The Investment Research Partnership

Expert Witness Case Study 3

Trust portfolio losses significant capital when the trust company and investment manager are part of the same holding company.

Case summary

A trust fund suffers heavily when the tech bubble bursts and inaction by the trustees compounds the losses.

The solicitors instructions.

The solicitor for the beneficiaries requested a review of the investment manager as to the appropriateness of the assets held over a 7 year period. This initially started at asset class and geographical level but was extended to cover individual shares and bonds.

The investigation.

The instructions to the expert witness were:-

a) review the asset classes selected by the investment manager

b) compare the portfolio returns to suitable benchmarks and peer groups

c) compare the asset classes held against a pre agreed portfolio asset mix

d) calculate capital losses

The above requests were duly under taken. In the process of reviewing the case notes and investment reports, the expert was able to suggest that the instructions be extended to include:-

1) review stocks at sub class level

2) consider a suitable portfolio from the fund division of the investment management company and compare against the risk/return of the portfolio

3) changes the investment manager should have made when losses started to occur.

4) independent reporting the trustees could have considered

The expert’s report

The investigation showed that the portfolio had limited strategy and did not follow company protocols. Little or no risk monitoring of the portfolio of stocks took place.

The expert rebuilt the portfolio taking into account cash flows, purchases and sales of assets, and highlighted at what key points action to minimise losses should have occurred by either the investment manager or trustees.

Comparisons were made against agreed market indices and more appropriate composite benchmarks. Quantum was calculated using a number of possible alternative but more appropriate portfolios.

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