“specific types of assets excluded from investment, if any” - Why is this part of the Investment Guidelines and not part of the Investment Constraints.
Imagine that you’re working at a medicine company and you don’t want to have any related stocks in your portfolio. It is an investment guideline in order to diversify risks. It doesn’t limit the ability of your manager to construct a suitable portfolio for you.
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But consider this - I do not wish to to invest in a tobacco company since it goes against my values. That would be considered a unique constraint even though it doesn’t stop my manager from adding tobacco stocks to my portfolio?
Tobacco companies are typically outperformed. Thus, it usually limits the ability of your manager to construct the portfolio if those stocks are not allowed to be added in your portfolio. Arms companies are the same.
But if you just do not wish to invest in tobacco companies and you don’t limit the manager to invest in those stocks, I don’t think it is an investment constraints.
I’m a bit confused here, @Okachiang. When I don’t want to invest in an arms company because of my values, I tell my manager not to do that and that becomes a unique constraint.
But not putting a particular asset is a guideline rather than a constraint. Why is that so?
Because arms companies stocks are typically outperforming. You’re apparently loosing chances to profit if your mgr is not allowed to invest in this industry. Also, it depends to your investment objectives. The point is whether your restrictions on your manager prevent him from building a suitable portfolio. If the restrictions are significantly prevent your mgr to construct an investment portfolio which meets your objectives then it’s an investment constraint. Otherwise it’s an investment guidelines. If you prefer a high expected return but you don’t want to invest in the companies that are proved profitable isn’t an investment constraint? But if you just don’t want the pizza companies, it’s totally unaffected.
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If I just don’t want the pizza companies, why is it unaffected? Pizza companies are also making profits, right?
Pizza companies may at a loss but tobacco companies always gain.
A guideline provides a borad guidance about what is expect.
Long term growth and income from international listed equities. The portfolio cannot use leverage or non-exchange traded derivatives.
A constraint may limit what can be done.
For example
No shares can be held in countries considered “high governance risk” by XYZ rating agency.
Only shares paying a dividend can be purchased.
Only 20% fund can be held in stocks outslide ABC index