reap asset management business plan
TRANSCRIPT
Proposal to launch an an asset management
business
George 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 markets
Then imagine … The wealth management business
you could build with
25%
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 pressure
The implication … In the asset management business
is a huge COMPETITIVE ADVANTAGE
25%
Over 20 years …
$1,000,000 @ 10% grows to $6,727,500
$1,000,000 @ 25% grows to $86,736,200
So who can do 25%? You, I, and a committed team of
owners at
using
REAPTM
Asset Management Company
REAPTM?
Relational - portfolio structure
Equity - securities holdings
Allocation - decision process
Program- the overall system TM - our proprietary edge
Skeptical? …
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
REAPTM algorithm “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 simulations
Test 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 modest
application of margin in taxable environment
OK, 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 automation
Passive-aggressive investing …
Random market energy
$
REAPTM - portfolio setup (researched)- buy/sell decisions (systematic)- trade size decisions (systematic)- timing (systematic)
=
25% (ish) long-termcompounding
Sell
Buy
Actual 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 REAPTM algorithm
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 features
The 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 results
The 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 vehicles
The key to success Obtaining clients to increase
assets under management Growing the assets with the model
Track record 3 Vehicles
AMCo House account = actual/model portfolio AMCo shareholders 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(AMCo house 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
values
Fee structure
Performance Fee
X+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 REAPTM less the total absolute % increase of the benchmark + prior fees
Where the benchmark total % increase is x …
Example
Year S&P500
10%/yr REAPTM Fee
1 8.0% 10.0% 11.0% .5%
2 16.0% 21.0% 15% .0%
3 0% 33.1% 16% .0%
4 15% 46.4% 52% 2.0%
5 72% 61.0% 85% 4.0%*
* Recovered retro-actively – max 2% per year
Try 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 their clients would
Target market … Other asset management firms
Banks, 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 structure
First Client Me AMCo will 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 talk
AMCo 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 model
Cost 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 budget
How AMCo shareholders make money Capital growth of AMCo + any dividends or
distributions Opus Investment Club capital growth, income, and
distributions only open to AMCo shareholders encouraged but optional participation
AMCo can optionally manage a portion of shareholders’ own personal assets (like me)
Client referral fees 30% of total fees AMCo earns from referred clients
AMCo IPO at a significant multiple to net asset value – THE BIG PAY-OFF if everything goes according to plan
Why 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 AMCo client, (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 AMCo shareholders
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 value
Obtaining 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 AMCo shareholders can earn a commission against client fees for clients they bring in
Shareholder incentive 30% of all fee revenue earned by
AMCo for 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 AMCo has the client
Risk 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 – AMCo works long-term.
CLUB funds are not vested or locked belong to the member, and can be withdrawn at any time
Shareholder/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 other shareholders (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 AMCo will simply manage the
trading according to the model, and invoice the client for fees
AMCo will not have deposit or withdrawal access to client assets – only trading authority
My 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
AMCo is 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)
Remember …
25%