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Permeating the organization means that the vision itself becomes an energy form that influences the human energies that run the business. Statements that only talk about achieving a goal or arriving at a linear point in the future don’t have the power that Wheatley describes. An open, internal-focused statement would read something like this one from an international investment firm: “We are committed to building positive futures, one relationship at a time.” This company understands the value of the ethereal energy inherent in the process of doing business. It acknowledges that good things will result from the way they do business, not just what may appear on a future balance statement.

Discussing ethics is awkward because people feel so strongly about them. Ethics aren’t universally shared or even understood, and their application in practice is always an issue. Our difficulty in talking about ethical situations may be due to the fact that no one wants to be labeled “unethical.” Yet every organization should ask itself daily: “Are we an ethical organization?” The question is provocative.

Creating and articulating vision and values is a basic leadership role. Some people mistrust the concept of vision and values in organizations. Organizational leaders don’t want to waste time creating yet another useless description of the future, and employees grow weary of hearing lofty ideals mouthed by their leaders. Phony visions do nothing but reinforce their cynicism; actions speak louder than words. People watch what others do, not what they say. Organizations must act in accordance with their vision every day—instead of treating the concept as a training exercise that they’ll update every five years.

A vision is not a goal. It’s not a statement that points toward a destination. Margaret J. Wheatley expresses this concept eloquently in her 1992 book Leadership and the New Science. She explains how a vision is really a field of energy: Vision—the need for organizational clarity about purpose and direction—is a wonderful candidate for field theory. In linear fashion, we have most often conceived of vision as thinking into the future, creating a destination for the organization.We have believed that the clearer the image of the destination, the more force the future will exert on the present, pulling us into that desired future state. It’s a very strong Newtonian image, much like the old view of gravity. But what if we changed the science and looked at vision as a field? What if we saw a field of vision that needed to permeate organizational space, rather than viewing vision as a linear destination?

Organizations, like teams, operate best when everyone contributes to the organizational goals. When parts merely work together collectively, they focus only on their own domain—on their own success or survival. We might work hard to attain the output expected by others, but only in ways that ensure our individual success. When we look at ourselves as a system, however, we begin to integrate our functions and modify them to support others. Imagine an orchestra showing up to play with no program, no sheet music, and no conductor. No one communicates a vision of the musical outcome.

Forty musicians, all virtuosos in their own right,would produce something short of the orchestra’s potential without the organization inspired by the conductor’s vision. Now imagine this same group of musicians guided by the leader, all on the same page of music, all blending their individual performances to produce an outcome. The audience is moved; emotions are stirred; the box office is happy.

Daily electronic data feeds of index levels, constituents, changes and prices are vital to the portfolio management process. This data needs to be of high quality with very low error and recalculation rates. Downloads via the internet and, more importantly, via information systems like Bloomberg facilitate the use of benchmark indices. Tools that help to split indices according to sectors, rating classes and maturity buckets are a good basis for a structured portfolio management.

Now we come to the softer criteria. Investors will want a benchmark that is well-known and widely used within their peer group. This will give them some comfort as to the ongoing integrity of the index and the ability to make peer group comparisons. This would also allow multinational companies to standardize approaches across their pension plans.

Institutional investors want their indices to represent the investable universe. Much of the theoretical justification for indexing as an investment strategy relies on the index fund being the “market portfolio.” Broad coverage within a market will allow valid comparisons between different investment styles, including active and passive. Internationally, the Lehman family of fixed income indices and the Merrill Lynch fixed income index family are designed to give a comprehensive coverage. Ideally an index will have a set of rules that are preset, unambiguous and publicly available. This is particularly important for constituent reviews and corporate actions. Establishing rules at the outset reduces the risk of “interested parties” influencing the list of constituents. The best indices in this regard will have a set of rules that allow someone with those rules, the necessary data on the investment universe and (most rarely) the inclination, to replicate the list of constituents themselves. The rapid development of the European corporate bond market has necessitated various adjustments to the index-inclusion criteria. At the foremost, index providers like Lehman Brothers and Merrill Lynch had to increase the minimum size of the corporate bond issues included to represent the more liquid and thus investible part of the universe.

A market capitalization-weighted index will be a prerequisite for the vast majority of investors. There is a move by index providers to refine pure market capitalization weightings to take into account common investment constraints. Examples for this are issuer-capped or -constrained indices. They tend to be useful in less diversified market segments like the Euro high-yield bond market. Yet investors have to keep in mind that the tracking of issuer-capped indices causes higher transaction costs than traditional market capitalization-weighted indices do.

Total return indices will be the performance benchmark for most investors. Usually, these are calculated on a daily basis. In addition, capital or price only indices are a useful portfolio management tool. Indices that track the average spread versus government bonds or swaps, dollar or modified duration, coupon and market value of the index universe should supplement an index family. From a portfolio manager’s point of view these index characteristics must be accessible on a daily basis, whereas historical data enables comprehensive analyses.

If the investment universe of a portfolio and the composition of the benchmark index diverge significantly, the portfolio manager faces an additional risk. This benchmark risk is unsystematic and causes performance differences between the portfolio and its benchmark that cannot be controlled by the manager. This point should be kept in mind during the process of product development as well as during index selection, because this unsystematic risk causes tracking error without giving the investor the opportunity to generate any systematic outperformance versus the benchmark.

To accommodate the needs of different types of investors, a variety of types of indices have been developed. Broadly, these can be grouped into four main categories:

narrow indices used primarily as the basis for index futures contracts,
large capitalization indices used by international investors,
broad market indices used by local investors, and finally
specialized indices (e.g. sector, style or market segment indices).

When using the criteria described above, it would be normal to compare indices within the broad groupings listed above rather than across those groupings.

I use unit mix and rent schedule tables to verify the rent income on properties, and from experience I have yet to ever find one in a pro forma that accurately depicted the actual income picture. That’s why it’s important to know how to read and analyze this informa¬tion. Let’s look a little closer.

With this information, the owner is telling you that the total rent for the eight units on this property is $4,000 per month based on the rents as listed in the “Total Rent” column. But on this par¬ticular table, the seller put asterisks next to the rents to indicate that the actual rents are lower. Significantly lower—see the small print. An inexperienced buyer might look at this table and conclude that the $4,000 is the actual income of the The unit mix and rent schedule is a table that is usually in rental property brochure pro formas. It lists the number of units, the type, square footage, and rent. Its purpose is to give you a picture of the income, by unit and overall for the property.

Before you start a rumor that Ken McElroy is a broker hater, know that on the bottom of every sales brochure I’ve ever seen are these words:

This brokerage company makes no warranty or representation about the content of this brochure. It is your responsibility to independently confirm its accuracy and competencies. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the property.

This disclaimer makes it pretty clear that a smart investor must verify each and every number in this brochure. If you don’t, they are basically saying with this one statement: It’s your own fault.

Here’s how you verify the income from the numbers on a typical property pro forma in a sales brochure. The information I’ll use in this example is from an actual property in Phoenix, Arizona. Let’s start with unit mix and rent schedule.

Traditionally, many property owners will try to sell their property based on the future potential income. It is in your best interest to buy it at the actual income. That’s the way I like to buy—based on the way the property is currently running and the amount of money it is currently making. I think of that as “wholesale.” If you buy property based on how it could run and the income it could generate in the future—the future potential income—I call that buying it “retail.” Try to avoid retail purchases at all costs. Buying right means buying at wholesale. When you buy wholesale, your mortgage is lower and right out of the gate that means you are maximizing your profitability on the property.

With the important distinction between retail and wholesale out in the open, trust but verify all numbers listed on the back of the sales brochures you get from brokers and sellers. These sales brochures have a fairly standard format. Usually on the front there is a photo of the building and on the back are a lot of numbers that depict the property’s operations performance. You simply cannot accept these numbers as fact, since they are often inflated.