The Risk Management Framework (the Framework) provides principles for identifying, assessing, and monitoring risk within the Bank. The Framework specifies the key elements of the risk management process in order to maximize opportunities, to minimize adversity and to achieve improved outcomes and outputs based on informed decision making.
Categories of Risk
The Bank generates most of its revenues by accepting Credit, Country, Liquidity and Market Risk. Effective management of these four risks is the decisive factor in our profitability. In addition, the Bank is subject to certain consequential risks that are common to all business undertakings.
These risks are grouped under two headings: Operational and Reputational Risk. The Framework is organized with reference to these five risk categories, as detailed below:
Credit Risk
This risk is defined as the possibility of loss due to unexpected default or a deterioration of credit worthiness of a business partner.
Credit Risk includes Country Risk i.e., the risks that counterparty is unable to meet its foreign currency obligations as
a result of adverse economic conditions or actions taken by governments in the relevant country.
Market Risk
The risk of loss generated by adverse changes in the price of assets or contracts currently held by the Bank (this risk is also known as price risk).
Liquidity Risk
The risk that the Bank is unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn; the consequences of which may be the failure to meet obligations to repay depositors and fulfill commitments to lend.
Operational Risk
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. The definition excludes reputational risk.
Reputational Risk
The risk of failing to meet the standards of performance or behavior required or expected by stakeholders in commercial activities or the way in which business is conducted.
Risk Responsibilities
- The Board of Directors is accountable for overall supervision of the risk management process. This is discharged by distributing responsibilities at Board level for their management and determining the manner in which risk authorities are set. The Board is also responsible for approval of all risk policies and ensuring that these are properly implemented. Further, the Board shall also seek appointment of senior management personnel capable of managing the risk activities conducted by the Bank.
- The Board Risk Management Committee (BRMC) is responsible for ensuring that the overall risk strategy and appetite of the Bank is appropriately defined in the Strategic Plan and recommend the same to the Board of Directors.
- The BRMC recommends for approval to the Board of Directors the policies proposed by MANCO (Management Committee of the
Bank) which discharges various responsibilities assigned to it by the BRMC.
- The CEO and Group Chiefs are accountable for the management of risk collectively through their membership of risk committees, i.e., Management Committee and the Asset & Liability Committee. Independent supervision of risk management activities is provided by the Audit Committee.
- The Risk Management Group is headed by a Group Chief responsible to set-up and implement the Framework of the Bank.
Risk Management Group Organization
Risk management functions have been segregated by business specialization, i.e., Credit Risk, Credit Administration, Risk Architecture, Risk Analytics, Operational Risk and Market Risk. All these functions are operating in tandem to improve and maintain the health of assets and liabilities.
Credit Risk
Credit risk, the potential default of one or more debtors, is the largest source of risk for the Bank. The Bank is exposed to credit risk through its lending and investment activities. The Bank credit risk function is divided into Corporate and Financial Institutions Risk, Commercial and Retail Risk, and Consumer Risk. The functions operate within an integrated framework of credit policies, guidelines and processes. The credit risk management activities are governed by the Credit Risk Framework of the Bank that defines the respective roles and responsibilities, the credit risk management principles and the Bank’s credit risk strategy. Further Credit Risk Management is supported by a detailed Credit Policy and Procedural Manual.
The Bank manages 3 principal sources of credit risk:
i) Sovereign credit risk on its public sector advances
ii) Non-sovereign credit risk on its private sector advances
iii) Counterparty credit risk on interbank limits
Sovereign Credit Risk
When the Bank lends to public sector borrowers, it prefers obtaining a full sovereign guarantee or the equivalent from the Government
of Pakistan (GOP). However, certain public sector enterprises have a well defined cash flow stream and appropriate business model,
based on which the lending is secured through collaterals other than GOP guarantee.
Non-Sovereign Credit Risk
When the Bank lends to private sector borrowers it does not benefit from sovereign guarantees or the equivalent. Consequently, each
borrower’s credit worthiness is analyzed on the Credit Application Package that incorporates a formalized and structured approach for credit analysis and directs the focus of evaluation towards a balanced assessment of credit risk with identification of proper mitigates.
These risks include Industry Risk, Business Risk, Financial Risk, Security Risk and Account Performance Risk. Financial analysis is further strengthened through use of separate financial spreadsheet templates that have been designed for manufacturing/trading concerns, financial institutions and insurance companies.
Counter Party Credit Risk on Interbank Limits
In the normal course of its business, the Bank’s Treasury utilizes products such as Reverse REPO and call lending to meet the needs of the borrowers and manage its exposure to fluctuations in market, interest and currency rates and to temporarily invest its liquidity prior to disbursement. All of these financial instruments involve, to varying degrees, the risk that the counterparty in the transaction may be unable to meet its obligation to the Bank.
Reflecting a preference for minimizing exposure to counterparty credit risk, the Bank maintains eligibility criteria that link the exposure limits to counterparty credit ratings by external rating agencies. For example, the minimum rating for counterparties to be eligible for a banking relationship with the Bank is BBB.
Country Risk
The Bank has in place a Country Risk Management Policy which has been approved by the Board. This policy focuses on international exposure undertaken by the Bank. The Bank utilizes country risk rating assessment reports published by Dun & Bradstreet Limited (an international credit rating agency) which use political, commercial, macroeconomic and external risk factors in assigning a country risk rating. The country risk limits used by the Bank are linked to the Dun & Bradstreet ratings and FID is responsible for monitoring of country exposure limits.
Credit Administration
Credit Administration is involved in minimizing losses that could arise due to security and documentation deficiencies. The Credit Administration
Division constantly monitors the security and documentation risks inherent in the existing credit portfolio through six regional credit administration departments located all over the country.
Risk Analytics
To ensure a prudent distribution of asset portfolio, the Bank manages its lending and investment activities within a framework of Borrower,
Group and Sector exposure limits and risk profile benchmarks.
Internal Risk Rating Models
The Bank has developed internal risk rating models to assign credit risk ratings to its Corporate and Institutional borrowers. These models are based on expert judgment, comprising of both quantitative and qualitative factors. The ratings are assigned at Risk Analytic’s Level and are given due weightage while extending credit to these asset classes. The Bank intends to comply with the requirements of Foundation Internal
Ratings Based approach for credit risk measurement under Basel II, for which services of a consultant have been solicited to assist the Bank in carrying out statistical testing and validation of the rating models.
Stress Testing
The Bank is also conducting stress testing of its existing portfolio, which includes all assets, i.e., advances as well as investments. This exercise is conducted on a semi-annual basis through assigning shocks to all assets of the Bank and assessing its resulting affect on capital adequacy.
Early Warning System
In order to ensure that monitoring of the regular lending portfolio focuses on problem recognition, an early warning system in the form of a ‘Watch-List’ category has been instituted to cover the gap between Regular and Substandard categories. Identification of an account on the said ‘Watch-List’ influences the lending branch to carry out an assessment of the borrower’s ability to rectify the identified problem / weakness within a reasonable time-frame, consider tighter structuring of facilities, confirm that there are no critical deficiencies in the existing security position and, if possible, arrange for strengthening of the same through obtaining additional collateral. It should however, be noted that the
Watch-List category of accounts is part of the Bank’s Regular portfolio and does not require any provisioning.
In some cases, an account may even be downgraded directly from a Regular to Sub-Standard or worse on subjective basis based on the severity of the trigger involved.
Management of Non Performing Loans
The Bank has a Special Asset Management Group (SAM), which is responsible for management of non performing loans. SAM undertakes restructuring / rescheduling of problem loans, as well as litigation both civil and criminal for collection of debt.
For the non-performing loan portfolio, the Bank makes a specific provision based on an assessment of the credit impairment of each loan. At the end of 2008, the average specific provisioning rate was 76.33% of the non-performing loan portfolio.
The accounting policies and methods used to determine specific and general provision are given in the note numbers 5 and 10 to these financial statements. The movement in specific and general provision held is given in note 10.5 to these consolidated financial statements.
Portfolio Diversification
During the year 2008, the advances grew by 25.30%, while concomitantly maintaining healthy Advances to Deposit Ratio and Capital Adequacy Ratio. While expanding the advances portfolio, efficient portfolio diversification has been a key consideration. The diversification takes into account the volatility of various sectors by placing concentration limits on lending to these sectors thereby ensuring a diversified advances portfolio.
Composition of the Bank’s advance’s portfolio is significantly diversified. Textile, Cement, Agriculture and Electric Generation are major contributors to the advances portfolio. These sectors are considered to be the biggest contributors towards country’s GDP as well.
Tuesday, May 11, 2010
Portfolio Management in Investments
Portfolio Management
Portfolio management involves a series of decisions and actions that must be made by every
investor whether an individual or institution. Portfolios must be managed whether investors
follow a passive approach or ail active approach to selecting and holding their financial
assets. As we saw when we examined portfolio theory, the relationships among the various
investment alternatives that are held as a portfolio must be considered if an investor is to
hold an optimal portfolio, and achieve his or her investment objectives.
Portfolio management can be thought of as a process. Having the process clearly in mind is
very important, allowing investors to proceed in an orderly manner.
In this chapter, we outline the portfolio management process, making it clear that a logical
and orderly flow does exist. This process can be applied to each investor and by any
investment manager. Details may vary from client to client, but the process remains the
same.
Portfolio Management as a Process:
The portfolio management process has been described by Maginn and Tuttle in a book that
forms the basis for portfolio management as envisioned by the Association for Investment
Management and Research (AIMR), and advocated in its curriculum for the Chartered
Financial Analyst (CFA) designation. This is an important development because of its
contrast with the past, where portfolio management was treated on an ad hoc basis,
matching investors with portfolios on an individual basis. Portfolio management should be
structured so that any investment organization can carry it out in an effective and timely
manner without serious omissions.
Maginn and Tuttle emphasize that portfolio management is a process, integrating a set of
activities in a logical and orderly manner. Given the feedback loops and monitoring that is
included; the process is both continuous and systematic. It is a dynamic and flexible
concept, and extends to all portfolio investments, including real estate, gold, and other real
assets.
The portfolio management process extends to all types of investment organizations and
investment styles. In fact, Maginn and Tuttle specifically avoid advocating how the process
should be organized by money management companies or others, who should make the
decisions, and so forth. Each investment management organization, should decide for itself
how best to carry out its activities consistent with viewing portfolio management as a
process.
Having structured portfolio management as a process, any portfolio manager can execute the necessary decisions for an investor. The process provides a framework and a
control over the diverse activities involved, and allows every investor, an individual or
institution, to be accommodated in a systematic, orderly manner.
As outlined by Maginn and Tuttle, portfolio management is an ongoing process by
which:
1. Objectives, constraints, and preferences are identified for each investor. This leads
to the development of an explicit investment policy statement which is used to guide
the money management process.
2. Capital market expectations for the economy, industries and sectors, and individual
securities are considered arid quantified.
3. Strategies are developed arid implemented. This involves asset allocation, portfolio
optimization, and selection of securities.
4. Portfolio factors are monitored and responses are; made as investor objectives
and constraints and/or market expectations change.
5. The portfolio is rebalanced as necessary by repeating the asset allocation, portfolio
strategy, and security selection steps.
6. Portfolio performance is measured and evaluated to ensure attainment of the investor
objectives.
Individual Investors Vs Institutional Investors:
Significant differences exist among investors as to objectives, constraints, and preferences.
We are primarily interested here in the viewpoint of the individual investor, but the basic
investment management process applies to all investors, individuals, and institutions.
Furthermore, individuals are often the beneficiaries of the activities of institutional
investors, and an understanding of how institutional investors fit into the investment
management process is desirable.
A major difference between the two occurs with regard to time horizon, because
institutional investors are often thought of on a perpetual basis, but this concept has no
meaning when applied to individual investors. For individual investors, it is often useful to
think of a life-cycle approach, as people go from the beginning of their careers to
retirement. This approach is less useful for institutional investors, because they typically
maintain a relatively constant profile across time.
Kaiser has summarized the differences between individual investors and institutional
investors as follows:
1. Individuals define risk as ''losing money”, whereas institutions use approach,
typically defining risk in terms of standard deviation.
2. Individuals can be characterized by their personalities, whereas for institutions, we
consider the investment characteristics of those with a beneficial interest in the
portfolios managed by the institutions.
3. Goals are a key part of what individual investing is all about, along with their assets,
whereas for institutions, we can be more precise as to their total package of assets
and liabilities.
4. Individuals have great freedom in what they can do with regard to investing whereas
institutions are subject to numerous legal and regulatory constraints.
5. Taxes often are a very important consideration for individual investors, whereas
many institutions, such as pension funds, are free of such considerations. The implications of all of this for the investment management process are as follows:
•For individual investors: Because each individual's financial profile is different, an
investment policy for an individual investor must incorporate that investor's unique
factors. In effect, preferences are self-imposed constraints.
•For institutional investors: Given the increased complexity in managing institutional
portfolios, it is critical to establish a well defined and effective policy. Such a
policy must clearly delineate the objectives being sought, the institutional investor's
risk tolerance, and the investment Constraints and preferences under which it must
operate.
The primary reason for establishing a long term investment policy for institutional investors
is two fold:
1. It prevents arbitrary revisions of a soundly designed investment policy.
2. It helps the portfolio manager to plan and execute on a long term basis and resist
short term pressures that could derail the plan.
Formulate an Appropriate Investment Policy:
The determination of portfolio policies—referred to as the investment policy statements is
the first step in the investment process. It summarizes the objectives, constraints, and
preferences for the investor. A recommended approach in formulating ah investment policy
statement is simply to provide information, in the following order, for any investor
individual or institutional:
Objectives:
•Return requirements
•Risk tolerance
Followed by:
•Constraints and Preferences:
o Liquidity
o Time horizon
o Laws and regulations
o Taxes
o Unique preferences and circumstances
Objectives:
Portfolio objectives are always going to center on return and risk, because these are the two
aspects of most interest to investors. Indeed, return and risk are the basis of all financial
decisions in general and investing decisions in particular. Investors seek returns, but must
assume risk in order to have an opportunity to earn the returns.
Furthermore, an individual can be a composite of these stages at the same time. The four
stages are:
1. Accumulation Phase: In the early stage of the life cycle, net worth is typically small,
but the time horizon is long. Investors can afford to assume large risks.
2. Consolidation Phase: In this phase, involving the mid-to-late career stage of the life
cycle when income exceeds expenses, an investment portfolio can be .accumulated.
A portfolio balance is sought to provide a moderate trade-off between risk and
return.
3. Spending Phase: In this phase, living expenses are covered from accumulated assets
rather than earned income. Although some risk taking is still preferable, the
emphasis is on safety, resulting in a relatively low position on the risk-return tradeoff.
4. Gifting Phase: In this phase, the attitudes about the purpose of investments changes.
The basic position on the trade-off remains about the same as in phase 3.
Establishing a Portfolio Risk Level:
Investors should establish a portfolio risk level that is suitable for them, and then seek the
highest returns consistent with that level of risk. We will assume here that investors have a long-run horizon. If not, they probably should avoid stocks, or at least minimize any equity
position.
Assuming you are a long-term investor, and that you own an S&P 500-type portfolio, ask
yourself what is the worst that is likely to happen to you as an investor in stocks. Ignoring
the Great Depression, which hopefully will not occur again, consider the worst events that
have, occurred. During the bear market of 1973 to 1974, investors could have lost about 37
percent of their investment in S&P 500 stocks. During the bear market of 2000 to 2002,
investors could have lost over 40 percent. Therefore, it is reasonable to assume that with a
long-time horizon, investors will face one or more bear markets with approximately 40
percent declines. This is in line with the long-term standard deviation of S&P 500 returns of
about 20 percent with two standard deviations on either side of the mean return
encompassing 95 percent of all returns.
If an investor can accept a loss (at least on paper) of approximately 40 percent once or twice
in an investing life time, and in otherwise optimistic about the economy and about stocks,
the investor can assume the risk of U.S. stocks. On the other hand, if such a potential
decline is unacceptable, an investor will have to construct a portfolio with a lower risk
profile. For example, a portfolio of 30 percent stocks and 50 percent Treasury bills would
cut the risk in half. Other alternatives consisting of stocks and bonds would also decrease
the risk.
Inflation Considerations:
An investment policy statement often will contain some statement about inflation-adjusted
returns because of the impact of inflation on investor results over long periods of time. For
example, a wealthy individual's policy statement may be stated in terms of maximum. After
tax, inflation-adjusted total return consistent with the investor's rise profile, whereas another
investor's primary return objective may be stated as inflation-adjusted capital preservation,
perhaps with a growth-oriented mix to reflect the need for capital growth over time.
Inflation is clearly a problem for investors. The inflation rate of 13 percent in 1979 to-1980
speaks for itself in terms of the awful impact it had on investors' real wealth. But even with
a much lower inflation—say, 3 percent--the damage is substantial. It can persist steadily,
eroding values. At a 3 percent inflation rate, for example, the purchasing power of a dollar
is cut in half in 10s than 25 years. Therefore, someone retiring at age 60 who lives to
approximately age 85 and does not protect him or herself from inflation will suffer a drastic
decline in purchasing power over the years.
The very low inflation rates of the late 1990s and early 2000s probably lulled many
investors into thinking that inflation is no longer a serious problem, and that they did not
need to consider this issue as being very important. However, for the last 80 or so years, the
compound annual rate of inflation has been approximately 3 percent. It is reasonable to
assume that in the future inflation will| be higher than it has been recently, and therefore this
is an issue that investors need to consider.
Constraints and Preferences:
To complete the investment policy statement, these items are described for a particular
investor as the circumstances warrant. Since investors vary widely in their constraints and
preferences, these details may also vary widely. Time Horizon Investors need to think about
the time period involved in their investment plans. The objectives being pursued may require a policy statement that speaks to specific planning horizons. In the case of an
individual investor, for example; this could well be the investor's expected lifetime. In the
case of an institutional investor, the time horizon can be quite long. For example, for a
company with a defined benefit retirement plans whose employees are young; and which
has no short-term liquidity needs, the time horizon can be quite long.
Liquidity Needs:
Liquidity is the ease with, which an asset can be sold without a sharp change in price as the
result of selling. Obviously, cash equivalents (money market securities) have high liquidity,
and are easily sold at close to face value. Many stocks also have great liquidity, but the
price at which they are sold will reflect their current market valuations.
Investors’ must decide how likely they are to sell some part of their portfolio in the
short run. As part of the asset allocation decision, they must decide how much of their
funds to keep in cash equivalents.
Tax Considerations:
Individual investors, unlike some institutional investors, must consider the impact of taxes
on their investment programs. The treatment of ordinary income as opposed to capital gains
is an important issue, because typically there is a differential tax rate. Furthermore, the tax
laws in United States have been changed several times, making it difficult for investors to
forecast the tax rate that will apply in the future.
In addition to the differential tax rates and their changes over time, the capital gains
component of security returns benefits from the fact that the tax is not payable until the gain
is realized. This tax deferral is, in effect a tax-free loan that remains invested for the benefit
of the taxpayer. As -explained below, some securities become “locked up” by the reluctance
of investors to pay the capital gains that will result from selling the securities.
Retirement programs offer tax sheltering whereby any income and/or capital gains taxes are
avoided until such time as the funds are withdrawn. Investors with various retirement and
taxable accounts must grapple with the issue of which type of account should hold stocks as
opposed to bonds (given that bonds generate higher current Income).
Legal and Regulatory Requirements:
Investors must obviously deal with regulatory requirements growing out of both common
law and the rulings and regulations of state and federal agencies. Individuals are subject to
relatively few such requirements, whereas a particular institutional portfolio, such as an
endowment fund of a pension fund, is subject to several legal and regulatory requirements.
With regard to fiduciary responsibilities, one of the most famous concepts is the Prudent
Man Rule. This rule, which concerns fiduciaries, goes back to 1830, although it was not
formally stated until more than 100 years later. Basically, the rule states that a fiduciary, in
managing assets for another party shall act like people of prudence, discretion and
intelligence act in governing their own affairs.
The important aspect of the Prudent Man Rule is its flexibility; because interpretations of
the rule can change with time and circumstances. Unfortunately, some judicial rulings have
specified a very strict interpretation, negating the, value of flexibility for the time period and circumstances involved. Also unfortunately, in the case of state laws governing private
trusts the standard continues to be applied to individual investments rather than the portfolio
as a whole which violates all of the portfolio-building principles.
One of the important pieces of federal legislation governing institutional investors is the
Employment Retirement Income Security Act, referred to as ERISA. This act, administered
by the Department of Labor, regulates employer-sponsored retirement plans. It requires that
plan assets be diversified and that the standards being applied under the act be applied to
management of the port/olio as a whole.
The investment policy thus formulate is an operational statement. It clearly specifies the
actions to be taken to try to achieve the investor's goals, or objectives, given the preferences
of the investor and any constraints imposed. Although portfolio investments consider aliens
are often of a qualitative nature, they help to determine a quantitative statement of return
and risk requirements that are specific to the needs of any particular investor.
Unique Needs and Circumstances:
Investors often face a variety of unique circumstances. For example, a trust established on
their behalf may specify that investment activities be limited to particular asset classes, or
even specified assets. Or in individual may feel that their life span is threatened by illness
and wish to benefit within a certain period of time.
Determine and Quantify Capital Market Expectations:
Having considered their objective's and constraints, the next step is to determine a set, of
investment strategies based on the policy statement. Included here ape such issues as asset
allocation portfolio diversification and the impact of taxes. Once the portfolio strategies are
developed, they are used along with the investment manager's expectations' fit the capital
market and' for individual assets to choose a portfolio of assets. Most importantly, the asset
allocation decision must be made.
Forming Expectations:
The forming of expectations involves two steps:
1. Macroexpectational factors: These factors influence the market for bonds, stocks
and other assets on both a domestic and international basis. These are expectations
about the capital markets.
2. Microexpectational influences: These factors invoke the cause agents that underlie
the desired return and risk estimates and influence the selection of a particular asset
for a particular portfolio.
Rate of Return Assumptions:
Most investors base their actions on some 'assumptions about the rate of return expected
from various assets, obviously it is important to investors to plan their investing activities
on realistic rate of return assumptions.
Investors should study carefully the historical rates of return available in such sources as the
data provided by Ibbotson Associates or the comparable data. We know the historical mean
returns, both arithmetic and geometric, and the standard deviation of the returns for major
asset classes such as stocks, bonds and bills.
Asset Allocation:
The asset allocation decision involves .deciding the percentage of investable funds to be
placed in stocks, bonds, and cash equivalents. It is the most important investment decision
made by investors, because it is the basic determinant of the return and risk taken.
The returns of a well-diversified portfolio within a given asset class are highly correlated
with the returns of the asset class itself. Within an asset class, diversified portfolios will
tend to produce similar returns over time. However, different asset classes are likely to
produce results that ire quite dissimilar. Therefore, differences in asset allocation will be the
key factor over time causing differences in portfolio performance.
The Asset Allocation Decision:
Factors to consider in making the asset allocation decision include the investor's return
requirements (current income versus future income), the investor's risk tolerance, and the
time horizon. This is done in conjunction with the investment manager's expectations about
the Capital markets and about individual assets.
How asset allocation decisions are made by investors remains a subject that is not fully
understood. It is known that actual allocation decisions often differ widely from how
investors say they will allocate assets.
Types of Asset Allocation:
William Sharpe has outlined several types of asset allocation. If all major aspects of the
process have been considered, the process is referred to as integrated asset' allocation. These
include issues specific to an investor, particularly the investor's risk tolerance, and issues
pertaining to the capital markets, such as predictions concerning expected returns, risks, and
correlations. If some of these steps are omitted, the asset allocation approaches are more
specialized. Such approaches include:
1. Strategic asset allocation: This type of .allocation is usually done once every few
years; using simulation procedures to determine the likely range of outcomes
associated with each mix. The investor considers the range of outcomes for each
mix; and chooses the preferred one, thereby establishing a long-run or strategic asset
mix.
2. Tactical asset allocation: This type of allocation is performed routinely, as part of
the ongoing process of asset management. Changes in asset mixes are driven by
changes in predictions concerning asset returns. As predictions of the expected
returns on stocks, bonds, and other assets change, the percentages of these assets
held in the portfolio changes. In effect, tactical asset allocation is a market timing
approach to portfolio management intended to increase exposure to a particular
market when its performance is expected to be good and decrease exposure when
performance is expected to be poor.
Changes in Investor's Circumstances:
An investor's circumstances can change for several reasons. These can be easily organized
on the basis of the framework for determining portfolio policies outlined above.
1. Change in Wealth: A change in wealth may cause an investor to behave differently,
possibly accepting more risk in the case of an increase in wealth, or becoming more
risk averse In the case of, a decline in wealth.
2. Change in Time Horizon: Traditionally, we think of investors aging and becoming
more conservative in their investment approach.
3. Change in Liquidity Requirements: A need for more current income could increase
the emphasis on dividend-paying stocks, whereas a decrease in current income
requirements could lead to greater investment in small stocks whose potential payoff
may be, years in the future.
4. Change in Tax Circumstances: An investor who moves to a higher tax bracket may
find municipal bonds more attractive. Also, the timing of the realization of capital
gains can become more important.
5. Change in Legal / Regulatory Considerations: Laws affecting investors change
regularly, whether tax laws or laws governing retirement accounts, annuities, and so
forth.
6. Change in Unique Needs and Circumstances: Investors face a number of possible
changes during their life depending on many economic, social, political, health; and
work-related factors.
Rebalancing the Portfolio:
Even the most carefully constructed portfolio is not intended to remain intact without
change. Portfolio managers spend much of their time monitoring their portfolios and doing
portfolio rebalancing. The key is to know when arid how to do such rebalancing because a
trade-off is involved the cost of trading versus the cost of not trading.
The cost of trading involves commissions, possible impact on market price, and. the time
involved in deciding to trade. The cost of not trading involves holding positions that are not
best suited for the portfolio’s owner, holding positions that violate the asset allocation plan,
hording a portfolio that is no longer adequately diversified and so forth.
One of the problems involved in rebalancing is the "lock-up" problem. This situation arises
in taxable accounts subject to capital gains taxes. Even at low level of turnover the tax
liabilities generated can be larger than the gains achieved by the active management driving
the turnover. In the absence of taxes, such, as with tax deferred IRA and 401(k) plans,
investors would simply seek to hold those securities with the highest risk adjusted expected,
rates of return.
Performance Measurement:
The portfolio management process is designed to facilitate making investment decisions in
an organized, systematic manner. Clearly, it is important to evaluate the effectiveness, of
the overall decision-making process. The measurement of portfolio performance allows
investors to determine the success of the portfolio management process and of the portfolio
manager. It is a key part of monitoring the investment strategy that was based on investor
objectives, constraints and preferences.
Performance measurement is important to both those who employ a professional portfolio
manager, on their behalf as, well as to those who invest personal funds. It allows investors
to evaluate the risks that are being taken, the reasons for the success or failure of the
investing program; and the costs of any restrictions that may have been placed on the
investment manager.
Unresolved issues remain in performance measurement despite the development of an entire
industry to provide data and analyses of expost performance. Nevertheless, it is a critical
part of the investment management process, and the logical capstone in its, own right of the
entire study of investments.
EVALUATION OF INVESTMENT PERFORMANCE
Framework for Evaluating Portfolio Performance:
When evaluating a portfolio's performance, certain factors must be considered. Assume that
in early 2004 you are evaluating the Go Growth mutual fund, a domestic equity fund in the
category of large growth (it emphasizes large-capitalization growth stocks). This fund
earned a total return of 20 percent for its shareholders for 2003. It claims in an
advertisement that it is the #1 performing mutual funds in its category. As a shareholder,
you are trying to assess Go Growth’s performance.
SOME OBVIOUS FACTORS TO CONSIDER IN MEASURING PORTFOLIO
PERFORMANCE:
Differential Risk Levels:
Based on our discussion throughout this text of the risk-return trade-off that underlies all
investment actions, we can legitimately say relatively little about Go Growth’s
performance. The primary reason is-that investing is always a two-dimensional process
based on both return and risk. These two factors are opposite sides of the same coin, and
both must be evaluated if intelligent decisions are to be made. Therefore, if we know
nothing about the risk of this fund, little can be said about its performance. After all, Go
Growth's managers may have taken twice the risk of comparable portfolios to achieve this
20-percent return.
Given the risk that all investors face, it is totally inadequate to consider only the returns
from various investment alternatives. Although all investors prefer higher returns, they are
also risk averse. To evaluate portfolio performance properly, we must determine whether
the returns are large enough given the risk involved. If we are to assess portfolio
performance correctly, we must evaluate performance on a risk-adjusted basis.
Portfolio management involves a series of decisions and actions that must be made by every
investor whether an individual or institution. Portfolios must be managed whether investors
follow a passive approach or ail active approach to selecting and holding their financial
assets. As we saw when we examined portfolio theory, the relationships among the various
investment alternatives that are held as a portfolio must be considered if an investor is to
hold an optimal portfolio, and achieve his or her investment objectives.
Portfolio management can be thought of as a process. Having the process clearly in mind is
very important, allowing investors to proceed in an orderly manner.
In this chapter, we outline the portfolio management process, making it clear that a logical
and orderly flow does exist. This process can be applied to each investor and by any
investment manager. Details may vary from client to client, but the process remains the
same.
Portfolio Management as a Process:
The portfolio management process has been described by Maginn and Tuttle in a book that
forms the basis for portfolio management as envisioned by the Association for Investment
Management and Research (AIMR), and advocated in its curriculum for the Chartered
Financial Analyst (CFA) designation. This is an important development because of its
contrast with the past, where portfolio management was treated on an ad hoc basis,
matching investors with portfolios on an individual basis. Portfolio management should be
structured so that any investment organization can carry it out in an effective and timely
manner without serious omissions.
Maginn and Tuttle emphasize that portfolio management is a process, integrating a set of
activities in a logical and orderly manner. Given the feedback loops and monitoring that is
included; the process is both continuous and systematic. It is a dynamic and flexible
concept, and extends to all portfolio investments, including real estate, gold, and other real
assets.
The portfolio management process extends to all types of investment organizations and
investment styles. In fact, Maginn and Tuttle specifically avoid advocating how the process
should be organized by money management companies or others, who should make the
decisions, and so forth. Each investment management organization, should decide for itself
how best to carry out its activities consistent with viewing portfolio management as a
process.
Having structured portfolio management as a process, any portfolio manager can execute the necessary decisions for an investor. The process provides a framework and a
control over the diverse activities involved, and allows every investor, an individual or
institution, to be accommodated in a systematic, orderly manner.
As outlined by Maginn and Tuttle, portfolio management is an ongoing process by
which:
1. Objectives, constraints, and preferences are identified for each investor. This leads
to the development of an explicit investment policy statement which is used to guide
the money management process.
2. Capital market expectations for the economy, industries and sectors, and individual
securities are considered arid quantified.
3. Strategies are developed arid implemented. This involves asset allocation, portfolio
optimization, and selection of securities.
4. Portfolio factors are monitored and responses are; made as investor objectives
and constraints and/or market expectations change.
5. The portfolio is rebalanced as necessary by repeating the asset allocation, portfolio
strategy, and security selection steps.
6. Portfolio performance is measured and evaluated to ensure attainment of the investor
objectives.
Individual Investors Vs Institutional Investors:
Significant differences exist among investors as to objectives, constraints, and preferences.
We are primarily interested here in the viewpoint of the individual investor, but the basic
investment management process applies to all investors, individuals, and institutions.
Furthermore, individuals are often the beneficiaries of the activities of institutional
investors, and an understanding of how institutional investors fit into the investment
management process is desirable.
A major difference between the two occurs with regard to time horizon, because
institutional investors are often thought of on a perpetual basis, but this concept has no
meaning when applied to individual investors. For individual investors, it is often useful to
think of a life-cycle approach, as people go from the beginning of their careers to
retirement. This approach is less useful for institutional investors, because they typically
maintain a relatively constant profile across time.
Kaiser has summarized the differences between individual investors and institutional
investors as follows:
1. Individuals define risk as ''losing money”, whereas institutions use approach,
typically defining risk in terms of standard deviation.
2. Individuals can be characterized by their personalities, whereas for institutions, we
consider the investment characteristics of those with a beneficial interest in the
portfolios managed by the institutions.
3. Goals are a key part of what individual investing is all about, along with their assets,
whereas for institutions, we can be more precise as to their total package of assets
and liabilities.
4. Individuals have great freedom in what they can do with regard to investing whereas
institutions are subject to numerous legal and regulatory constraints.
5. Taxes often are a very important consideration for individual investors, whereas
many institutions, such as pension funds, are free of such considerations. The implications of all of this for the investment management process are as follows:
•For individual investors: Because each individual's financial profile is different, an
investment policy for an individual investor must incorporate that investor's unique
factors. In effect, preferences are self-imposed constraints.
•For institutional investors: Given the increased complexity in managing institutional
portfolios, it is critical to establish a well defined and effective policy. Such a
policy must clearly delineate the objectives being sought, the institutional investor's
risk tolerance, and the investment Constraints and preferences under which it must
operate.
The primary reason for establishing a long term investment policy for institutional investors
is two fold:
1. It prevents arbitrary revisions of a soundly designed investment policy.
2. It helps the portfolio manager to plan and execute on a long term basis and resist
short term pressures that could derail the plan.
Formulate an Appropriate Investment Policy:
The determination of portfolio policies—referred to as the investment policy statements is
the first step in the investment process. It summarizes the objectives, constraints, and
preferences for the investor. A recommended approach in formulating ah investment policy
statement is simply to provide information, in the following order, for any investor
individual or institutional:
Objectives:
•Return requirements
•Risk tolerance
Followed by:
•Constraints and Preferences:
o Liquidity
o Time horizon
o Laws and regulations
o Taxes
o Unique preferences and circumstances
Objectives:
Portfolio objectives are always going to center on return and risk, because these are the two
aspects of most interest to investors. Indeed, return and risk are the basis of all financial
decisions in general and investing decisions in particular. Investors seek returns, but must
assume risk in order to have an opportunity to earn the returns.
Furthermore, an individual can be a composite of these stages at the same time. The four
stages are:
1. Accumulation Phase: In the early stage of the life cycle, net worth is typically small,
but the time horizon is long. Investors can afford to assume large risks.
2. Consolidation Phase: In this phase, involving the mid-to-late career stage of the life
cycle when income exceeds expenses, an investment portfolio can be .accumulated.
A portfolio balance is sought to provide a moderate trade-off between risk and
return.
3. Spending Phase: In this phase, living expenses are covered from accumulated assets
rather than earned income. Although some risk taking is still preferable, the
emphasis is on safety, resulting in a relatively low position on the risk-return tradeoff.
4. Gifting Phase: In this phase, the attitudes about the purpose of investments changes.
The basic position on the trade-off remains about the same as in phase 3.
Establishing a Portfolio Risk Level:
Investors should establish a portfolio risk level that is suitable for them, and then seek the
highest returns consistent with that level of risk. We will assume here that investors have a long-run horizon. If not, they probably should avoid stocks, or at least minimize any equity
position.
Assuming you are a long-term investor, and that you own an S&P 500-type portfolio, ask
yourself what is the worst that is likely to happen to you as an investor in stocks. Ignoring
the Great Depression, which hopefully will not occur again, consider the worst events that
have, occurred. During the bear market of 1973 to 1974, investors could have lost about 37
percent of their investment in S&P 500 stocks. During the bear market of 2000 to 2002,
investors could have lost over 40 percent. Therefore, it is reasonable to assume that with a
long-time horizon, investors will face one or more bear markets with approximately 40
percent declines. This is in line with the long-term standard deviation of S&P 500 returns of
about 20 percent with two standard deviations on either side of the mean return
encompassing 95 percent of all returns.
If an investor can accept a loss (at least on paper) of approximately 40 percent once or twice
in an investing life time, and in otherwise optimistic about the economy and about stocks,
the investor can assume the risk of U.S. stocks. On the other hand, if such a potential
decline is unacceptable, an investor will have to construct a portfolio with a lower risk
profile. For example, a portfolio of 30 percent stocks and 50 percent Treasury bills would
cut the risk in half. Other alternatives consisting of stocks and bonds would also decrease
the risk.
Inflation Considerations:
An investment policy statement often will contain some statement about inflation-adjusted
returns because of the impact of inflation on investor results over long periods of time. For
example, a wealthy individual's policy statement may be stated in terms of maximum. After
tax, inflation-adjusted total return consistent with the investor's rise profile, whereas another
investor's primary return objective may be stated as inflation-adjusted capital preservation,
perhaps with a growth-oriented mix to reflect the need for capital growth over time.
Inflation is clearly a problem for investors. The inflation rate of 13 percent in 1979 to-1980
speaks for itself in terms of the awful impact it had on investors' real wealth. But even with
a much lower inflation—say, 3 percent--the damage is substantial. It can persist steadily,
eroding values. At a 3 percent inflation rate, for example, the purchasing power of a dollar
is cut in half in 10s than 25 years. Therefore, someone retiring at age 60 who lives to
approximately age 85 and does not protect him or herself from inflation will suffer a drastic
decline in purchasing power over the years.
The very low inflation rates of the late 1990s and early 2000s probably lulled many
investors into thinking that inflation is no longer a serious problem, and that they did not
need to consider this issue as being very important. However, for the last 80 or so years, the
compound annual rate of inflation has been approximately 3 percent. It is reasonable to
assume that in the future inflation will| be higher than it has been recently, and therefore this
is an issue that investors need to consider.
Constraints and Preferences:
To complete the investment policy statement, these items are described for a particular
investor as the circumstances warrant. Since investors vary widely in their constraints and
preferences, these details may also vary widely. Time Horizon Investors need to think about
the time period involved in their investment plans. The objectives being pursued may require a policy statement that speaks to specific planning horizons. In the case of an
individual investor, for example; this could well be the investor's expected lifetime. In the
case of an institutional investor, the time horizon can be quite long. For example, for a
company with a defined benefit retirement plans whose employees are young; and which
has no short-term liquidity needs, the time horizon can be quite long.
Liquidity Needs:
Liquidity is the ease with, which an asset can be sold without a sharp change in price as the
result of selling. Obviously, cash equivalents (money market securities) have high liquidity,
and are easily sold at close to face value. Many stocks also have great liquidity, but the
price at which they are sold will reflect their current market valuations.
Investors’ must decide how likely they are to sell some part of their portfolio in the
short run. As part of the asset allocation decision, they must decide how much of their
funds to keep in cash equivalents.
Tax Considerations:
Individual investors, unlike some institutional investors, must consider the impact of taxes
on their investment programs. The treatment of ordinary income as opposed to capital gains
is an important issue, because typically there is a differential tax rate. Furthermore, the tax
laws in United States have been changed several times, making it difficult for investors to
forecast the tax rate that will apply in the future.
In addition to the differential tax rates and their changes over time, the capital gains
component of security returns benefits from the fact that the tax is not payable until the gain
is realized. This tax deferral is, in effect a tax-free loan that remains invested for the benefit
of the taxpayer. As -explained below, some securities become “locked up” by the reluctance
of investors to pay the capital gains that will result from selling the securities.
Retirement programs offer tax sheltering whereby any income and/or capital gains taxes are
avoided until such time as the funds are withdrawn. Investors with various retirement and
taxable accounts must grapple with the issue of which type of account should hold stocks as
opposed to bonds (given that bonds generate higher current Income).
Legal and Regulatory Requirements:
Investors must obviously deal with regulatory requirements growing out of both common
law and the rulings and regulations of state and federal agencies. Individuals are subject to
relatively few such requirements, whereas a particular institutional portfolio, such as an
endowment fund of a pension fund, is subject to several legal and regulatory requirements.
With regard to fiduciary responsibilities, one of the most famous concepts is the Prudent
Man Rule. This rule, which concerns fiduciaries, goes back to 1830, although it was not
formally stated until more than 100 years later. Basically, the rule states that a fiduciary, in
managing assets for another party shall act like people of prudence, discretion and
intelligence act in governing their own affairs.
The important aspect of the Prudent Man Rule is its flexibility; because interpretations of
the rule can change with time and circumstances. Unfortunately, some judicial rulings have
specified a very strict interpretation, negating the, value of flexibility for the time period and circumstances involved. Also unfortunately, in the case of state laws governing private
trusts the standard continues to be applied to individual investments rather than the portfolio
as a whole which violates all of the portfolio-building principles.
One of the important pieces of federal legislation governing institutional investors is the
Employment Retirement Income Security Act, referred to as ERISA. This act, administered
by the Department of Labor, regulates employer-sponsored retirement plans. It requires that
plan assets be diversified and that the standards being applied under the act be applied to
management of the port/olio as a whole.
The investment policy thus formulate is an operational statement. It clearly specifies the
actions to be taken to try to achieve the investor's goals, or objectives, given the preferences
of the investor and any constraints imposed. Although portfolio investments consider aliens
are often of a qualitative nature, they help to determine a quantitative statement of return
and risk requirements that are specific to the needs of any particular investor.
Unique Needs and Circumstances:
Investors often face a variety of unique circumstances. For example, a trust established on
their behalf may specify that investment activities be limited to particular asset classes, or
even specified assets. Or in individual may feel that their life span is threatened by illness
and wish to benefit within a certain period of time.
Determine and Quantify Capital Market Expectations:
Having considered their objective's and constraints, the next step is to determine a set, of
investment strategies based on the policy statement. Included here ape such issues as asset
allocation portfolio diversification and the impact of taxes. Once the portfolio strategies are
developed, they are used along with the investment manager's expectations' fit the capital
market and' for individual assets to choose a portfolio of assets. Most importantly, the asset
allocation decision must be made.
Forming Expectations:
The forming of expectations involves two steps:
1. Macroexpectational factors: These factors influence the market for bonds, stocks
and other assets on both a domestic and international basis. These are expectations
about the capital markets.
2. Microexpectational influences: These factors invoke the cause agents that underlie
the desired return and risk estimates and influence the selection of a particular asset
for a particular portfolio.
Rate of Return Assumptions:
Most investors base their actions on some 'assumptions about the rate of return expected
from various assets, obviously it is important to investors to plan their investing activities
on realistic rate of return assumptions.
Investors should study carefully the historical rates of return available in such sources as the
data provided by Ibbotson Associates or the comparable data. We know the historical mean
returns, both arithmetic and geometric, and the standard deviation of the returns for major
asset classes such as stocks, bonds and bills.
Asset Allocation:
The asset allocation decision involves .deciding the percentage of investable funds to be
placed in stocks, bonds, and cash equivalents. It is the most important investment decision
made by investors, because it is the basic determinant of the return and risk taken.
The returns of a well-diversified portfolio within a given asset class are highly correlated
with the returns of the asset class itself. Within an asset class, diversified portfolios will
tend to produce similar returns over time. However, different asset classes are likely to
produce results that ire quite dissimilar. Therefore, differences in asset allocation will be the
key factor over time causing differences in portfolio performance.
The Asset Allocation Decision:
Factors to consider in making the asset allocation decision include the investor's return
requirements (current income versus future income), the investor's risk tolerance, and the
time horizon. This is done in conjunction with the investment manager's expectations about
the Capital markets and about individual assets.
How asset allocation decisions are made by investors remains a subject that is not fully
understood. It is known that actual allocation decisions often differ widely from how
investors say they will allocate assets.
Types of Asset Allocation:
William Sharpe has outlined several types of asset allocation. If all major aspects of the
process have been considered, the process is referred to as integrated asset' allocation. These
include issues specific to an investor, particularly the investor's risk tolerance, and issues
pertaining to the capital markets, such as predictions concerning expected returns, risks, and
correlations. If some of these steps are omitted, the asset allocation approaches are more
specialized. Such approaches include:
1. Strategic asset allocation: This type of .allocation is usually done once every few
years; using simulation procedures to determine the likely range of outcomes
associated with each mix. The investor considers the range of outcomes for each
mix; and chooses the preferred one, thereby establishing a long-run or strategic asset
mix.
2. Tactical asset allocation: This type of allocation is performed routinely, as part of
the ongoing process of asset management. Changes in asset mixes are driven by
changes in predictions concerning asset returns. As predictions of the expected
returns on stocks, bonds, and other assets change, the percentages of these assets
held in the portfolio changes. In effect, tactical asset allocation is a market timing
approach to portfolio management intended to increase exposure to a particular
market when its performance is expected to be good and decrease exposure when
performance is expected to be poor.
Changes in Investor's Circumstances:
An investor's circumstances can change for several reasons. These can be easily organized
on the basis of the framework for determining portfolio policies outlined above.
1. Change in Wealth: A change in wealth may cause an investor to behave differently,
possibly accepting more risk in the case of an increase in wealth, or becoming more
risk averse In the case of, a decline in wealth.
2. Change in Time Horizon: Traditionally, we think of investors aging and becoming
more conservative in their investment approach.
3. Change in Liquidity Requirements: A need for more current income could increase
the emphasis on dividend-paying stocks, whereas a decrease in current income
requirements could lead to greater investment in small stocks whose potential payoff
may be, years in the future.
4. Change in Tax Circumstances: An investor who moves to a higher tax bracket may
find municipal bonds more attractive. Also, the timing of the realization of capital
gains can become more important.
5. Change in Legal / Regulatory Considerations: Laws affecting investors change
regularly, whether tax laws or laws governing retirement accounts, annuities, and so
forth.
6. Change in Unique Needs and Circumstances: Investors face a number of possible
changes during their life depending on many economic, social, political, health; and
work-related factors.
Rebalancing the Portfolio:
Even the most carefully constructed portfolio is not intended to remain intact without
change. Portfolio managers spend much of their time monitoring their portfolios and doing
portfolio rebalancing. The key is to know when arid how to do such rebalancing because a
trade-off is involved the cost of trading versus the cost of not trading.
The cost of trading involves commissions, possible impact on market price, and. the time
involved in deciding to trade. The cost of not trading involves holding positions that are not
best suited for the portfolio’s owner, holding positions that violate the asset allocation plan,
hording a portfolio that is no longer adequately diversified and so forth.
One of the problems involved in rebalancing is the "lock-up" problem. This situation arises
in taxable accounts subject to capital gains taxes. Even at low level of turnover the tax
liabilities generated can be larger than the gains achieved by the active management driving
the turnover. In the absence of taxes, such, as with tax deferred IRA and 401(k) plans,
investors would simply seek to hold those securities with the highest risk adjusted expected,
rates of return.
Performance Measurement:
The portfolio management process is designed to facilitate making investment decisions in
an organized, systematic manner. Clearly, it is important to evaluate the effectiveness, of
the overall decision-making process. The measurement of portfolio performance allows
investors to determine the success of the portfolio management process and of the portfolio
manager. It is a key part of monitoring the investment strategy that was based on investor
objectives, constraints and preferences.
Performance measurement is important to both those who employ a professional portfolio
manager, on their behalf as, well as to those who invest personal funds. It allows investors
to evaluate the risks that are being taken, the reasons for the success or failure of the
investing program; and the costs of any restrictions that may have been placed on the
investment manager.
Unresolved issues remain in performance measurement despite the development of an entire
industry to provide data and analyses of expost performance. Nevertheless, it is a critical
part of the investment management process, and the logical capstone in its, own right of the
entire study of investments.
EVALUATION OF INVESTMENT PERFORMANCE
Framework for Evaluating Portfolio Performance:
When evaluating a portfolio's performance, certain factors must be considered. Assume that
in early 2004 you are evaluating the Go Growth mutual fund, a domestic equity fund in the
category of large growth (it emphasizes large-capitalization growth stocks). This fund
earned a total return of 20 percent for its shareholders for 2003. It claims in an
advertisement that it is the #1 performing mutual funds in its category. As a shareholder,
you are trying to assess Go Growth’s performance.
SOME OBVIOUS FACTORS TO CONSIDER IN MEASURING PORTFOLIO
PERFORMANCE:
Differential Risk Levels:
Based on our discussion throughout this text of the risk-return trade-off that underlies all
investment actions, we can legitimately say relatively little about Go Growth’s
performance. The primary reason is-that investing is always a two-dimensional process
based on both return and risk. These two factors are opposite sides of the same coin, and
both must be evaluated if intelligent decisions are to be made. Therefore, if we know
nothing about the risk of this fund, little can be said about its performance. After all, Go
Growth's managers may have taken twice the risk of comparable portfolios to achieve this
20-percent return.
Given the risk that all investors face, it is totally inadequate to consider only the returns
from various investment alternatives. Although all investors prefer higher returns, they are
also risk averse. To evaluate portfolio performance properly, we must determine whether
the returns are large enough given the risk involved. If we are to assess portfolio
performance correctly, we must evaluate performance on a risk-adjusted basis.
Faisal Shahzad
Faisal Shahzad (Urdu: فیصل شہزاد; born June 30, 1979) is a Muslim[4] Pakistani-American being held in police custody in New York City as the prime suspect in the May 1, 2010, Times Square car bomb attempt, to which he has reportedly confessed.
Shahzad was arrested approximately 53 hours after the attempt,[8] at 11:45 p.m. EDT on May 3, 2010, by U.S. Customs and Border Protection agents.[9][10] He was taken into custody at John F. Kennedy International Airport, after boarding Emirates Flight 202 to Dubai.[5][11][12] His final destination had been Islamabad, Pakistan.
A federal complaint was filed on May 4, alleging that Shahzad committed five terrorism-related crimes, including the attempted use of a weapon of mass destruction.[13] Shahzad waived his constitutional right to a speedy hearing.[5][14][6][9] If convicted, he faces up to life in prison.[5]
Shahzad has reportedly implicated himself in the crimes, and given information to authorities since his arrest, and since receiving Miranda warnings.[9][15] CBS News reported that Shahzad admitted training in bomb-making at a terrorist camp in the Waziristan region of Pakistan.[6] As of May 7, Shahzad was continuing to answer questions and provide intelligence to investigators.[14] Over a dozen people were arrested by Pakistani officials in connection with the plot.
Shahzad was arrested approximately 53 hours after the attempt,[8] at 11:45 p.m. EDT on May 3, 2010, by U.S. Customs and Border Protection agents.[9][10] He was taken into custody at John F. Kennedy International Airport, after boarding Emirates Flight 202 to Dubai.[5][11][12] His final destination had been Islamabad, Pakistan.
A federal complaint was filed on May 4, alleging that Shahzad committed five terrorism-related crimes, including the attempted use of a weapon of mass destruction.[13] Shahzad waived his constitutional right to a speedy hearing.[5][14][6][9] If convicted, he faces up to life in prison.[5]
Shahzad has reportedly implicated himself in the crimes, and given information to authorities since his arrest, and since receiving Miranda warnings.[9][15] CBS News reported that Shahzad admitted training in bomb-making at a terrorist camp in the Waziristan region of Pakistan.[6] As of May 7, Shahzad was continuing to answer questions and provide intelligence to investigators.[14] Over a dozen people were arrested by Pakistani officials in connection with the plot.
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