Proposal to launch an an asset management business George Parkanyi Asset Management Company ( AMCo) (placeholder name)
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Proposal to launch an an asset management business
George Parkanyi
Asset Management Company ( AMCo)(placeholder name)
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Imagine A compound annual rate of return of
over 15-20 years,consistently,
without leverage.
25%
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from?
the global financial markets
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Then imagine The wealth management business you
could build with
25%
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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 longterm UNDERPERFORM the market becauseof fees, trading, mandate restrictions, andshort-term performance pressure
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The implication In the asset management business
is a huge
COMPETITIVE AD V ANT AGE
25%
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Over 20 years
$1,000,000 @ 10% grows to $6,727,500
$1,000,000 @ 25% grows to $86,736,200
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So who can do 25%? You, I, and a committed team of
owners at
using
REAPTM
Asset Management Company
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REAPTM?
Relational - portfolio structure
Equity - securities holdings
Allocation - decision process
Program - the overall system TM - our proprietary edge
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Skeptical?
Why would WE be able to separate 25%from the markets when most trained money
managers can only dream of doing that?
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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
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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 ARRs
Model portfolio since Nov 2004 $1M invested in 60 stocks 1 Nov Up 50% to date vs 23% (S&P500)
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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 taxableenvironment
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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
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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
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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 becauseregistered account has to be in CAD
About 4% dividend income included
In USD terms, performance more like 72%
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The business edge 1 The REAPTM algorithm
Superior compounding beats the indices and most competition
2 The portfolio structure
Accommodates very large portfolios ($100Ms through$ 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
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The catch - time By definition, all business models based
on compounding take time
Warren Buffett is not a multi-billionairebecause of quits hits, short-termthinking, or a desire for short-term
results
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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
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The means Earn trust
track record
performance-based fee structure Solid governance
Spread the word Referrals
High Net-worth Individuals (HNIs)
Institutional contacts Sales program - institutions
Low-risk entry Offer try-and-buy vehicles
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The key to success Obtaining clients to increase assets
under management
Growing the assets with the model
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Track record 3 Vehicles
AMCo House account = actual/model portfolio
AMCo shareholders Investment Club (CLUB) Institutional T AB account (client try and buy)
Each vehicle Track monthly Net Asset Value (NA V)
CLUB and T AB participants can withdraw at anytime at the prevailing NA V price( AMCo house funds are vested in the corporationand part of the corporate assets)
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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
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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
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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
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Try and Buy Two separate accounts for prospective
institutional clients (US & Canada)
Institutions place a small trialinvestment in the respective T ABaccount
Very low risk
Experience what their clients would
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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
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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 thebooks to start
Walk the talk
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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
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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 feeincome within an approved budget
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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
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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 - thereforeMUST FOLLOW THE MODEL to the tee!
Separate CLUB accounts for Canada and for US if there isa 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 (andout) at the correct pro-rata NA V value
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Obtaining clients Referrals, referrals, referrals
Keep costs low
Based on trust / relationships
Managing shareholders expected to meet withpotential HNI / institutional clients as opportunitiespresent (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
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Shareholder incentive 30% of all fee revenue earned by AMCo
for clients brought in by the shareholder
Must personally introduce the prospect tothe management team
Acceptance of client subject to approval by
management to ensure compliance withlaws (e.g. money laundering etc)
For as long as AMCo has the client
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Risk management Keep personal investments modest
until the operating model both investments ANDrelationships prove to work smoothly
The model calls for staying fully invested the account WILL go down with the rest of the market for a periodof time (but is designed and tests to outperformthe general market with inherent defensive properties)
Dont use money that may be imminently needed forother purposes AMCo works long-term.
CLUB funds are not vested or locked belong to the member, and can be withdrawn at any time
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Shareholder/member protection I will run the model, have trading authority, provide
accounting, and calculate NA Vs (with a non-relatedmanaging 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 allcheques and authorize shareholder funds withdrawals
All members will be able to log into accounts in whichthey have an interest, with viewing (but not trading)authority
NA Vs will be based on account values less approvedexpenses incurred outside the account as agreedand applicable.
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Client protection Clients will hold accounts with a third
party
AMCo will simply manage the tradingaccording to the model, and invoice theclient for fees
AMCo will not have deposit orwithdrawal access to client assets only trading authority
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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 Its a passion Numbers guy and Ive 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
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What Id like you to do
Provide a non-binding letter of interest indicating Interest in managing or founding subscription
(managing is designed to maximize client acquisitionpotential and maintain integrity of the business and themodel active managing participation is expected)
How many shares of AMCo you wish to subscribe (lotsof 100, maximum 1000 1100 min/max if managing)
Investment club participation interest lump sum(minimum $1000) and/or monthly (minimum $100 /mo)
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Contact Information George Parkanyi