Position: Portfolio Manager, CFA
Firm: ALK Investment Management (ALK)
Client: Sam and Amy Kratchman
Situation: A potential new client has just been left $1,075,000 (on an after-tax basis) from a wealthy grandparent and is deciding between your firm and Vanguard Investment. in terms of who will manage their new found wealth. As part of the process, the client would like you to put together a mock portfolio, detailing all potential assets to be included in the portfolio, as well as your forecast of the economy, markets, etc. and why ALK will provide a higher risk adjusted rate of return than other managers.
Client: Your clients are Sam and Amy Kratchman both 39 years old (as of 1/30/13). They have two children, ages 6 and 4 and two dogs, Scooby and Shaggy.
Real Estate: Immediately after finishing college, Sam and Amy got married and moved to San Diego for warmer weather and a great job. Sam was a bartender all throughout college and earned a lot of cash. Between their savings and current income, they were able to buy a house (January 2000) for $225,000. They took out a 20 year mortgage at 7.25% with 25% down. In 2006 they had their first child and decided to move back East to be near their family selling their home in September of that year. Not sure of where to live in the Philly area, they moved in with Amy’s parents investing the proceeds of their sale into their liquid savings (CD’s). After a year, Sam couldn’t take it any longer and decided they needed to buy a place of their own even though real estate values were starting to soften. In December 2007 they bought a house valued at $600,000. They used 75% of their proceeds from their previous home sale as the down payment on the home. Currently, as rates have dropped, they would like to refinance their current mortgage. They are looking for you to take them through the refinance process and let them know where their loan to value ratio stands at this time given the decline in real estate over the time period. They want to use a 10/1 ARM in order to shorten their repayment period and pay off the balance as a one-time balloon payment. In addition, they would like to take advantage of current real estate prices by purchasing a beach house. The homes they are looking at are valued around $450,000-$550,000. They would like to use money from their CD account as a down payment leaving $100,000 remaining in the account after the purchase.
Historical Savings: Sam and Amy were very good about putting money away for their future needs, and although they always kept some money in safe CD’s, they also tried to play the stock market. Initially (January 1995), they invested $5,000 in 3 month CD’s. From that point forward, they rolled over their CD investment on a quarterly basis, adding $500 to the position each time. This process has continued to the present day.
In January 2000, they decided it was a good time to begin investing in some riskier assets and were told a good strategy was “to invest in what you know.” Sam and Amy were big runners and decided to invest in Nike by purchasing 50 shares of the stock. On a semi-annual basis they continued to purchase 50 shares, reinvesting their dividends back into the company stock. When the stock rose above $80 per share, they cut back their purchases to 25 shares. This has continued through the current day.
Sam and Amy were also big movie buffs and had been using Netflix for a while to see all kinds of great entertainment. In May 2002 Netflix had their IPO and they decided to purchase 250 shares of the company at that time. At the end of every year END/BEGINNING OF 12? they looked to add onto their position purchasing 250 shares if the stock price remained below $30 and 100 shares if it rose above .In July of 2011 the stock became extremely expensive and they decided to lock in on some of their profits selling half their