Financial Management: Investment Policy Decision Report for a Club

The assignment is an investment policy statement (IPS) designed for a local sporting club with a $250,000 portfolio. The report outlines the club's objectives, which include maximizing profit with limited risk and generating returns to cover annual expenditures, special events, prizes, and maintaining th...Read More

INVESTMENT
POLICY
DECISION

Executive Summary
The Assignment presents an Investment Policy Statement for a Local Sporting club based on
portfolio constraints. The report presents the Objective and Constraints of the portfolio. The
out lay of the portfolio is $ 250,000 with investment in diverse securities ranging from shares
to cash. Further, the said investment decision has been taken based on Environmental Social
and Government Constraints of the organisation. Tax has not been considered for the purpose
of analysis.
The first section of the report presents an Investment Policy Statement which lists the
objectives of investment along with risk bearing capacity of the client, time horizon of
investment, legal and liquidity constraints, unique constraints etc. the detailed Investment
Policy Statement has been presented here-in-below:

Contents
Executive Summary...............................................................................................................................2
PART 1...................................................................................................................................................4
RESEARCH AND ANALYSIS..................................................................................................................4
Objective of Client.............................................................................................................................4
Risk....................................................................................................................................................4
Liquidity.............................................................................................................................................5
Legal..................................................................................................................................................5
Tax.....................................................................................................................................................5
Time...................................................................................................................................................5
Unique Constraints............................................................................................................................5
Rationale for the above allocation.........................................................................................................5
Investment of 50% in Equity..............................................................................................................5
Investment of 40% in Bond................................................................................................................6
Investment of 10% in cash.................................................................................................................6
Companies which are selected..............................................................................................................6
Brief Introduction about the companies............................................................................................6
RECOMMENDATION............................................................................................................................12
CONCLUSION.......................................................................................................................................12
References...........................................................................................................................................13

Financial Management
PART 1
RESEARCH AND ANALYSIS
Investment Policy Statement
Client: Sporting Club with a portfolio of $ 250,000 to be invested in diversified portfolio
encompassing securities like share, bonds and cash.
Present Investment: Presently, the club invests in a maximize account which provides a low
return to the sports club and accordingly plans to increase return by taking additional risk. On
the basis of the same, the investment portfolio statement has been prepared. The statement
contains the following points:
(a) Objective of Client;
(b) Risk;
(c) Liquidity Constraint;
(d) Legal Constraints;
(e) Tax Constraints: Not Detailed;
(f) Time Horizon;
(g) Unique Constraint
Objective of Client
The Sporting club aims to maximise profit with a limited risk. Thus, it wishes to
diversify the risk and achieve highest sharp ratio for a given portfolio. The return
proposed can be absolute or relative. In the present context, the return aim has been
considered absolute since no benchmark has been considered. He absolute return has
been considered in the range of 10-15%. The said return seeks to cover the following
expense of the club:
(A) Annual expenditure meet;
(B) Special Expenses in the form of tournaments, events, etc;
(C) Prizes, distributions;
(D) Donations to other trusts etc.
(E) Maintaining Capital base
It has been inferred from the expenditure needs of the club that the annual fund
requirement of the sports club shall range from 10-15% i.e. in the range of $ 25000 to $
37500. Thus, the objective of the portfolio creation is return sufficient enough to meet
the expenses of the club along with marinating capital base i.e. protecting the capital base
against inflation. Further, the rate of inflation prevailing in Australian economy ranges
between 2-3%.
Also, the return objective of the company seems realistic based on return requirement.

Risk
Since, the sports club has a significant value of portfolio and is not much dependent on
the portfolio for meeting out its day to day need which is evident from the fact that
initially the amount was invested in cash maximize account. Thus, the risk bearing
capacity of the entity may be high. Further, the level of risk bearing capacity shall
determine the portfolio allocation. If the risk bearing capacity is high than major
investment in the portfolio shall be in equity. If the risk bearing capacity is low then
majority of investment shall be in debt or cash accounts which is more secured compared
to equity. Further, only domestic market has been explored for investment.
Liquidity
Since, the sporting club is able to meet its requirement of day to day. Thus, liquidity
requirement of the club shall not be such high. Thus, majority of portfolio can be
invested in bonds and securities to generate a high rate of return. Also, the requirement
of cash can be met by maintain a small amount of portfolio in cash.
Legal
The Sporting club is not subject to any such legal constraints and can freely invest its
portfolio in any securities. Further, there is no such legal law except the law of
Association of person to govern the sporting club
Tax
The tax rate in Australia is 30% and the same has not been considered while creating
portfolio for the Sporting club. Also sporting club is a taxable entity in Australia.
Time
Since, the sporting club is expected to exist for a long period of time in future and there
is no such emergency need in small to medium term. The investment horizon of the
portfolio has been considered long thereby increasing the risk bearing capacity of
portfolio and lowering the liquidity needs.
Unique Constraints
One of the unique constraints stated in the portfolio creation is that the investment shall
be made in cultural and ethical stocks. Thus, for creation of portfolio only large cap stocks
are considered
On the basis of above deliberation, the ideal portfolio has been considered comprising the
following:
(a) Equity Component of 50% of Portfolio i.e. 125000$;
(b) Bond Component of 40% of the Portfolio i.e. $ 100000;
(c) Cash Component of 10% of Portfolio i.e. $ 25000.

Rationale for the above allocation
Investment of 50% in Equity
Since on the basis of above Investment Policy Statement it can be inferred that the portfolio
has high risk bearing capacity and the investment horizon being high, the appropriate
allocation shall comprise majority of Equity. Further, since the return requirement is high,
investment in equity shall give a better pay. Also, the major investment shall be made in large
stocks which shall provide a better return also lower risk along with dividend to pay off any
cash liability.
Investment of 40% in Bond
Since on the basis of above Investment Policy Statement it can be inferred that the portfolio
has high risk bearing capacity and the investment horizon is high 40% of the investment shall
be made in 10-year bonds with a return of approximate 10% per annum. This shall provide a
higher return to the company along with regular cash flows in the form of coupons.
Investment of 10% in cash
Since on the basis of above Investment Policy Statement it can be inferred that the portfolio
shall have certain liquidity requirement. Thus, to meet the same a cash buffer shall be kept in
account which shall provide a return of 1.5% which is too low.
Companies which are selected
For the purpose of investment, the following companies have been
considered:
1. Commonwealth Bank of Australia
2. Woolworths Group Limited
3. Beach Energy Limited
4. Wesfarmers Limited
Brief Introduction about the companies
Commonwealth Bank of Australia (CWB)
The Commonwealth Bank of Australia is listed on Australian Stock
Exchange. The beta of the company is 1.10 and is a risky stock. The
Commonwealth Bank of Australia is a provider of vast services to its
customer which includes retail services, banking services, fund
management services, superannuation services, various broking related
services, insurance services, and activities related to finance services to
its wide range of customer. The Commonwealth Bank has a varied
segments which includes Retail Banking Services which provides loan
services ,security services, deposit services and many retail services to its

customers; Business and private banking ,who provides various types of
banking services to its various agriculture based customers, Institutional
Banking and Markets ,which serve the various corporate and government
based clients ;Wealth management Segment ,which provide services
related to management of assets globally ,administration of platform
services and business related to general insurance; New Zealand ,which
includes the services provided related to banking and fund management
services operating in New Zealand .The company is a large cap with a
market capitalisation of $137,016.The company also has good a very
strong and good fundamentals as the company has a ROE 13.29% which
is lower than the industry average. (Reuters.com, 2019)
Reasons for selection:
1) Large market capitalisation
2) Declaration of dividend
Woolworths Group Limited
The Woolworths Group is listed on Australian Stock Exchange. The beta of
the company is 0.74 and is a less risky stock. The market capitalisation of
the company is $45,872. The ROE percentage of the company is 15.55
which is better as compared to the industry performance and the ROI of
the company is also good which is 11.87% as compared to the industry
average of 5.77%. This company is formerly known as Woolworths limited.
It is engaged in the retail operation business. The principal segment of the
company includes Australian Food and petrol who is engaged in procuring
the food and petrol related products for the buyers of Australia. The New
Zealand supermarkets segment who is occupied in the business of
procuring food and liquor-based products for the buyers of Australia. The
Endeavour Drinks group segment who is occupied in the business of
procuring liquor-based products for the buyers in Australia. The BIGW
segment who is occupied in the business of buying general items for the
people in Australia. The Hotels segment who is also engaged in providing
various relax and leisure services to its customer in Australia.
(Reuters.com, 2019)
Reasons for selection:
1) Large market capitalisation
2) Declaration of dividend
Beach Energy Limited
The Beach energy Limited is listed on Australian Stock Exchange. The
beta of the company is 2.38 which indicates that the company is highly

volatile and risky. The market capitalisation of the company is $4,761.The
ROE percentage of the company is 19.91 which is better as compared to
the industry performance and the ROI of the company is also good which
is 19.91% as compared to the industry average .The company is engaged
in the exploration of oil .The principal business of the company also
include the production of hydrocarbons. The principal segment of the
company includes Cooper Basin which is engaged in the sale of oil and
gas from production in Australia. The other segment of the company
includes the interest of the company in all on shore and off shore
production within the country Australia other than the segment operation
of Cooper Basin. The other segment of the company also includes interest
in international segment which includes all areas outside Australia.
(Reuters.com, 2019)
Wesfarmers Limited
The Wesfarmers Limited is listed on Australian Stock Exchange. The beta
of the company is 0.92 which indicates that the company is less risky. The
market capitalisation of the company is $41,623. The company is involved
in various business process which includes supermarket store, liquor
(Reuters.com, 2019)products, hotels, industry products and fertilizers.
The breakup graph has been presented here-in-below:
50%
40%
10%
Portfolio Structure
Equity Bond Cash

Investment Position
No Company Name Percentage Amount
1 Woolworths Limited 13% 31250
2 Wesfarmers Limited 13% 31250
3 Common Wealth Bank 13% 31250
4 Beach Energy Limited 13% 31250
5 10 Year Treasury Limited 40% 100000
6 Cash 10% 25000
The diagrammatic representation of the above investment strategy has been presented as
under:
13%
13%
13%
13%
40%
10%
Portfolio Detailed Breakup
Woolworths Limited Wesfarmers Limited Common Wealth Bank
Beach Energy Limited 10 Year Treasury Limited Cash
The purchase price of shares of the company has been presented as under:
No Name of the company Price
1 Woolworths Group Limited 28.43
2 Wesfarmers Limited 32.24
3 Common Wealth Bank 67.34
4 Beach Energy Limited 1.75

For the period of six month, the change in the price of the above stated companies have been
tracked and presented here-in-below:
Woolworths Group Limited
Date Open High Low Close Adjusted Volume
30-Sept 27.85 28.44 27.03 28.43 27.98854 60849677
31-Oct 28.62 29.93 28.15 28.92 28.47093 66352020
30-Nov 29.16 29.75 27.98 29.42 28.96317 55064669
31-Dec 29.42 30.67 28.95 29.37 28.91394 46347288
31-Jan 29.62 30.58 28.21 28.67 28.22481 67118746
28-Feb 28.98 30.88 28.76 30.4 30.4 62475221
31-Mar 31 32 30.09 31.85 31.85 6,40,76,631
Wesfarmers Limited
Date Open High Low Close Adj Close Volume
30-Sept 35.0499 35.5338 32.2317 33.1782 32.23617 69244647
31-Oct 33.1995 34.1959 30.71 31.59 30.69307 76018630
30-Nov 32.01 33.06 30.4 32.22 31.30518 62604669
31-Dec 32.22 32.945 30.82 32.21 31.29546 50044379
31-Jan 32.38 35.55 32.05 33.18 32.23792 60255153
28-Feb 33.42 35.15 33.21 34.65 34.65 62559592
31-Mar 34.8 36.255 34.03 36.01 36.01 35200948
Commonwealth Bank of Australia
Date Open High Low Close Adj Close Volume
30-Sept 71.13 71.37 65.23 69.23 67.34183 67475494
31-Oct 69.3 73.05 67.31 71.23 69.28728 72985420
30-Nov 72.06 72.72 67.55 72.39 70.41563 63837927
31-Dec 72.39 73.55 69.91 69.91 68.00328 57480579
31-Jan 69.23 74.945 69.15 73.95 71.93309 73558709
28-Feb 73.95 75 70.2 70.64 70.64 64606381
31-Mar 71 75.5 69.72 74.52 74.52 51812663
Beach Energy Limited
Date Open High Low Close Adj Close Volume
30-Sept 2.15 2.23 1.515 1.76 1.751373 240573677
31-Oct 1.74 1.77 1.437 1.525 1.517524 318872474
30-Nov 1.565 1.66 1.275 1.345 1.338407 230911085
31-Dec 1.345 1.85 1.29 1.8 1.791176 206849427
31-Jan 1.81 2.11 1.622 2.08 2.069804 249472774
28-Feb 2.08 2.2 1.965 2.06 2.06 195234660

31-Mar 2.08 2.27 1.977 2.13 2.13 113388501
For the purpose of computing the margin earned on the proposed investment, adjusted closing
price has been considered. Also, the equity allocation has been equal. The computation of
margin earned has been presented as under:
No Name of the Company Return (%)
1 Woolworths Limited 15%
2 Wesfarmers Limited 15%
3 Common Wealth Bank 14%
4 Beach Energy Limited 22%
The mean return of the portfolio has been computed by taking simple average of the four
return which equals to 17%. Thus, the return earned by the portfolio from equity segment
shall be 17%
Analysis of Bonds
For the purpose of return on bond, data about bond returns has been considered and average
rate of 10% has been considered for computation of portfolio return. Further, the tenure of
bond considered is 10 years. (S&P DowJones LLC, 2019)
Analysis of Cash
Return on Cash has been considered at 1.5%. (Dow Jones and company, 2019)
Return on Investment
The computation of Return on Investment has been presented here-in-below:
Woolworths Limited Wesfarmers Limited CommonWealth Bank
Limited Beach Energy Limited
0%
5%
10%
15%
20%
25%
Return %

Component of Portfolio Return Weight Weight* Return
Return on Equity (Avg) 17% 0.5 8.5%
Bond Return 10% 0.4 4%
Cash Return 1.50% 0.1 0.15%
Total 12.65%
Thus, on the basis of above it can be concluded that portfolio shall achieve a return of
12.65% in 6 months which shall equate to a return of 15-16% annually as only equity
component of return shall only change. Accordingly, portfolio shall be able to achieve the
objective.
PART 4
In the present context, the investment horizon has been stated to start form 01-10-2018 and
any prior period has not been considered for analysis. Also, the return of the portfolio is
significantly high from the rate of return earned earlier by the portfolio. Thus, the portfolio
has been able to achieve its goal.
RECOMMENDATION
Stocks shall be dropped or added based on changing market need.
Rebalancing of portfolio as the price of securities break a certain threshold.
CONCLUSION
The company has attained the desired benchmark as required by the investment policy statement
(IPS).

References
Dow Jones and company, 2019. Australia’s RBA Leaves Cash Rate Unchanged at 1.5%. [Online]
Available at: https://www.wsj.com/articles/australias-rba-leaves-cash-rate-unchanged-at-1-5-
11554177094
[Accessed 22 May 2019].
Reuters.com, 2019. Beach Energy Ltd (BPT.AX). [Online]
Available at: https://www.reuters.com/finance/stocks/chart/BPT.AX
[Accessed 22 May 2019].
Reuters.com, 2019. Commonwealth Bank of Australia. [Online]
Available at: https://www.reuters.com/finance/stocks/overview/CBA.AX
[Accessed 22 May 2019].
Reuters.com, 2019. Wesfarmers Ltd (WES.AX). [Online]
Available at: https://in.reuters.com/finance/stocks/company-profile/WES.AX
[Accessed 22 May 2019].
Reuters.com, 2019. Woolworths Group Ltd (WOW.AX). [Online]
Available at: https://www.reuters.com/finance/stocks/overview/WOW.AX
[Accessed 22 May 2019].
S&P DowJones LLC, 2019. S&P Australia 5-10 Year Investment Grade Corporate Bond Index. [Online]
Available at: https://us.spindices.com/indices/fixed-income/sp-australia-5-10-year-investment-
grade-corporate-bond-index
[Accessed 22 May 2019].