June 2007 Channel Counties Chapter Bulletin
IN THIS ISSUE:
President’s Message: New Beginnings
Chapter News
2007-08 Chapter Leadership
Put a CPA on the Pension Plan Team: Part 2
Welcome New Members
Chapter Events
Annual Retreat/Installation of Directors & Officers
Tax Controversy & Litigation
Fraud
Annual Golf Tournament
Technology
Estates & Trusts
Interest Group Meetings
AP&AS (Santa Barbara)
AP&AS (Ventura)
Conejo Valley Discussion Group (Thousand Oaks)
Santa Barbara CPA Discussion Group
Ventura CPA Discussion Group
View all Channel Counties Chapter Events
California CPA Education Foundation CPE in the Channel Counties Chapter
Resources
PRESIDENT'S MESSAGE
New Beginnings
By Cindy Young, CPA
Well, here I am, with my picture on this page. Seven years ago when Eileen Sheridan called to invite me to join our board of directors, eventually becoming chapter president really wasn’t something I’d contemplated. But the time has flown by. CalCPA and your chapter directors have been working diligently on a host of events that I’m excited to share with you.
The chapter awarded 10 scholarships totaling $15,000 to accounting majors at UCSB, SBCC, Cal Lutheran, Ventura College and Moorpark College during our May 17 Student Night banquet. As many of you know, only proceeds from two events—our annual golf tournament and one full day of CPE—replenish our scholarship fund. Make sure to calendar the golf tournament, Oct. 22 at Montecito Country Club, and watch for notification of all our 2007 CPE events in next month’s Bulletin.
Our state legislators and their staff heard directly from our membership May 29 during CPA Day at the Capitol. Well-intended proposed legislation and regulations have plenty of unintended consequences. CPAs from throughout the state volunteered to spend the day in Sacramento to enlighten our lawmakers about the impacts, positive and negative, of certain proposed laws on our clients and our profession. Remember that CalCPA is representing and protecting our interests every day in Sacramento.
As you read this, many of us are packing our bags and “retreating” to San Diego June 8–10, where we’ll be checking into the luxurious Omni Hotel.
Congratulations and a huge thank you to outgoing president Juan Soto for a job well done. Those are some mighty big shoes I’ll be trying to fill, but with the help of program associate Rita Williams and our dedicated board of directors, I’ll give it my best shot. That Saturday evening in San Diego I look forward to joining Juan and the rest of the entourage at Petco Park, just across the street from our hotel.
Go Padres!
—Cindy Young, CPA
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CHAPTER NEWS
2007-08 Chapter Leadership
Cindy Young: President
Tom Letus: First Vice President
Susan Jacobson: Second Vice President
Patricia Krout: Secretary
Mike Ray: Treasurer
Gail Anikouchine: Director
Mike Ray: Director
Jeff Dottl: Director
Juan Soto: Past President
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Put a CPA on the Pension Plan Team: Part 2
By John Jackson CPA/PFS, AIF
In my first article I discussed the formation of the pension plan, building the investment policy statement, forming the investment committee and selecting the vendors. Now we will discuss the portfolio construction.
Asset management inside a pension plan presents a rather unique problem for the investment committee, as it must consider the financial condition for many different individuals. The age, net worth and risk tolerance of each participant will be different. The investment committee holds a fiduciary relationship with each plan beneficiary and should offer a portfolio that addresses the individual financial needs of each plan participant.
The best practice is to provide a separate account for each participant, who can then be given a choice of investment options. I normally construct five or six different portfolios starting from all fixed assets (a conservative approach) and move the portfolio structure gradually to all equity (a more aggressive approach).
Academia tells us that the equity market is an efficient one and that equity market returns are greater than the fixed income market over a long period of time. But over the short run, say five years, fixed income will prevail 23 percent of the time. If an employee intends to retire within five years the portfolio may have a heavy allocation of fixed income, whereas a 30-year-old employee, with a long investment time horizon, may have a low or no allocation of fixed income. With their own account employees are able to determine their future.
This same academia tells us that neither market timing nor individual assets selection works. Diversification is the key to success and asset class selection explains more than 90 percent of the market yield. Diversification involves selecting separate asset classes and owning as many different individual stocks as possible within each class. This will obviously be accomplished through mutual funds.
Asset classes represent different areas of the stock market such as company size (large cap and small cap) or company price (growth and value). A discussion of this concept can be read at www.dfaus.com, which explains that markets are efficient; risk and return are related; diversification is key; structure explains performance.
If you got this far, you now know portfolio structure is the key to success. Since half of the capital is outside of the United States, a prudent investor would invest heavily internationally with some exposure in the emerging markets, but the investments committed overseas would be tempered with caution. Some countries with poor contract laws and rather unstable governments should be avoided.
The investment policy statement should have the basic portfolio structure as the target, with a specific tolerance for drift. The structure of a sample equity portfolio may be weighted 60 percent U.S., 35 percent international and 5 percent emerging market, then further sorted 80 percent large cap and 20 percent small cap, with the total portfolio being 50 percent growth and 50 percent value.
The fixed income side of the portfolio should be focused on short-term (under five years) obligations. Research indicates that longer-term obligations carry excessive high volatility with very small amount of extra return. A 20-year bond has almost twice the volatility of a five-year bond, and five times the volatility of a two-year bond. In a rising interest market like we have seen over the last few years, a long-term bond becomes a poor investment.
Cost is the other factor in improving or hindering portfolio performance. In addition to the mandatory cost of operation, mutual funds incur additional cost. “A” class funds charge an upfront load or commission, usually 4 percent to 6 percent of the funds invested; “B” Class funds charge a penalty if you sell the funds prior to a date certain, usually five years after purchase. These penalties may decrease over time. Some funds have 12(b) 1 Fees representing their sales cost. There are also transaction fees incurred inside the mutual funds. If the fund is actively managed (you can tell by reviewing their stock turnover rate), your additional cost in the fund may be more than 1 percent.
Each of these fees and costs should be analyzed before investing in a specific mutual fund.
A good investment committee, when building or revising the investment policy statement, will select no-load funds, with low turnover that are able to maintain their asset class position in the market. If they are a small cap value, they should remain a small cap value year after year. You will notice that many funds drift toward market neutral as they grow. These funds are to be avoided.
To summarize portfolio construction: diversify the assets according to the Investment policy statement, control cost and rebalance with new money coming into the portfolio. It is as simple as that. And remember to visit www.feedthepig.org.
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Welcome New Members
On behalf of the Central Coast Chapter’s officers, directors and members, we extend our warmest of welcomes to our new member.
Candidate Member
Dannielle Pusatere
Candidate Members Recently Converted to Licensed CPAs
Nancy Boyce, CBIZ & Mayer Hoffman McCann PC
Licensed Members
Jason Janzen, Bartlett Pringle & Wolf LLP
Verna Linskey
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CHAPTER EVENTS
Annual Retreat/Installation of Directors & Officers [PDF]
Date: Friday-Sunday, June 8–10
Location: Omni Hotel; San Diego
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Tax Controversy & Litigation
Speaker: Dennis Perez, attorney
Date: Tuesday, Aug. 21
Time: 8:30 a.m./registration/9 a.m.–noon/program
Location: Hotel Mar Monte
CPE: 3 hours
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Audit Standards Update: The New Audit Risk Assessment Standards
Speaker: Thomas Noce
Date: Tuesday, Sept. 25
Time: 7:30 a.m./registration; 8:30 a.m.-4:30 p.m./program
Location: TBD
CPE: 8 Hours
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Fraud
Speaker: Luis Tejeda, fraud technical adviser, IRS
Date: Wednesday, Oct. 17
Time: 8:30 a.m./registration/9 a.m.–noon/program
Location: TBD
CPE: 3 hours
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Annual Golf Tournament [PDF]
Date: Monday, Oct. 22
Location: Montecito Country Club
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Technology
Speaker: David Cieslak
Date: Tuesday, Nov. 13
Time: 8:30 a.m./registration/9 a.m.–noon/program
Location: TBD
CPE: 3 Hours
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Estates & Trusts
Speaker: Mary Kay Foss
Date: Tuesday, Jan. 8
Time: 8:30 a.m./registration/9 a.m.–noon/program
Location: TBD
CPE: 3 hours
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INTEREST GROUP MEETINGS
AP&AS (Santa Barbara)
Date: Thursday, June 28
Location: Doubletree Resort; Santa Barbara
Info: Tim O’Keeffe, (805) 963-1837 or tokeeffe@dbntm.com
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AP&AS (Ventura)
Date: Wednesday, June 27
Time: 7:30 a.m.
Location: Soares, Sandall, Bernacchi & Petrovich; 405 E. Esplanade Drive, #300; Oxnard
Info: Raj Acharya, raj@ssbp.com or (805) 485-7965
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Conejo Valley Discussion Group (Thousand Oaks)
Date: Wednesday, June 20
Info: Interest Group Chair John Jackson, jbjcpa@sbcglobal.net
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Santa Barbara CPA Discussion Group
Date: Tuesday, June 26
Location: Santa Barbara Club; 1105 Chapala St.; Santa Barbara
Info: Interest Group Chair Cindy Young, lucinda.young@gmail.com, or program associate rita.williams@calcpa.org
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Ventura CPA Discussion Group
Date: Thursday, June 28
Info: Interest Group Chair Garry Jones, (805) 778-1858 or rita.williams@calcpa.org
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RESOURCES
Channel Counties Chapter Leadership
Contact Program Associate Rita Williams
Contact Program Director Gary Hammond
