INVESTMENT MANAGEMENT GAME (IMAG)

Lesson 3: Client Discovery & the Investment Policy Statement

IMAG — Investment Management Game

Learning Outcomes

By the end of this lesson you will be able to:

  • Profile a client and translate qualitative preferences into quantitative objectives
  • Formulate a complete Investment Policy Statement (IPS)
  • Define risk tolerance, return requirements, constraints, and ESG policy
  • Use the IPS as the governing document for all subsequent decisions

Teaching chapters: Client Discovery & Personas · Investment Policy & Risk Governance

Understanding Your Client

Client Typology

  • Institutional clients: pension funds, endowments, insurance companies, sovereign wealth funds
  • Retail clients: high-net-worth individuals, family offices
  • Key differences: time horizon, liability structure, regulatory constraints, reporting requirements

→ Content: IMAG client persona description (who is the simulated investor?).

The Client Discovery Process

  1. Goals: what does the client want to achieve?
  2. Constraints: what limits what they can do?
  3. Preferences: what do they care about beyond returns?
  4. Time horizon: when do they need the money?
  5. Liquidity needs: how much cash must be accessible?

→ Content: worked example with IMAG client profile.

Translating Qualitative to Quantitative

Qualitative statement Quantitative objective
“Preserve capital” Max drawdown ≤ 10%; real return ≥ 0%
“Moderate risk taker” Portfolio volatility 8–12% p.a.
“Long-term growth” Target return: CPI + 4% over 10 years
“ESG-conscious” Portfolio ESG score ≥ 7/10

→ Content: IMAG-specific calibration table.

Risk Tolerance Assessment

  • Risk capacity: ability to absorb losses (financial situation)
  • Risk willingness: psychological comfort with volatility
  • Tools: questionnaires, scenario testing, loss aversion probes
  • Result: a defined risk budget (max volatility, max drawdown, VaR)

→ Content: risk questionnaire template; scoring guide.

The Investment Policy Statement

What is an IPS?

  • The governing document of the portfolio
  • Agreed upon by client and manager before any investment is made
  • Serves as the benchmark for every subsequent decision
  • Must be reviewed at least annually (or after major market events)

IPS Structure

  1. Client background & objectives
  2. Return requirement (absolute or relative to benchmark)
  3. Risk tolerance (quantified)
  4. Time horizon
  5. Liquidity requirements
  6. Tax considerations (if applicable)
  7. Legal & regulatory constraints
  8. ESG & exclusion policy
  9. Benchmark definition
  10. Rebalancing policy

Return Requirement

  • Required return = spending needs + inflation + fees
  • Must be realistic given the risk budget
  • Distinguish: nominal vs. real, absolute vs. relative
  • Example: “Achieve CPI + 3.5% net of fees over rolling 5-year periods”

→ Content: return decomposition diagram; link to Cesim scoring benchmark.

Risk Constraints

  • Maximum portfolio volatility (annualised standard deviation)
  • Maximum drawdown from peak
  • Tracking error limit vs. benchmark
  • Value-at-Risk (VaR) at 95% confidence

Note

In IMAG, the risk constraints you set here will govern your SAA (Lesson 4) and all TAA decisions (Lesson 5).

Benchmark Definition

  • The benchmark is the reference point for relative performance
  • Choices: market-cap index, custom blended index, CPI-linked target
  • Must reflect the client’s strategic asset allocation
  • Defines what is “active risk” vs. “passive market risk”

→ Content: worked example of composite benchmark construction for IMAG.

Risk Governance

The Governance Framework

  • Who makes decisions? Who approves? Who monitors?
  • Investment Committee: strategy decisions, IPS approval
  • Portfolio Manager: day-to-day execution
  • Risk Officer: limit monitoring, breach escalation
  • Compliance: regulatory adherence

→ Content: governance org-chart; decision rights matrix.

Monitoring & Reporting

  • Frequency: daily (risk limits), monthly (performance), quarterly (IPS review)
  • Key reports: factsheet, attribution report, risk dashboard
  • Breach protocol: when does a breach trigger a rebalancing?

→ Content: sample reporting template.

Key Takeaways

  • The IPS is the most important document you will produce in this course
  • Every investment decision in Lessons 4–6 must be traceable to the IPS
  • A well-defined IPS prevents emotion-driven decisions under market stress

Simulation Task — Lesson 3

Deliverable: Your IPS

Draft a complete IPS for the IMAG simulation covering:

Submit before Lesson 4. Your SAA must be consistent with this document.

Further Reading

  • Chapter: Client Discovery & Personas
  • Chapter: Investment Policy, Risk & Governance