Substantial discussions with trustees and directors allows us to get an understanding of where the company is, and where it wants to go. Armed with this information, we can help design and execute an investment policy that suits the client’s particular requirements.

This initial step requires Malaczynski Burn to work with the pension fund's actuary or company’s financial director. Good governance requires a fund to have an investment consultant which is independent from its actuary.

There are, however, two junctures where their work crosses. Malaczynski Burn will obtain the actuary's view on the fund's assets and liabilities, and use it as the starting point. Once we have completed a detailed investment policy, we believe that the actuary should be involved again to confirm that the policy is consistent with his/her views. At the same time, we will present an analysis of appropriate asset classes around the world.

Only when the client fully understands what is available, can a realistic investment objective be created. This initial analysis allows us to appreciate the unique characteristics and objectives of the client, as well as understanding the cash flow needs. To develop a policy that takes all interests into account, we will need a complete understanding of the trustees' or directors' expectations, as well as the beneficiaries of the fund. Malaczynski Burn will request the trustees or directors to articulate their investment objective. This will be a clearly specified investment goal and the future measure of how well the investments succeed.

Before Malaczynski Burn can develop risk management strategies, it is necessary for us to understand how the trustees or directors define risk. Malaczynski Burn will lead the trustees or directors through an analysis of the various risks they may face when investing assets. Through this analysis, the client will be able to articulate which risks it can tolerate and those which they cannot accept, as well as how these risks should be managed.

An organisation is a going concern and its stability and continuity are essential to its stakeholders. Its assets must be managed in such a way that it can meet its obligations. Therefore its assets should be able to carry an appropriate level of risk. Before constructing a portfolio, it is important to determine which investment risks are acceptable and which are not.

Every investment carries some risk. The higher the risk, usually the higher the return, i.e. risk is usually the price you pay for return. Sometimes it is possible to increase returns while reducing risk, by finding assets that have a low correlation of their short term returns. Finding the right balance between risk and return is essential.

Once the risks worth taking are identified, one should develop strategies to manage those risks. Good consultants will spend the majority of their time searching for a diverse a range of assets and different methods of execution of those assets, to maximise the amount of return gained for each unit of risk taken.

Some risk decisions have a higher probability of success than others. We believe that asset managers have a greater chance of getting stock selection right than industry selection or timing. Therefore we bias portfolios to maximise the effectiveness of those decisions.

Ensuring that the client's chosen level of risk remains constant and as low as possible, requires constant supervision. Malaczynski Burn will enable the client to create a risk budget which is appropriate for its investment objective and monitor this to allow easy remedy should environmental factors change.

Asset allocation is deciding which assets the client will invest in and what percentage of the portfolio will be invested in each asset class. The most likely assets are equities, bonds, cash, property and alternatives. Alternatives can include hedge funds, commodities, private equity and venture capital. These asset classes are available throughout the world and the client will need to determine which countries' equities it will purchase.

The chain of decisions can also include:

• Developed markets or emerging markets
• Large-capitalisation or small-capitalization shares
• Growth and value shares.

Malaczynski Burn will guide this decisionmaking process. The client's asset/liability profile and investment objective will determine its strategic asset allocation model. This model will make the single greatest contribution to achieving the investment objective.

Malaczynski Burn will build a number of asset models which are consistent with the client's asset/liability profile and investment objective. We will advise which model is the optimal longterm strategic asset allocation for the client. In creating the asset models, Malaczynski Burn will include assets with longterm characteristics which are consistent with both the client's investment objective and its risk tolerance.

Our analysis of different assets will focus not so much on how each asset performs on its own, but rather on how different assets complement each other when blended in a composite portfolio. Correlation analysis will be crucial to our work and our conclusions.

When different asset classes have been blended into asset models, these models will be subjected to multifactor analysis, scenario planning and stochastic analysis. This aids in assessing our expectations of how they will perform in differing crisis periods. Malaczynski Burn will work with the client to select the most appropriate model.”

Benchmarks are tools for evaluating the risk and return characteristics of assets. They can also be used to measure the performance of an asset manager, an asset class and an entire portfolio. The choice of benchmarks can have a significant impact on the performance of the portion of an investor's portfolio that is being measured.

Selecting the most appropriate benchmarks for asset modelling is a crucial step in constructing the portfolio. Vagaries in capitalisation, tax treatment, dividends, style, liquidity and many other factors mean that each asset class can be represented by a large number of benchmarks.

On occasion, Malaczynski Burn has constructed new, personalised benchmarks to suit a purpose where the list available did not have the necessary characteristics. Malaczynski Burn will advise the client of the relevant benchmarks which exist, the merits of each, and the one which will suit their purposes.

Like the selection of an asset allocation model, the selection of benchmarks should be driven by the client's investment objectives and risk budget. The benchmarks chosen need to be consistent with both.

The strategies used to execute the chosen asset model will form part of the framework on which the client's longterm investment solution is built. These strategies will be selected because of their ability to deliver the broader risk/reward characteristics of their benchmarks, their robustness, efficiency and potential to add value to the total portfolio.

Different investment strategies can enhance performance. They can also reduce volatility and risk. They will be critical in determining if the client's portfolio outperforms its investment objective and by how much and if the portfolio remains within the risk parameters established by the trustees or directors.

Certain market environments benefit passive investment, while others benefit active investment. Sometimes stock concentration is a friend and at other times it's an enemy. In some circumstances arbitrage will reduce risk in others it will increase it.

The way in which the client's portfolio is constructed and monitored on a longterm basis, will reflect its overall range of investment strategies and their relationship to each other. The choice and balance of execution strategies is the next most, important job for the consultant after the construction of an asset model.

The investment strategies Malaczynski Burn recommend will be designed to increase the robustness of the asset model and to create extra value for the client. The investment objective, the directors' tolerance for risk, the assets in which the client will invest, and the benchmarks and asset allocation model chosen by the directors will determine the strategies. The strategies will be designed to enable the client to outperform its benchmark without taking any unrewarded risk.

The previous steps will determine most of the risk/reward characteristics of a portfolio. The next action will be to translate these steps into a series of investment mandates. The asset managers will then be identified to carry out discrete portions of the solution by selecting the securities for the portfolio.

Malaczynski Burn will guide this part of the process by:

• identifying the types of asset managers required to carry out the client's strategy,
• identifying specific managers who fulfil the necessary criteria, and recommending asset managers to the trustees or directors.

Each asset manager will be evaluated using Malaczynski Burn's qualitative and quantitative analysis tools. We pay particular attention to the asset managers currently employed by the client, and will respect any existing relationships.

We often find that significant improvements come from re-focusing on an existing manager's strengths, increasing the tightness of mandate's drafting or altering a benchmark to shift emphasis. Where required, we will recommend the appointment of new managers and manage the transition to the new portfolio – often with the help of a transition manager to control costs.

For each asset manager selected, Malaczynski Burn will prepare a detailed investment mandate giving the asset manager clear instructions. These instructions will ensure that the manager's stock selection skills are used to the best advantage of the client, and that the asset manager invests only in the assets required to contribute to the client's strategy and ultimate investment solution. The mandates will include benchmarks and performance targets for the managers.

Malaczynski Burn can conduct any negotiation or renegotiation of the asset managers' contracts, with a focus on protecting the interests of the client and reducing the fees paid to the asset managers.

Malaczynski Burn provide a number of important services related to the monitoring and management of the portfolio.

These include:

• Reviewing the assumptions on which the investment policy is based and monitoring the effectiveness of the investment policy.
• Monitoring and evaluating the benchmarkrelative and investment objectiverelative performance of the client's composite portfolio, and correcting any underperformance.
• Monitoring and evaluating the benchmarkrelative performance of the client's asset managers, and correcting any underperformance.
• Monitoring and evaluating if the asset managers are adhering to their mandates, as well as adhering to their styles, disciplines, and methodologies.
• Monitoring and evaluating the benchmarkrelative risk of the composite portfolio and the asset managers, to ensure that the client's tolerance for risk is not exceeded.
• Looking for any breakdowns in asset manager investment disciplines, any departures or changes in responsibilities of key investment personnel, and any change of ownership or control at any asset manager firm, including those which occur through takeovers and mergers.
• Monitoring if the client's portfolio strategic asset allocation is being maintained, and recommending any required rebalancing of the portfolio when appropriate.
• Measuring the performance and risk of the composite portfolio and each asset manager.
• Quarterly reporting to the trustees or directors of the client on the performance and risk of the client's composite portfolio and the asset managers.
• Continuously monitoring the effectiveness of the client's overall investment process, policy, and solution, and recommending any appropriate changes.
• Providing any other investment consulting services requested by the client.

The strategies used to execute the chosen asset model will form part of the framework on which the client's longterm investment solution is built. These strategies will be selected because of their ability to deliver the broader risk/reward characteristics of their benchmarks, their robustness, efficiency and potential to add value to the total portfolio.

Different investment strategies can enhance performance. They can also reduce volatility and risk. They will be critical in determining if the client's portfolio outperforms its investment objective and by how much and if the portfolio remains within the risk parameters established by the trustees or directors.

Certain market environments benefit passive investment, while others benefit active investment. Sometimes stock concentration is a friend and at other times it's an enemy. In some circumstances arbitrage will reduce risk in others it will increase it.

The way in which the client's portfolio is constructed and monitored on a longterm basis, will reflect its overall range of investment strategies and their relationship to each other. The choice and balance of execution strategies is the next most, important job for the consultant after the construction of an asset model.

The investment strategies Malaczynski Burn recommend will be designed to increase the robustness of the asset model and to create extra value for the client. The investment objective, the directors' tolerance for risk, the assets in which the client will invest, and the benchmarks and asset allocation model chosen by the directors will determine the strategies. The strategies will be designed to enable the client to outperform its benchmark without taking any unrewarded risk.