Analyzing And Applying The Investment Process For Two Funds In An Essay.

“You are required to;

- research and analyse in detail the various stages of the investment process, as outlined in chapter 1 of the text-book; and

- apply the investment process when, as an investment adviser, you are setting up and developing an ongoing review and management plan for two funds of $1.5 million each (both set up from inherited money), one fund for a 35 year old professional client with a spouse and two children and the other for a 65 year old retiree with a spouse and no plans to work again.

Understanding the investment process

A diversified portfolio can assist in protecting wealth from ups and downs of the market. There are usually four major types of investment also known as asset classes, having own risks and benefits which are; Cash, fixed rate, shares and property. An investor can directly invest in these assets or might prefer a managed fund that can provide various investments.

Defensive investments: These investments are focused on producing general income, as opposed to increasing in value. Defensive investments have two types in common which are; cash and fixed interest (Bodie and et al. 2014).

Cash investment: It comprises high-interest saving accounts. The major benefit of cash investment is stability. However, it offers security and is less risky. The value of cash can reduce; this might take place in the situation of inflation where the cost of products and services increases. For most of the investors, cash investments are appropriate for keeping cash-on-hand for urgencies and expenses and using it as a transaction account.

Fixed interest investment: It is inclusive of corporate bonds, government bonds and term deposits. Deposit allows in earning interest in savings at the same or a slightly high rate compared to a cash account. On the other hand, bonds usually act as loans to corporate or government, who put them in to sell to investors for a set amount of time at a determined rate of interest. Chance and Brooks (2015), assertedthat risk of investment in bond depends upon company it can be highly risk, stable or low risk, some types can make a deduction in value, by considering this aspect investor can possibly get less money than they initially paid.

Shares: In simple words, a single share shows a single ownership unit in a corporate. When a share is purchased, then the investor becomes a part of company (as an owner) and is entitled to share in future profits. Shares are said to be the growth investments as their value rises over time. Investor can make money by put these shares into sale for high prices. Chandra and Leong (2016) specified that shares are best complimented when investors want to construct solid funds for medium as well long-term savings goals and having a long-investment timeframe. If an investors holds a share, then they might get income from dividends which are a part of company’s profit been paid to shareholders.

Property investments: It includes of hotels, residential property, industrial property, retail premises and commercial property. Property investments provide value to investors in two key ways; properties rise in capital value, investors gain rental income from their tenants.  Same like shares, the property’s value might rise, and the investor might be able to earn money on the medium to the long basis by putting the property into sale and get more than they have paid them initially (DeFusco and et al. 2015). However, the prices and to assured to increase, and property can be complex as compared to other investment types to be put into sale rapidly.

Types of investments

The investment process is described a series of steps, which a rational investor follows for making a decision regarding what securities will give the maximum return along with the extent of investment to be made in different types of securities along with the time and duration of investment (Hallerbach, 2016.). The investment process comprises of five steps that are to be followed for a rational investment.

Figure 1: Investment Process

(Source: Bodie and et.al.)

Investment Identification

Investment identification is concerned with identifying specific assets to invest in by determining the amount of the wealth to invest in each category (Mbogo and et.al. 2017). This step considers the selection, time and diversification of each category. The assets to be kept in the portfolio are decided by this step. The portfolio is constructed with an aim to maximise return while minimizing the risk. This step also involves gathering related information to all the investor. This process reveals the potential category of investment in which the investor can invest.

Investor Preferences

This step involves determining the objective for which the investor wants to invest their investable wealth. There is always a positive relationship between risk and return earned on investment; thus for justifiable investment strategies, the investors have to decide their objective keeping in mind the risk and return of each investment. Apart from the objective of investment, there are some other factors like time and duration to be considered for deciding the investment policy. McNeil and et al. (2015) asserted that this decision also depends upon many other things like the transaction costs incurred in making modifications to the existing portfolio along with the extent of expected improvement in the outlook of investment in the revised portfolio.

Management approach

This step is concerned with the managing of assets. This is because with time the investment objective is changed or the current portfolio may not be optimal in current conditions. Thus the investor may make some modifications in the portfolio by selling some old securities and purchasing others. Another motive behind revising the portfolio is because the security prices may change over time and some securities can now be more attractive than the other, and those who were fascinating initially may not be the same anymore.

Evaluation of portfolio performance includes assessing the performance of portfolio on a regular basis. This is measured not only in terms return but also in the context of risk incurred by the investor (Wolke, 2017). Thus, it is important that the investor implies some suitable measures to evaluate the return and risk according to some relevant standards that are required to be formed at the initial stage of investment.

Defensive investments

 It is the most crucial phase of investment process. The purpose of this review is identifying securities for their profitability. The review can be undertaken by two approaches depending upon the nature of the investment.  The first is a technical analysis that comprises of conducting research on the prices of stocks with the aim of predicting the future movements in price. For this, the past prices are evaluated to identify the trends in the movements of price. The recent stock prices are also evaluated for assessing emerging patterns.

The other approach is a fundamental analysis which is concerned with the intrinsic value of any investment and compares it with the current value of cash flows which the investor expects out of the investment. This approach makes an attempt not only to estimate the rate of discount but also measures the dividends that a particular stock may provide in future based on the EPS and payout ratio of the stock.

For estimating the future rate of return, it is important to consider the rate of return. The true value of each stock is to be made known, and then a comparison is made with the current market price of the stock in order to judge their fair price. This will reveal the overvalued stocks and those who are undervalued. Thus, present analysis has been done on the basis of analysing past three to five-year rate of return and future. This information will serve as the expected return.

Shares	Current market price	Expected percentage change in rate	Average EPS of 3 to 5 yrs
Bingo Industries Ltd (BIN. AX)	2.63 AUD	$0.1	14.53%
Web jet Limited	10.07 AUD	$0.07	23.37%
Class Ltd	2.99 AUD	$-.03	43.31%

From above figures, it can be assessed that appropriate returns have been earned by the companies in last few years and on the basis of same these equity shares have been selected. The companies belong to different industries so that advantage relating to a diversified portfolio can be gained by the investor.

Bingo Industries Ltd (BIN. AX)

Figure 2: Chart representing movement in price of Bingo Industries Ltd (BIN. AX)

(Source: Bingo Industries Ltd (BIN.AX). Charts. (2018))

Figure 3: Chart representing movement in price of Web jet Limited

(Source: Web jet Limited. Charts. (2018))

Figure 4 Chart representing movement in price of Class Ltd

(Source: Class Ltd. Charts. (2018))

From above graphs, it could be assessed that any kind of high volatility in the price movement of shares does not exist. The same will mitigate investor from high risk, and he will be able to gain appropriate returns.

Secured Funds	Current Yield	Current market price	Expected movement in price
SPDR S&P/ASX Australian Bond Fund	3.87% (SPDR S&P/ASX Australian Government Bond Fund (GOVT). Fund Details. (2018).)	$25.35	$0.13
I Share Core Composite Bond ETF	2.20%	$105.22	$0.48 (iShares Core Composite Bond ETF (IAF). Fund Details. (2018).)

A portion of the investment will be done in secured funds so that appropriate amount of fixed income can be assured and for same investment will be done in above securities.

Shares

Presently, Australia property market is presenting sign of cooling down as house price index has decreased by 0.3% in December. The same contributed to the downfall in home value growth for the year as it was increased by 4.2% previous year and 5.8% in the year 2016. The property market has been observed resilient due to a decrease in the rate of return; thus it will be more appropriate to wait for some in case investment is to be done for reselling. However, the appropriate opportunity is available if an individual is interested in long-term investment.

Shares	Current market price	Expected percentage change	Average EPS of 3 to 5 yrs
AGL Energy Limited	$23.67	0.12%	28.65%
ResMed Inc.	88.68 USD	-0.11%	7.08%
Aristocrat Leisure	23.50 AUD	1.29%	55.41

Analysis of AGL Energy Limited

Figure 5: Chart representing fluctuation in Market Price of the shares of AGL Ltd

(Source: AGL Energy Ltd (AGL.AX).Charts. (2018)

AGL Energy Limited is engaged in trading of gas and electricity and other related products and services like constructing infrastructure for power generation and energy processing. The above chart clearly depicts the steady growth in the prices of the shares with being the highest in early 2017. Thus, considering the growth of the share, it is suitable to keep the share in the portfolio since it is expected to give huge returns in the future. The below table reveals the highest and lowest P/E ratio.  The highest P /E ratio of the industry in the last five years was 46.65 which is higher than the industry and other companies in the same sector. Thus, it is the most suitable company to invest in the energy sector.

Figure 6: P/E Ratio of AGL Limited and the Industry
(Source: AGL Energy Ltd (AGL.AX).Financials. (2018)

Figure 7: Price Fluctuations in ResMed Inc

(Source: ResMed. Inc Charts. (2018)

ResMed Inc. is engaged in the introduction, production, distribution of medical devices along with software applications based on the cloud technology that is used for diagnosing and another purpose. The above chart represents the fluctuations in the statistics of the stocks.  The above chart depicts that the growth of the stock has been the highest in mid-2015, and it shows the same prospects for 2018 as well. In the year 2016 and 2017 may not have shown good prospects, but 2018 might prove to be a profitable year for the stock. The P/E ratio of the company has although been low as compared to the industry, but it is recommended to hold the stock and not sell it in the near future.

	Company	Industry	Sector
P/E Ratio (TTM)	35.94	30.52	37.33
P/E High - Last 5 Yrs.	32.41	70.46	45.97
P/E Low - Last 5 Yrs.	21.17	21.02	24.41

Figure 8: P/E Ratio of ResMed. Inc and the Industry
(Source: ResMed. Financials. (2018)

Property investments

Figure 9: Chart representing fluctuation in Market Price of the shares of Aristocrat Leisure

(Source: Aristocrat Leisure.Charts, (2018))

Aristocrat Leisure Limited is engaged in offering interactive gaming solution. The above chart depicts that the stock has constantly been improving since 2014. Thus, it offers a justifying reason for keeping it in the portfolio.  The P/R ratio of the Company is much better than the sector although it is low than the industry; however, keeping in mind the constant growth this stock is preferred. The stock has outperformed and is a strong buy option.

	Company	Industry	Sector
P/E Ratio (TTM)	29.95	29.06	20.61
P/E High - Last 5 Yrs.	34.94	54.99	34.89
P/E Low - Last 5 Yrs.	22.96	15.21	13.09

Figure 10: P/E Ratio of Aristocrat Leisure  and the Industry
(Source: P/E Ratio of Aristocrat Leisure  Financials. (2018)

Secured Funds	Current Yield	Current market price	Expected movement in price
SPDR S&P/ASX Australian Bond Fund	3.87%	$25.35	$0.13
I Shares Core Composite Bond ETF	2.20%	$105.22	$0.48

 

Conclusion

It can be concluded from the report that the portfolio has been made after considering the rigorous process of investment. The report contains separate investment portfolio for a professional and a senior citizen. The risk tolerance risk for investments by the senior citizen has been kept low, and the same has been kept moderate for the professional. This is done keeping in mind the investment objective. The risk factor is although kept limited for both the portfolios since both the investors are beginners and a high-risk approach can lead to loss of savings. An aggressive investment strategy requires a high degree of specialization for mitigating the losses by making quick adjustments in the current portfolio. Thus, the portfolio of senior citizens, some stable and secured funds have also been provided for creating a balance risk funds and return. A high-risk approach for the senior citizen may result in the loss of his savings of a lifetime. Thus, it is necessary that major amount of investment must be made in secured funds.

Portfolio structure for 35-Year-old professional client

Investment Type	Proportionate to Total Investment	Amount
Shares	50%	$1.5 million * .50 =$0.75 million
Secured or Fixed Interest Investment	20%	$1.5 million * .20 =$0.3 million
Property	25%	$1.5 million * .25 =$0.375 million
Cash	5%	$1.5 million * .05 =$0.075 million

An investor can only purchase most of the stocks via licensed mediators. Further, this makes it complex to manage a portfolio, as investor always require to contact their mediator to trade their shares or make an alteration to their account. Most of the online broker services provide basic tools for putting sales and purchase orders by own, and tools for tracking orders and investments. Such online tools and services bring a wide variety of prices, and a lot of highlights low-cost trades. These tools are inclusive of graphics for personal stock and a portfolio as a large, enabling investor to watch on growth and consider losses.

Having a schedule is a necessary aspect, as managing a personal stock portfolio requires time, and by making use of available opportunities on perfect timings. A benefit of employing someone to manage a portfolio is that it needs less time. Apart from some number of hours every month to consider the portfolio and make decisions to sell or purchase stock and making a decision of what time horizon must be before making the investment. This means how much time investor can wait prior to putting its stock into sale and doing something with the available cash like paying for education for a child or retiring.

Investment Type	Proportionate to Total Investment	Amount
Shares	25%	$1.5 million * .25 =$0.375 million
Defensive Investment	55%	$1.5 million * .55 =$0.825 million
Property	10%	$1.5 million * .10 =$0.15 million
Cash	10%	$1.5 million * .10 =$0.15 million

Investment Identification

Stock investment is a great way to earn money, companies wherein investors own their shares see their increasing value. A stock portfolio is a great way to grow wealth on a long-term basis, like savings meant for retirement. Keeping records is another main aspect to be considered even while employing an online broker, for this aspect, an investor has to keep their own records. Keeping a hard copy of stock in which investors invest, particularly if they want to track them on a daily basis without logging into an account.

Maintaining a portfolio of stocks is a continual step of considering and re-considering. If a stock is giving well-performance does not mean every time it will give the same results. Changes in dividends, time horizon in the company wherein investors own stocks; all make a contribution towards the requirement to sell certain stocks and switch to others. The investor must be able to reconsider their portfolio and make suitable changed on the basis of collected data.

References

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Chance, D.M. and Brooks, R., 2015. Introduction to derivatives and risk management. Cengage Learning.

Chandra, S. and Leong, F.T., 2016. A diversified portfolio model of adaptability. American Psychologist, 71(9), P.847.

DeFusco, R.A., McLeavey, D.W., Anson, M.J., Pinto, J.E. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.

Hallerbach, W.G., 2016. Advances in portfolio risk control. In Risk-Based and Factor Investing (Pp. 1-30).

Mbogo, P.K., Aduda, J. and Mwangi, M.M., 2017. The Effect of Portfolio Size on the Financial Performance of Portfolios of Investment Firms in Kenya. American Journal of Finance, 1(2), pp.1-15.

McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts, techniques and tools. Princeton university press.

Wolke, T., 2017. Risk Management. Walter de Gruyter GmbH & Co KG.

AGL Energy Ltd (AGL.AX). Financials. (2018). (Online). Available through < https://www.reuters.com/finance/stocks/financial-highlights/AGL.AX>. [Accessed on 20^th January 2018].

Webjet Ltd (WEB.AX). Charts. (2018). (Online). Available through < https://www.reuters.com/finance/stocks/chart/WEB.AX>. [Accessed on 20^th January 2018].

Bingo Industries Ltd (BIN.AX). Charts. (2018). (Online). Available through < https://www.reuters.com/finance/stocks/chart/BIN.AX>. [Accessed on 20^th January 2018].

AGL Energy Ltd (AGL.AX).Charts. (2018). (Online). Available through <>. [Accessed on 20^th January 2018].

Class Ltd. Charts. (2018). (Online). Available through < https://www.reuters.com/finance/stocks/chart/ Class Ltd >. [Accessed on 20^th January 2018].

ResMed Inc. Charts. (2018). (Online). Available through < https://www.reuters.com/finance/stocks/chart/ ResMed>. [Accessed on 20^th January 2018].

Aristocrat Leisure. Charts. (2018). (Online). Available through <https://www.reuters.com/finance/stocks/chart/ Aristocrat Leisure>. [Accessed on 20^th January 2018].

SPDR S&P/ASX Australian Government Bond Fund (GOVT). Fund Details. (2018). (Online). Available through <https://www.investsmart.com.au/shares/asx-govt/spdr-sandp-asx-australian-government-bond-fund>. [Accessed on 20^th January 2018].

iShares Core Composite Bond ETF (IAF). Fund Details. (2018). (Online). Available through < https://www.investsmart.com.au/shares/asx-govt/ iShares Core Composite Bond ETF [Accessed on 20^th January 2018].

Australian Associates Press. Australia's housing market on track to cool in 2018 as prices fall in capital cities. . (2018). (Online). Available through < https://www.theguardian.com/australia-news/2018/jan/02/australias-housing-market-on-track-to-cool-in-2018-as-prices-fall-in-capital-cities [Accessed on 20^th January 2018].