Current Investment Environment in Australia and Internationally

This document discusses the current investment environment in Australia and internationally, highlighting the benefits of portfolio diversification with ETFs. It also provides insights into how to calculate portfolio returns and discusses the investment philosophy and process. The subject of finance is explored in this document.

Finance
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Table of Contents
Current investment environment both in Australia and internationally..........................................3
The benefits of portfolio diversification with ETFs........................................................................7
Investment environment in the international market.......................................................................9
Investment philosophy and process...............................................................................................11
How to calculate portfolio returns?...............................................................................................16
References......................................................................................................................................18
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Current investment environment both in Australia and internationally
Australia is now generally welcoming to foreign investment in the country. These investments
are widely considered to be an important contributor to Australia’s economic productivity and
growth. Australia provides a simple and low- risk environment to invest and do business in an
effective manner. Australia is a globally integrated economy with strong trade and investment
links with investors. To protect the interest of the investors the Australian shares and assets are
reviewed by the Australian Foreign Investment Review Board (FIRB). Australia provides
various benefits for investors (Jayawardena, Todorova & Su, 2016). These include:
 Highly skilled workforce
 Consistent economic growth
 Strong governance
 Strategic location
 World class infrastructure
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So
urce: International Monetary Fund, World Economic Outlook Database, October 2018;
Austrade.
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The Australian Government welcomes foreign investment and domestic investment to the
country’s growth and development. Australian Government investment promotion agency,
AUSTRADE works as an agent which provides information to investors about growth
opportunities in five areas which play an important role in Australia (Deo, et. al., 2017). These
five areas are listed below:
 Major infrastructure
 Advanced manufacturing, services, and technology
 Food and agriculture business
 Energy and resources
 Tourism
Australian share market to continue the positive trend
 Australia’s S&P/ASX 200 Accumulation Index increased by 11.8% during 2018, and the
small ordinaries Accumulation Index increased by 20%.
 Better performing sectors included Information Technology (+23.2%), Metals and
Mining (+22.3%) and Healthcare (+23.6%).
 Poorer performing sectors of the Australian share market over the previous year included
Retail (-16.6%), Telecommunications (-26.0%) and Financials (-0.2%).
 During 2018 the banking sector will be under the spotlight with the federal government
announcing a “Royal Commission” into Financial Services and banks (Bianchi, et. al.,
2017).
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i
Figure: Stock Market Data
By Author, 2019
After striking a peak of nearly 6,400 in September 2018, the ASX200 followed the swoon in
world markets, finishing at 5,646.
Equity market data
Australian Securities and Investments Commission (ASIC) observe data from all orders and
trades in the Australian equity market for each quarter.
In December 2018 quarter the Australian Securities Exchange (ASX) accounted for 82.8% of the
total dollar turnover in equity market products. Turnover in the Australian equity market
increased over December at a daily average of $6.44 billion, hiding the previous record of $6.37
billion from June 2017 (Jayawardena, Todorova & Su, 2016).
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Figure: Market Share – December quarter
Source: Australian Securities & Investments Commission
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The benefits of portfolio diversification with ETFs
Portfolio diversification means investing in a range of various securities with the aim of
minimizing the total risk in the portfolio. In other words, if one investment is in the loss, the
other investments may help to compensate that loss (Andersen, Fusari & Todorov, 2019).
Figure: Investor’s risk profile
By Author, 2019.
Most Australian investors highly invest their money in the Australian equity market. The
investors of Australia mostly hold equities or individual company which offers satisfactory
returns when these companies are strongly performing in the stock market. However, the
investors holding a minimum number of equities then it does not allow to investors to diversify
their risk.
For example Australia shows only 2.4% of the world equity market. This will make sense and
also beneficial for investors to grow their prospects outside the Australian Stock Exchange.
Internationally ETFs permit to the investor to do trading in the international market to enhance
their investment in very well manner. While doing investment in US equities with help of ETF, it
allows to Australian investors to match their portfolio with access to over 50% of the worldwide
equity market.
To eliminate the holding risk, an investor of a small number may select to purchase stocks basket
which diversify their risk over many various companies. While adopting EFT, it allows the
investor to hold equities of a large number that can be bought in a single trade without any
expense which included in individual stocks trading.
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For example ABC an investor which holds 5 companies and out of which 2 is performing very
poorly in the stock market. This could be having a big impact on the whole performance of their
portfolio. But if those 2 companies were part of a portfolio of 20 or 30 companies, then this
effect can be reduced with these securities. If the investor trade in a large number of companies
can be expensive to him, so ETFs helpful to minimize a single company risk because ETFs
allows an investor to purchase a large number of companies in a trade which is single.
ETFs following the S&P/ASX 100, for instance, if an investor purchase any security then they
pay brokerage at once and then an investor has an exposure to the 100 largest companies in
Australia. If ABC an investor tried to purchase the companies individually then they would need
to pay 100 times brokerage.
For a retired person or an individual investor looking for extra income from their investments, by
receiving income from multiple sources minimizes the dependence on a single source to manage
their level of income. ETFs can assist investors to minimize the risk by permitting them to invest
in other incomes which are produce from stock markets or securities.
For example: When the market of Australia suffers a depression, investors who produce most of
their income by investing in Australian equities could search their own income levels to reduce
such situation. The investors can get an attractive level of income by investing in other income
producing assets or in international equities. An investor also spread the risk of their level of
income falling under the Australian stock market which experiences a downturn (Jayawardena,
Todorova & Su, 2016).
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Investment environment in the international market
Many countries farmed a policy which mainly aimed at attracting “Foreign Direct Investment”.
In 2017, 65 countries and economies adopted at least 126 investment policy measures, of which
84% were favorable to investors. The liberalized entry conditions in a number of industries
including energy, transport, and manufacturing. Most of the country provides the facility of
investment and promotes simplify administrative procedures by giving and establishing new
special economic zones (SEZs). For developing nation the FDI is the largest external source of
finance. It makes up 39% of total incoming finance in developing economies (Iamsiraroj &
Ulubaşoğlu, 2015).
Figure: FDI Inflows in 2016 and 2017.
By Author, 2019
In an international point of view, the investors want to a more return with diversified risk in their
portfolio. The Foreign direct investment provides more investment in the country which
develops its share market, enhanced investors income and national income of the country.
Inefficient portfolio formation, the investors face both risk and return situation. With the help of
return, they can minimize the risk level in the portfolio.
The portfolio manager prepares a portfolio which is beneficial for the investors which help them
to generate more income with their portfolio. In today’s world, wealth management is a
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necessary step for the individual and portfolio provides a way to manage the wealth of an
individual in an appropriate manner (Duarte, Kedong & Xuemei, 2017).
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Investment philosophy and process
Boutique wealth management has strict investment guidelines that ensure, the company prepared
portfolio risk within specified levels and spread portfolio to deliver consistent risk-adjusted
returns to our investors (Madlem & Edwards, 2019).
The company highlight below some important parameters that use in investment process:
 Our portfolio manager invests in companies that provides favorable returns and also have
a growing business scenario from the past year.
 The company believes that this approach to investing is capable of generating consistent
investment returns over the long term through the power of compounding.
 The company adopts a value of blend and growth strategies for stock picking.
 The investment decision- making process includes the Fund Manager and the sector
specialist. Decision- making process commences with management meeting to measure
the size of business, opportunity size, and the future potential.
Figure: Process of making an investment decision
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By Author, 2019
For Fixed Income
 The fixed income market provides different attractive investment opportunities which are
beneficial for investors to enhance their income in the share market.
 Credit and duration are the main elements of performance in a fixed income portfolio.
 Individual security selection and curve positioning are also drivers of the fixed income
market.
 Effective control of risk is essential in the management of fixed income portfolios.
Figure: Top Down- Bottom-up Approach
By Author, 2019
Our company monitor four components in terms of criticality to risk/return performance on a
fixed income portfolio are duration, curve positioning, credit, and individual security selection.
The approach is a “TOP DOWN – BOTTOM UP” with a bottom-up perspective being applied
on curve positioning and individual security selection and a top-down perspective being applied
to duration and credit.
The whole process is run periodically or at any irregular time frame and the investment team of a
company sees the need if economic/market events warrant.
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Investment portfolio comprising of:
 Equity
 Listed investment companies (LICs) or exchange-traded products (ETPs)
 Index calls and put options and SPI (Share price index) futures contracts
ASX LICs (1 March 2019)
Code Company Market Cap Weight (%)
ARG Agro Investments 5,432,200,000 12.91
AFI Australian Foundat 7,200,890,000 17.12
BKI BKI Investment
Limited
1,105,840,000 2.63
DJW Djerriwarrh 708,176,000 1.68
MGG Magellan Glob Trust
Ordinary Units FP
1,705,270,000 4.05
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Equity
Code Company Market Cap Weight (%)
ABP Abacus Property
Group FP Ordinary
2,093,060,000 0.12
BHP BHP Group Limited 109,674,000,000 6.17
BXB Brambles Limited 18,739,900,000 1.06
CBA Commonwealth Bank 130,909,000,000 7.37
NAB National Aust. Bank 69,797,300,000 3.93
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Index call and put options
Eastern Australia Feed Barley
SPI (Share price index) futures contracts
VIC Monthly Base Load Electricity Futures
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