Investment portfolio. Case study Essay Example

Investment portfolio

The goal of an investment decision is always to make a profit vis-à-vis the risks associated with the decision in order to achieve the investment goals. The portfolio construction process therefore determines how the funds of the investor are diversified to reduce the risk of investing, in line with their objectives while achieving capital growth. The investment risk cannot be eliminated but the portfolio construction provides a balance between return and risk such that the client funds are invested in a way that is within the acceptable risk level of the client. The client’s total fund that ought to be invested is $2,000,000 outside their superannuation account. The clients are willing to invest their money in ETFs, LICs, futures, cash and equity.

The choice of an investment strategy for any investor is largely dependent on the objective of the chosen. The choice of the invest strategy is therefore an answer to the question: the investment horizon, potential returns, risk tolerance and objective of the funds (Wall Street Survivor). The client is a high risk tolerant investor with preference on the large companies, top 100 companies. However, the risk tolerance of the client can be different from the willingness of the client to bear the risk. As much as the client insists of their ability to tolerate high risk, it’s advisable that investment strategy take on the diversified portfolios for better long-term outcomes (Vanguard, 2017). The investment strategy that is used to draw up the portfolio for the client is based on the top down approach.

The top down approach is based on the ideas of looking at the bigger picture before narrowing down to the asset and sub asset allocation of the investor. The strength of the market is therefore important in choosing on how these funds are eventually allocated in the different asset classes. Vanguard explains the top down approach in four stages as: a) asset allocation decision, b) choice of where to invest, c) choice between passive and active funds and d) evaluation of individual funds. Crescenzi (2009) explain that the top down approach to investing has become inevitable to apply in the investment decisions. He cites that the introduction and the development of the financial markets provides very many asset classes for which an investor can put their money and due to their dependence, it becomes hard to make the optimal investment decision (p. 2).

Based on the preferences of the client, the strategy that will be applicable in coming up with the portfolio is a diversified strategy through the top down approach. Since the approach is the top down approach, the choice of companies will be based in the macro element and their risk factors. The modern portfolio theory supports this diversification element. The theory suggests that the only way one can achieve optimal returns relative to the associated risks is to have a portfolio that in assets classes that re less correlated with each other CRESCENZI ,2009 p. 138). Diversification of the portfolio also helps in reducing the gaps of investing. Macquire advises that in the event that one needs to diversify, then it is important to allocate assets effective. This decision is in line with the client requirements to have at least 50% in shares, 35% minimum funds allocated to ETFs and LICs while 15% held in cash management. Macquire further advises that a diversified portfolio should include a variety of industries to create a balance. This fact also informed the choice of the shares that van be invested. However, since the client has a reservation about the Australian resources and would like to have as little exposure to this industry as possible, the companies in the resources industries were not considered.

The Australian global and local economy outlook for the year was also considered in the portfolio construction. The US economy was considered bullish given the election of Donald Trump as president and his policy formulations thereafter. Moreover, the Australian market has been experiencing price volatility in the year with steeper yield curves and high bond and stock volatility. To factor in this price volatility, the individual share purchases were based on price changes from 2/26/2010 to 7/10/2017 at a threshold of 100%. Only shares with more that 100% share price increase were selected, excluding shares in the resources industry.

XCompany Name price at 7/10/2017 quantity
Adelaide Brighton Ltd $ 83,400.00
Amcor Ltd $ 160,900.00
Ansell Ltd $ 182,640.00
Aristocrat Leisure Ltd $ 65,250.00
BT Investment Management Ltd $ 66,000.00
Carsales.Com Ltd $ 58,650.00
Cochlear Ltd $ 153,140.00
$ 133,320.00
Qantas Airways Ltd $ 58,300.00
REA Group Ltd $ 158,375.00
TPG Telecom Ltd $ 27,850.00
$ 1,147,825.00
Equity Share Short Sales
Coca-Cola Amatil Ltd $ 30,555.00
Orica Ltd $ 61,890.00
QBE Insurance Group Ltd $ 12,280.00
Woolworths Ltd $ 43,809.00
$ (148,534.00)
$ 999,291.00

LICs AND ETFs

WAM Capital Limited Smaller companies
iShares S&P 500 US S&P 500
Vanguard Australian Shares Australian shares
Aberdeen Leaders Ltd Large, leading companies
Beta Shares Gold Bullion
$ 523,665.00

Maintaining the goal of a diversified portfolio, I chose to add the WAM capital limited LICs. WAM capital provides investors with a diversified portfolio of undervalued ASX companies. The purchase was also chosen as it is in lie with the objectives of the client to preserve capital and capital growth. One of the min reasons why WAM is a suitable investment vehicle for the client is for the reason that the LIC pays out large dividends and is usually reporting high performance (Harrison, 2017). Aberdeen Leaders is an investment company whose objective is to invest in the Australian stock exchange listed companies. The company’s main investment goal is to provide the clients with high capital growth over the long term period. The choice of Aberdeen leader’s ltd was informed by the chosen investment strategy and the client’s objectives as the LIC invests various sectors hence reducing investment risks.

The inclusion of the Beta Gold Bullion was to provide the client with an exposure to the less volatile gold bullion. Furthermore, the gold bullion will be currency hedged against variation in the USD and AUD exchange rate. This is a great investment in the wake of the exchange rate volatility following the election of the new US president. Moreover, the clients were uncertain about the US economy and its impact on investing in the dollar denominated price of investments. Gold provides the safest investment in such times of volatility and uncertainty. The investment benefits the clients as it can be traded on the ASX should the clients need to have liquidity in their investment in the near future.

Vanguard is considered as the pioneer of the exchange trade funds and it is one of the best index trackers hence providing the best investment choice for volatile markets. Vanguard’s ETF is suitable as its offer a track on all large Australian companies in different sectors thus diversification. The iShares S&P 500 on the other hand tracks the investment of the larger US companies. BlackRock, the managers of the ETF pride itself in providing the client with lost cost exposure to longer term investment in the largest US companies (BlackRock, 2017)

Hedging Options

Hedged position for ASX equity investment hedge positions
SPI futures contract value
sell the futures contract @ 5663 140,000.00

The client requirement had that at least 50% of the Australian direct share investment to be hedged using futures.

The direct share investment is = $1147825-$148534=999,291

One SPI 200 futures contract value= $25*5663 =$133,400

Since there is a minimum of 50% of $99,291 ought to be invested in futures, I considered investing 100% of the direct share investment. This means that the required number of SPI 20 futures contracts is:

case study

The client further requires that each contract have a settlement account of $20,000. Therefore, the total amount required for the hedging contracts iscase study 1

Cash Requirements

The client had a cash requirement of a maximum of 20% of the funds that is at most $400,000 should be kept as liquid cash. The cash holding stands at $337,044 which covers the short selling margin requirement of $140,000 while the other portion still meets the maximum requirement.

CASH INVESTMENT IN CASH TRUST
CASH Holding 337,044.00

References

Macquire How to reduce investment risk with portfolio diversification [online] available from: http://www.macquarie.com/au/personal/investments/expertise/investment-diversification-strategy accessed 31/7/2017

Harrison, T 2017 3 reasons why I own WAM capital limited and WAM Research Limited, The Mootley Fool [online] available from: www.fool.com/au/2017/05/29/3-reasons-why-i-own-wam-capital-limited-and-wam-research-limited

BlackRock 2017 iShares [online] available from: https://www.ishares.com/us/products/239726/ishares-core-sp-500-etf

Crescenzi, M. 2009 Investing From the Top Down A Macro Approach to Capital Markets, McGraw-Hill.

Vanguard, Vanguard ETF portfolio strategies [online] available from: http://www.moneymanagement.com.au/sites/moneymanagement.com.au/files/Vanguard%20Portfolio%20Strategies.pdf