CFAI cant make up its mind re: ongoing expenses and liquidity

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andytrader

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Do we include this in liquidity requirement or not?
The Maclins (Vol 2, page 216) have unfunded ongoing expenses of GBP 26K. But answer for liquidity constraint only mentions the one-time stuff.
Would like some certainty here.
 
I think it would not hurt you to include ongoings, when they don’t.
But it could hurt not to include when they do.
That is my idea, so I will try to mention on exams.
 
26K is an ongoing expense.
Liquidity need is something that is immediately required.
E.g. Someone needs 200 K to buy a home at the end of the year (or before they go into retirement). Someone needs to make a charitable contib in the next 6 months of 50K. Usually this is before the retirement starts..
and it would be like you had to take that amount OFF the existing investment portfolio before you started to calculate the required return requirement.
 
cpk123
Yes that’s right, but andytrader makes good point, because I have seen answers in which ongoing expenses that WERE NOT taken from assets to return calculation, were mentioned in liquidity constraints part.
 
CP I understand but there are numerous guideline answers where cfai mentions first year of ongoing expense as an immediate liquidity need. But in this example (and others) they don’t get any mention. I guess to be safe including it should not hurt but excluding it could result in point deduction.
 
in questions where there is a continuous need over a number of years - it does not qualify as a liquidity need. it becomes a ongoing expense. that is the only case that I have been able to determine.
Can you provide examples of this discrepancy… if you have them readily available - so we can go thro those and determine the pattern, if any.
 
I will be listing any expense shortful funded by portfolio under liquidity as I have seen it on numerous guideline essay answers.
CFA Text Volume 2, page 170
Liquidity constraint - refers generally to the investment portfolio’s ability to effeciently meet an investor’s anticipated and unanticipated demands for cash distribituion.
Ongoing expenses - costs of daily living create a need for cash (etc)
 
CP: 2011 AM mock. Question 2 part C
Beckers have 3650000 immediate cash needs + 209,500 in net living expenses for first year of retirement or a total of 3859000. Ongoing liquidity needs will be 209500 adjusted for inflation.
They even used the term “ongoing liquidity needs”.
So unless they have changed their position, this is one of MANY examples where they add ongoing expenses in the liquidty description. I dont have time to list them all but clearly there are others who have seen other examples elsewhere in CFAI material.
 
I think i figured this out few weeks ago. What i noticed is that liquidity requirements refer to what liquidity the portfolio needs to provide.
The reason ongoing expenses are not usually noted is because they are covered by salary. If this isnt the case and there is a shortfall that needs to be provided by the portfolio, THIS constitutes a liquidity requirement even if ongoing.
In the first scenario where salaries covers expenses, we do not state retirement income as a liquidity requirement because it is many years away and does not impact the asset allocation. It is, nonetheless factored into your return objective when you state that you want to growth the portfolio to cover living expenses.
Does anyone agree with my interpretation?
 
Agree with Andy and Straightjacket. While I have also seen expense shortful not listed under liquidity and only for the return requirement, I will list it to be safe.
 
As Straightjacket mentioned, definately include ongoing expenses if there’s a shortfall compared to income, or there’s no outside income.
The question is if salary meets expenses, should expenses be included in the liquidity constraint? I don’t think it should but I’m not sure if mentioning it would cost points. What a silly exam.

If this came up I think I’d answer it like “Immediate liquidity needs are to fund son’s education. After that he just needs to pay his inflation adjusted living expense which should come from his salary.”
 
I agree this is very silly but would be nice for CFAI to be consistent and thus far they have not. When there is a shortfall not covered by expenses - sometimes they include it sometimes they dont. I am going to include it because if I have a shortfall, there is no guarantee that my return in a given year will be achieved but I still need to live. Thus I should have some liquidity available in my portfolio and not all in private equity investments or fudns with a 10 year lock-up period.
 
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