Proposal to launch an an asset

management business

George Parkanyi
Asset Management Company (AMCo)
(placeholder name)
Imagine
 A compound annual rate of return of

25%
over 15-20 years,
consistently,
without leverage.
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

25%
is a huge
COMPETITIVE ADVANTAGE
 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

Asset Management Company

using

REAPTM
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
…
25% (ish) long-term
Random compounding
market
Sell
energy

$ =

REAPTM Buy
- portfolio setup (researched)
- buy/sell decisions (systematic)
- trade size decisions (systematic)
- timing (systematic)
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 house
account
 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
 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 …

Performance Fee
X+1% .5%
X+2% 1.0%
X+3% 1.5%
X+4% 2.0%
>X+4% Paid up for year
 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)
Contact Information
 George Parkanyi
gparkanyi@hotmail.com
Remember …

25%