FIN201 – Investment Management
Topic:
You are responsible for managing a $500,000 portfolio for a local tennis club. The managing committee has heard that by investing in shares and other financial instruments, the tennis club could achieve a higher return than what is currently earned through an internet maximiser account. The committee has heard that you are currently studying a unit on security analysis and portfolio management. You are requested to build a portfolio of investments by the end of December, 2018, track the performance of your portfolio on a weekly basis and submit a report by 28 February 2019. You may consider the following steps in your portfolio construction and management:
Part 1
Prepare an investment policy statement for the local tennis club based on what you learn in Topic 1. You may specifically consider the (i) liquidity requirements; (ii) return requirements; (iii) risk tolerance; (iv) time horizon; (v) tax considerations; (vi) regulatory and legal considerations; and (vii) unique needs and circumstances. Further given the sensitivities of the members of the organisation, you are asked to avoid investments that are seen to be socially and ethically NOT responsible.
Part 2
The tennis club is considering a mix of equity, debt and cash (or money market securities). You are asked to determine a capital allocation strategy by considering the current and future economic situation, government policy and monetary conditions. You are required to suggest a capital allocation strategy. For example, a mix of 40% equity, 40% debt and 20% cash (and marketable securities) may be suitable for an organisation or an individual pursuing a balanced portfolio. Prepare an account of why the chosen capital allocation is appropriate for the local tennis club.
Part 3
Having decided on a mix of capital allocation, you are now required to choose specific investments for equity and debt. You may give due consideration to possible diversification benefits when considering investments from different sectors or industries. You are required to prepare an explanatory statement as to why the specific investments (shares, bonds and others) are chosen.
Part 4
Prepare a report showing details of the above steps with timelines and tracking performance of your portfolio on a weekly basis at least for the months of January and February 2019. You may compare the performance of your portfolio with a bench mark portfolio such as the ASX All Ordinaries.
Solution
Introduction:
The report shows the investment policy statement of the Tennis club association, which is going to invest in a portfolio of stock, bonds, and cash. The report shows the allocation strategy and choice for the asset classes. The results of the daily return are, however, more reliable as it captures the real returns of the fund. The return of the fund and the performance in the two months is evidently good for this fund and portfolio of investment. However, better options can also be looked into as well. There are more high return funds which can be chosen for this investment; however, the results would be exposed to high risks as well.
Part 1: Investment Policy Statement
Tennis Club is responsible for the assurance that the community trust will operate within the sustainable and responsible financial framework. It is also responsible for assuring that the organization has enough resources to carry out its operations and make investments.
Purpose:
Its purpose is to provide the guiding principle for the investment portfolio of the funds.
Role:
The investment policy is used for providing the objectives, distribution policies, and guidelines for investment which also rule the actions of the committee and all the parties to those that the responsibility of the investment management of the portfolio is delegated. Other than this, the investment policy is developed aligned with the organization financial needs and the tolerance for financial and investment risk. The investment policy is developed by making sure that the management of the portfolio is done with consistency over the financial goals, whether they are long term or short term. The investment is intended to provide the flexible opportunity of facing any market changes or fluctuations in the financial situation and position of the company (Israelsen, 2010). The investment policy will be reviewed by the committee on a yearly basis, and any changes made to the policy statement of the portfolio investment will be done only by the confirmation of the majority of the Committee. The written affirmation of these changed will be needed to be provided to the committee members and to all the parties that are involved on behalf of the management of the portfolio.
Spending Policy and Objective of Investment
The aim of the investment is to be invested in the funds which help in preserving the long-term purchasing power of the assets. This is needed to be done while also yielding an expected and increasing stream of the annual revenue distributions in favor of the organization. A return-based spending policy is going to be developed to make the distributions of this revenue stream. This implies that the distributions will be funded from the net realized gains, net investment income, and also from proceeds from the sale of these investments. The distribution of the portfolio assets will be allowed to only the degree that the distribution does not cross the level, which helps remove the real assets of the fund over time. The aim of the committee will also be to reduce the difference in the distributions of the fund by making the factors of portfolio asset values and the past spending into the existing spending decisions. The committee will be required to review the suppositions on which the spending is done on a yearly basis for the aim of deciding the changes that require the amending of the spending policy of the portfolio funds, its targeted asset allocation or to both (Tokat, Wicas and Kinniry, 2014).
The periodic cash flow from the investment portfolio or spend into the portfolio will be utilized for the improved alignment of the portfolio investment with the intended allocation of the assets as shown in the allocation policy shown below.
Asset Allocation Policy
The committee has recognized the allotment of the assets of the portfolio in the various financial assets and the classes of the sub-assets with different scale of the return, risk, and return correlation. These will be important in determining the long term investment returns for the portfolio asset value and its steadiness.
The Committee is expecting that all the actual returns and the changes in the return would be varying from the said expectations and objectives of the return all across the short period. The committee while expects that the flexibility of the portfolio funds is retained in terms of making a periodic alteration to the asset allocation of the portfolio, it also anticipates doing so only in situations in which three is an expectation of material changes to the funds. Furthermore, it is also to be material to the underlying assumption of the spending policies of the fund and to the asset classes and capital markets in which the investment of the portfolio is made.
The fund’s assets for the portfolio are going to be managed as a balanced portfolio, and it is needed to be composed in three main parts. These can be the equity portion, debt portion, cash portion. The equity investment is aimed at maximizing the long term return of the portfolio investment, and the cash portion is aimed at conserving the return with a low-risk portfolio asset. The cash investment in the portfolio is going to be representing the stable periodic returns and the protection of the investment against the prolonged decline of the equity investments market value (Financial Literacy for Community Groups, 2015).
These cash investments will be considered as a temporary holding of the investment under normal circumstances. These will be sued by the committee for the liquidity needs of the organization or for helping the planned program for the dollar cost averaging of the investment in either of these sources of investments.
Diversification Policy
Diversification is one of the main tools by which the asset class’s returns and risks can be covered. The primary aim of the diversification is usually to avoid the undue risk of any larger losses in the long term returns of the funds. The protection of the portfolio is needed to be done against the unfavorable conditions; the committee is needed to take all reasonable precautions to reduce the investment concentrations. More specifically, the investment guidelines in terms of the diversification policy are given as.
- No single investment security except the securities will hold more than 5% of the portfolio investment.
- The single company or the investment company would comprise of any investment more than 20% except that of the passively managed funds which are usually seeking the returns on a broad and diversified market index.
- In terms of the fixed income funds or the bonds, no individual bond would have the credit rating below Moody’s Baa, or S&Ps BBB.
Other Investment Policies:
Except only by the authorized expression of the committee the portfolio and the investment managers, the following acts are forbidden.
- The purchasing of the securities for short sales or for gaining small margins
- The hypothecating of the securities apart from for the loans or the securities which are usually completely collateralized
- The engagement of the managers in any of the investment strategy which has the potential of amplifying or reducing the danger of the loss further than the level which is usually anticipated as per the objectives of the portfolio investment policy
Monitoring Portfolio Investment and Performance:
For the monitoring of the performance of the portfolio investment funds, the committee will monitor against the stated investment objectives. The frequency of the assessment is needed to be determined by the committee. The committee will be required to formally evaluate the performance of the portfolio and its core assets as follows;
- The composite of the investment performance will be judged by the committee as per the standards and not its fees.
- The performance of the investment managers that have been hired or are working for the management of the portfolio will be evaluated against these standards as well
- The market-based index which has been selected as per the manager agreed on the objective of the investment and the characteristics of the portfolio of the manager.
- The fulfillment of the overall long term financial purpose of the investment
- The investment horizon selected for the performance evaluation of the long term financial goals is at minimum m of five years or more.
The investment report is needed to be provided by the manager in the quarterly base or as asked by the committee. The investment portfolio structure, performance, and the strategy will be reviewed by the committee on a yearly basis.
Part 2: Capital Allocation Strategy
For the capital allocation of the portfolio assets, as per the investment policy mentioned above, the allocation of the funds will be done in the balanced growth strategy of Vanguard.
| Portfolio Investment | |
| Investment Amount | AUD 500,000 |
| Allocation Strategy | Balanced |
The following table shows the available options of the Vanguard Australia investment portfolio funds. The Conservative has more concentration in the Cash assets, and less in the Stocks. The following graph shows how the international and Australian stock s is the riskiest investment with obviously higher returns as well. The trust is, therefore, expected to invest in balanced funds. The balanced life strategy fund is based on providing the weighted average returns for the various indexes of the portfolio in which it invests. The annual return of the fund has been around 8.40% while the five years return has been around 7.8%. The fund has been performing well in the last year with 0.09% return in as compared to the benchmark return of 0.05%.
(Financial Literacy for Community Groups, 2015)
| Cash | Bonds | Stocks | |
| Conservative | 40% | 30% | 30% |
| Balanced Allocation Strategy | 20% | 30% | 50% |
| Growth | 5% | 25% | 70% |
| High Growth | 0% | 10% | 90% |
| Balanced Allocation Strategy | 20% | 30% | 50% |
| Percentage of Investment in Asset Classes | AUD 100,000 | AUD 150,000 | AUD 250,000 |
(Financial Literacy for Community Groups, 2015)
As per the allocation of the balanced strategy, 100,000 of the funds are allocated in Cash, 30% in Bonds, and 50% in the stocks.
Part 3: Specific Investments for Debt and Equity
In terms of the debt and equity investment, the debt-to-equity ratio of the fund is 1 which means held of the funds are allocated in equity while the other held is allocated in the Debt sources of investments.
| Total Debt Investment | 50% |
| Total Equity Investment | 50% |
| Debt to Equity Ratio | 1.00 |
As per the allocation strategy defined in the investment policy for the portfolio, the allocation to the underlying assets is shown below.
| Allocation to underlying Vanguard funds | |
| As at date 30 Apr 2019 | |
| Percentage | |
| Vanguard Global Aggregate Bond Index Fund (Hedged) | 35.00% |
| Vanguard Australian Shares Index Fund (Wholesale) | 19.80% |
| Vanguard Australian Fixed Interest Index Fund (Wholesale) | 15.10% |
| Vanguard International Shares Index Fund (Wholesale) | 14.60% |
| Vanguard International Shares Index Fund (Hedged) – AUD Class (Wholesale) | 8.90% |
| Vanguard International Small Companies Index Fund (Wholesale) | 3.60% |
| Vanguard Emerging Markets Shares Index Fund (Wholesale) | 3.00% |
| Total | 100.00% |
(Vanguard Australia, 2019)
Around 35% of the funds are going to be invested in the Global Aggregate Bond index fund, which is also hedged. This is the debt investment portion. The remaining 15% is invested in the Australian Fixed interest index fund for the wholesale market. The 3% of the fund is invested in the International small company’s index fund for the wholesale market and the remaining 3% in the emerging markets shares index fund in the wholesale market. The 9% of the remaining funds are invested in the international shares index fund for the wholesale market, which is also hedged. The last 20% is invested in the Australian Shares index fund of Vanguard.
Part 4: Performance of Portfolio
The performance of the portfolio investment is judged by looking at the change in prices of the funds during January and February on a daily and weekly basis. The following is the table showing the daily performance of the Life strategy Balanced fund of the Vanguard Australia (Vanguard, 2019).
| Vanguard Life Strategy Balanced Fund | ||||
| Historical Prices: Daily | ||||
| Date | Buy | Sell | NAV | Return |
| 02 Jan 2019 | 1.3444 | 1.3414 | 1.3429 | 0.01% |
| 03 Jan 2019 | 1.3445 | 1.3415 | 1.343 | 0.25% |
| 04 Jan 2019 | 1.3478 | 1.3448 | 1.3463 | 0.36% |
| 07 Jan 2019 | 1.3527 | 1.3497 | 1.3512 | 0.32% |
| 08 Jan 2019 | 1.357 | 1.354 | 1.3555 | 0.35% |
| 09 Jan 2019 | 1.3617 | 1.3587 | 1.3602 | 0.09% |
| 10 Jan 2019 | 1.3629 | 1.3599 | 1.3614 | -0.04% |
| 11 Jan 2019 | 1.3623 | 1.3593 | 1.3608 | -0.13% |
| 14 Jan 2019 | 1.3605 | 1.3575 | 1.359 | 0.39% |
| 15 Jan 2019 | 1.3659 | 1.3627 | 1.3643 | 0.22% |
| 16 Jan 2019 | 1.3689 | 1.3657 | 1.3673 | 0.23% |
| 17 Jan 2019 | 1.3721 | 1.3689 | 1.3705 | 0.36% |
| 18 Jan 2019 | 1.377 | 1.3738 | 1.3754 | -0.16% |
| 22 Jan 2019 | 1.3748 | 1.3716 | 1.3732 | -0.01% |
| 23 Jan 2019 | 1.3746 | 1.3714 | 1.373 | 0.34% |
| 24 Jan 2019 | 1.3793 | 1.3761 | 1.3777 | 0.25% |
| 25 Jan 2019 | 1.3827 | 1.3795 | 1.3811 | -0.17% |
| 29 Jan 2019 | 1.3803 | 1.3771 | 1.3787 | 0.22% |
| 30 Jan 2019 | 1.3834 | 1.3802 | 1.3818 | -0.01% |
| 31 Jan 2019 | 1.3833 | 1.3801 | 1.3817 | 0.09% |
| 01 Feb 2019 | 1.3846 | 1.3814 | 1.383 | 0.29% |
| 04 Feb 2019 | 1.3886 | 1.3854 | 1.387 | 0.55% |
| 05 Feb 2019 | 1.3962 | 1.393 | 1.3946 | 0.39% |
| 06 Feb 2019 | 1.4016 | 1.3984 | 1.4 | 0.07% |
| 07 Feb 2019 | 1.4026 | 1.3994 | 1.401 | -0.04% |
| 08 Feb 2019 | 1.4021 | 1.3989 | 1.4005 | 0.07% |
| 11 Feb 2019 | 1.4031 | 1.3999 | 1.4015 | 0.26% |
| 12 Feb 2019 | 1.4068 | 1.4036 | 1.4052 | 0.01% |
| 13 Feb 2019 | 1.4069 | 1.4037 | 1.4053 | 0.05% |
| 14 Feb 2019 | 1.4076 | 1.4044 | 1.406 | 0.21% |
| 15 Feb 2019 | 1.4106 | 1.4074 | 1.409 | 0.21% |
| 19 Feb 2019 | 1.4136 | 1.4104 | 1.412 | 0.07% |
| 20 Feb 2019 | 1.4146 | 1.4114 | 1.413 | 0.30% |
| 21 Feb 2019 | 1.4188 | 1.4156 | 1.4172 | 0.14% |
| 22 Feb 2019 | 1.4208 | 1.4176 | 1.4192 | 0.03% |
| 25 Feb 2019 | 1.4212 | 1.418 | 1.4196 | -0.16% |
| 26 Feb 2019 | 1.4189 | 1.4157 | 1.4173 | 0.11% |
| 27 Feb 2019 | 1.4205 | 1.4173 | 1.4189 | 0.02% |
| 28 Feb 2019 | 1.4208 | 1.4176 | 1.4192 | |
| Average Return Daily | 0.146% | |||
As per these values, it is evident that the fund has earned a handsome return of 0.146% on average in the two months of January and February 2019(Shahidi, 2014). The results of the returns on a daily basis show that the fund has very less gone negative and in loss, more specifically in 7 days only, while most of the days the return has been positive showing a stable growth fund characteristic.
The daily return performance shows that the fund is steadily going upwards with some minor dips in January. On the contrary, in February, it has gone upwards rather aggressively showing higher returns.
The weekly performance of the fund shows the following analysis.
| Vanguard Life Strategy Balanced Fund | ||||
| Historical Prices: Weekly | ||||
| Weekend Date | Buy | Sell | NAV | Return |
| 08 Jan 2019 | 1.34928 | 1.34628 | 1.34778 | 0.99% |
| 15 Jan 2019 | 1.36266 | 1.35962 | 1.36114 | 0.77% |
| 22 Jan 2019 | 1.3732 | 1.37 | 1.3716 | 0.44% |
| 29 Jan 2019 | 1.379225 | 1.376025 | 1.377625 | 0.58% |
| 05 Feb 2019 | 1.38722 | 1.38402 | 1.38562 | 1.16% |
| 12 Feb 2019 | 1.40324 | 1.40004 | 1.40164 | 0.46% |
| 19 Feb 2019 | 1.409675 | 1.406475 | 1.408075 | 0.65% |
| 19 Feb 2019 | 1.41886 | 1.41566 | 1.41726 | 0.08% |
| 28 Feb 2019 | 1.42004 | 1.41684 | 1.41844 | |
| Average Return | 0.64% | |||
The weekly returns graph shows a steep decline in January and then its stability. This is because of the reason that the results used are average of week returns. The February month shows the steep decline twice in the returns as it is based on average returns of the fund.
Conclusion:
Concluding, the results of the daily return are, however, more reliable as it captures the real returns of the fund. The return of the fund and the performance in the two months is evidently good for this fund and portfolio of investment. However, better options can also be looked into as well. There are more high return funds which can be chosen for this investment; however, the results would be exposed to high risks as well.
References:
Financial Literacy for Community Groups (2015) Guide to Investing Money for Community Organisations, [Online], Available: http://www.aph.gov.au/DocumentStore.ashx?id=8b0f9319-c427-4577-8b8c-9d742496b161 [18 May 2019].
Israelsen, C.L. (2010) 7Twelve: A Diversified Investment Portfolio with a Plan, John Wiley & Sons.
Shahidi, A. (2014) Balanced Asset Allocation: How to Profit in Any Economic Climate, John Wiley & Sons.
Tokat, Y., Wicas, N. and Kinniry, F.M. (2014) ‘The Asset Allocation Debate: A Review and Reconciliation’, Journal of Financial Planning, vol. 1, no. 1, pp. 1-15.
Vanguard (2019) Vanguard LifeStrategy Balanced Fund, [Online], Available: https://www.vanguardinvestments.com.au/retail/ret/investments/product.html#/fundDetail/retail/portId=8120/?overview [18 May 2019].
Vanguard Australia (2019) Vanguard LifeStrategy Balanced Fund, [Online], Available: https://api.vanguard.com/rs/gre/gls/1.3.0/documents/8295/au [18 May 2019].
