct a list of the remaining candidates and present a complete description and history of each of these candidates to the client for review and discussion. Our summary includes background and firm information, historical returns, risk characteristics and all other pertinent data. From these discussions, we assist the client in identifying finalists for an interview. This process permits the client to evaluate both the personalities and philosophies of those individuals who will ultimately be responsible for day-to-day management of their account. Step 4: Development of an Investment Policy for the Manager Once a manager is selected by the client, Prudential Securities next assists the client in structuring an investment policy statement customized to the individual manager. The statement includes guidelines for the investment manager to follow including: return objectives, prohibited investments, asset allocation parameters, liquidity and income requirements, and instructions for voting proxies. All of this serves to formalize the intended purpose of the account and establish a series of goals and guidelines used to measure its progress over time. In the end, good channels of communication between the client and the investment manager encourage lasting and successful relationships. Once the investment managers are in place, the next step in the consulting process is on-going performance measurement and evaluation. 11
Portwatch - Investment Performance Monitoring and Review Prudential Securities performance measurement reporting system is known as Portwatch. Portwatch is specifically designed to assist clients in the monitoring of their accounts and their investment performance. In the case of employee benefit plans and other tax-exempt plans, trustees or other named fiduciaries are accountable to a constituency for the proper stewardship of the assets. Third-party performance measurement can help provide a solution to this accountability issue. Performance measurement enables the client to assess the success of their portfolio in absolute and relative terms. It examines rates of return for both the overall portfolio and the individual investment managers, the risk incurred (as indicated by volatility and sensitivity to the market) and the overall portfolio performance relative to the goals set by the client as stated in the client s Investment Policy Statement. The Portwatch report compares indices relevant to each individual portfolio's structure and to a style comparative universe of other professionally managed portfolios. The Portwatch universe data employed is comprised of mutual funds, as tracked by Lipper with three or more years of performance data, or separate account managers tracked by Mobius with five or more years of performance data. The Portwatch report, plus expert analysis and commentary by our Financial Advisors, helps clients to better understand their investment results and improve control over their investment managers. If applicable, Portwatch provides the information for a client to report to its constituency about how the investment portfolio is being managed. Each Portwatch is customized with easy-to-read tables and graphs pertinent to the specific needs of the client. The report presents the portfolio s performance in absolute terms and also relative to the fund's stated investment objectives, appropriate market indices and risks taken. Performance returns are reported on a time-weighted basis as well as a dollarweighted basis. Returns are also stated before (gross) and after (net) fees paid to the investment manager(s). Prudential Securities assumes an active role in discussions between the client and their investment managers and will attend all regular and specially scheduled meetings upon request. 12
Review of Portfolio and Individual Manager Performance The structure of the Prudential Securities performance evaluation report addresses five basic questions: Did the Portfolio Results Meet Its Objectives? What Market Conditions Existed During the Review Period? How Much Risk Did Your Manager Take In Achieving Results? Did the Manager Add Real Value to Your Fund? How Did Other Investment Managers Perform During the Same Period 13
Custody and Prime Broker Services As a registered broker dealer, Prudential Securities provides custody and cash management services to retail and institutional clients. When acting as custodian, Prudential Securities performs the following services for its clients: Daily pricing of securities and cash balances Corporate actions: reorganization notices Automatic collection of interest and dividends Processing of cash flows to/from accounts Transfer of funds between Prudential Securities accounts Systematic sweep of available cash balances Settlement of all transactions (purchases and sales) Written confirmation of all transactions Monthly brokerage statements Calendar year end summary Prime Broker Services at Prudential Securities Prudential Securities may be designated by institutional clients to act as Prime Broker. The Prime Broker facility at Prudential Securities allows for a client to execute trades with various brokerage firms and to have the trades clear and settle at a central location (in this case at Prudential Securities). Some of the features of this relationship are: Ability to maintain relationships at multiple brokerage firms to execute trades Clearing and settling of trades at one central location Consolidated monthly account statement Consolidated financing Centralized corporate action and proxy services Access to account information via the Internet, 24 hours a day, seven days a week, through Prudential Online. SM 14