Portfolio Management of Dendy Park Tennis Club

This report discusses the portfolio management of Dendy Park Tennis Club, including investment policy statement, capital allocation strategies, explanatory statement for choosing specific investment, and evaluation of portfolio performance.

Investment
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
Part1 Preparation of investment policy statement...........................................................................1
Part 2 Capital Allocation Strategies.................................................................................................4
Part 3 Explanatory Statement for choosing specific investment.....................................................6
Part 4 Evaluation of performance of portfolio of Dendy Park Tennis Club....................................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Portfolio is a grouping and investing in the financial assets like shares, bonds, currencies,
mutual funds etc. Every investment have characteristics of risk and return. The concept of risk is
intuitively understood by the investment. In managing the portfolio, investor must firstly select
the securities, construct the portfolio and then decide the weights of different constituent
securities in the portfolio. In this project, portfolio management of Dendy Park Tennis Club,
one of the best tennis club in Melbourne is discussed. This report is divided into four part. First
part contain preparation of investment policy statement. Second part contains capital allocation
strategy in equity, debt and cash, third task contain decision regarding specific investment for
equity and debt. Last task contains evaluation and comparison of weekly performance of the
portfolio of Dendy Park Tennis Club.
Part1 Preparation of investment policy statement
The investment policy statement is a written statement which is drafted between a person
who is managing the portfolio and a client that outlines general rules for the mangers (Stoughton
and Zechner, 2011). This statements contains the investment objectives and goals of a client and
also clarify the strategies that a portfolio manager should employ to achieve these investment
goals and objectives (Fabozzi and Markowitz, 2011). The budget decided by the management of
Dendy Park Tennis Club for the portfolio is $500,000. The investment policy statements of
Dendy Park Tennis Club are :
Dendy Park Tennis Club
Investment Policy Statement
Purpose:
This Investment Policy Statement aims to furnish the framework in relation to
investment objectives, policies and guidelines of Dendy Park Tennis Club, Bayside, Australia.
The purpose of investing in such instruments is to utilize the Club's funds in a the shares, debt
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and money market securities so that it can maximise the profit of the company and increase the
net worth of the shareholder through diversification of asset class held by the club (Chandra,
2011). A copy of this statement will be furnished to all Investment managers of the company.
Investment Constraints:
The investment constraints of this policy contain the following areas: Liquidity Requirements: Dendy Park Tennis Club is a leasehold tennis facility with
limited financial pockets to expend on the facility such as renovations, constructions of
courts and other areas (Bayney and Chakravarti, 2012). The liquidity means how easy it
is to cash out of an investment. Before making decision for investment, Dendy Park
Tennis Club have to decide that how quickly they can sell their assets according to the
market changing conditions. The club has decided to increase their liquidity by keeping
aside $500,000 as investment budget for the portfolio. Risk Tolerance: A well-diversified investment portfolio is that which have a low risk
and have a perfect combination of the securities and its coefficient of covariance. Risk
tolerance means upto what level an investor can tolerate the risk in its portfolio.
Management of Dendy Park Tennis Club had evaluated its risk tolerance level and
accordingly framed its portfolio. Return Requirements: It is an essential part of the portfolio management. Decision of
investment is always be taking by considering the return requirement of the investor.
The assets will be invested, with prudence, to generate a dividend and interest income of
at least 5% to achieve the set goals and objectives of the club (Della Croce, 2012). Time Horizon: The Club is expected to operate on perpetual basis. For making any
investment it is important to decide the time horizon. In this portfolio 5 year time
horizon is taken for the shares and debenture and 3 months time horizon is taken for the
money market securities like commercial paper etc. An appropriation will be made for
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the fluctuations experienced in the market with diligence and due care. Tax Considerations: The Dendy Park Tennis Club will consider tax consequences with
the income and capital gains from the investments. Since the tax for the club is exempt
as a community service organisation under Australian Taxation Office Guidelines
prescribed by the government. This tax-exempt status of the club must be taken into
account while investing for organisation and there after investment proposal for the
portfolio is decided. Regulatory and Legal considerations: The Dendy Park Tennis Club follows a prudence
policies strictly in order to protect its assets and members. All the laws and regulations
and all the legal consideration are complied in making investment portfolio and income
from it is properly disclosed. Proper care must be taken when making investments on
Club's behalf by avoiding options that may prove to be socially unacceptable and
unethical for its image and disallowed investment by the government are not considered
in portfolio (Capelle‐Blancard and Monjon, 2012).
 Unique Needs and circumstances: The Dendy Park Tennis Club may implement unique
needs for their investing portfolio like withdraw more than 5% of its investment income
in case of occurrence of any unforeseen circumstances and can changes policies as per
environmental changes and change in systematic risk and unsystematic risk of the
portfolio.
Diversification:
The Dendy Park Tennis Club shall keep its portfolio as a well-diversified portfolio. The
portfolio must contain equity component of companies of different sectors, debt component
containing fixed rate of interest and money market securities like commercial paper, treasury
bills etc. which will make the portfolio of the club more diversify and help to reduce the both
systematic and unsystematic risk to some extent and helps in maximising the wealth of the
shareholders (Abu Hussain and Al-Ajmi, 2012). All investment portfolio must be readily
available for stakeholders of the club at any given point of time.
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Part 2 Capital Allocation Strategies
Dendy Park Tennis Club is considering to invest the $500000 and for this portfolio
manager have to decide how to allocate the $500000 in equity, debt and money market securities
by considering the current and future economic situation, government policies and monetary
conditions so that portfolios of Dendy Park Tennis Club will be balanced (Chen and Tong,
2016). Therefore the following conditions are to be kept in mind by the manager in deciding the
portfolios mix:
 Current and future economic situations: While constructing the portfolio an investor
must evaluate the economic situations like effect of inflation. Once the economy is
moving from the recession to recovery or inflation to recession then they have to adjust
their investment strategies (Reilly and Brown, 2011). So it is very important for the
company to evaluate its current and future economic situations.
 Government Policies: Government can implement the policies that can change the social
behaviour in the business environment like political stability, interest rate, regulations,
tax rates etc. If the interest rate increase then the cost of borrowing will increase and if
interest rate reduce then it will attract more investments.
 Monetary Conditions: Availability of funds for the Dendy Park Tennis Club and
monetary policies relating to effect of interest rate and exchange rate on the economy
(Pompian, 2011). While framing the investment policies for the organisation, monitory
conditions and its effect on the investment portfolio are to be kept in mind and
accordingly decide the portfolio investment mix (Duffie and Singleton, 2012).
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Dendy Park Tennis Club, while framing its strategies for the portfolio mix, have to decide
the classification of securities like equity shares, preference shares, bonds, debenture and money
market securities and done its securities analysis. Among the vast group of securities, portfolio
manager has to choose those one which are worthwhile to be included in investment portfolio.
This requires a detailed evaluation of investment and securities available (Bodie, Kane, and
Marcus, 2011). A simple strategy in investment of securities is that undervalued securities are
purchased and overvalued securities are sold. Dendy Park Tennis Club should cover the
evaluation of various aspects like:
 Balance between fixed interest securities and equities.
 Balancing high dividend payout companies against high earning growth companies as
required by investor.
 Balancing capital gain tax and income tax payable.
 Retaining some liquidity to seize upon bargains.
 Balancing transaction cost against capital gains from rapid switching
 Ascertaining the incomes of the growth portfolio.
Equities have higher return and also have high risk than the debt and therefore the Dendy
Park Tennis Club have to make the balance between them and accordingly decide portfolio mix
(Chorafas, 2011). After considering the investment proposal, perfect balanced portfolio mix has
to decide so that there will be effective balance between the risk and return of the portfolio.
Therefore, Dendy Park Tennis Club will make their portfolio balanced by investing 40% in
equity, 40% in debt and balance 20% in money market securities so that high risk can be avoided
from the portfolio. The amount of investment in shares is $500000 * 40/100 = $200000, amount
of investment in debt is $500000 * 40/100 = $200000 and amount of investment in money
market securities is $500000 * 20/100 = $100000.
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Part 3 Explanatory Statement for choosing specific investment
It has been seen that selection of right kind of portfolio is best results in gaining overall
advantage in coming period of time. These are appropriate underline assets that can help
investors to examine their best option before making any kind of decision regarding the
investment. The basic reason of selecting investment in shares is to earn maximum amount of
return in near future time. Whereas, bonds as well as other investment options are also one of the
crucial tools that can create benefits for the investors while making investment. Thus, it would be
right decision from a investment prospective to choose right options capital investment so that
long term gains and sustainability can be attain in near future time.
Capital Allocation: It is a system of distribution of financial resources in various sectors
to increase efficiency and to maximise the profit. It helps the management to achieve its goal in
optimising capital allocation so that it generates maximum wealth for the shareholders. The
process of allocation of capital is a complicated process. Allocation of the capital between
equity, debt and money market securities will be such that it reduces the risk of the portfolio and
enhance the diversification benefits (Guo and Seaman, 2011).
Diversified portfolio is a portfolio that includes a variety of securities so that the weight-
age of security is such that it minimises the overall risk of the portfolio. A well diversified
portfolio can be framed after taking understanding of systematic risk and unsystematic risk.
Systematic Risk: It is variability in the returns of security that is caused by the economy
change or market change and all the securities in the portfolio are affected by such change to
some extent. This risk can be measured by relating the variability of stock market index with the
variability of security. The systematic risk is measured by Beta (Sparkes, 2017).
Unsystematic Risk: It is a risk which is unique to the company and it is related to the
particular company only and can vary company to company due to worker's strike, change in
management etc. Unsystematic risk is associated with the particular company's security can be
eliminated or reduced by combing two negative correlative securities.
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Reduction or dilution of Portfolio Risk through Diversification: The process of
combining the more than one security in the portfolio is referring as diversification. Dendy Park
Tennis Club can use the diversification to reduce the total risk by substantially mitigating the
unsystematic risk, without sacrificing the return of the portfolio (L. Bogan, Just and S. Dev,
2013). In order to understand the impact of covariance or correlation on portfolio risk for two
securities, following three cases are to be considered by Dendy Park Tennis Club:
 Perfectly Positive Correlated: It occur when correlation between two securities is +1. In
this situation, diversification provides only risk averaging and there is no risk reduction
achievement.
 Perfectly Negatively Correlated: It occur when correlation between two securities is -1.
Diversification can reduce or eliminate the risk associated with the securities (Merna and
Al-Thani, 2011).
 Returns are uncorrelated or independent: In this situation, returns of two securities are
wholly unrelated and coefficient of correlation will be zero. Diversification can reduce
the risk even in case of uncorrelated securities.
Therefore, portfolio manager of the Dendy Park Tennis Club, in order to take advantage
of diversification, will invest in following different companies having different sectors:
Equity / Debt /
Money Market
Securities
Company Name Sector Amount Invested
($)
Purchase Price
per share ($)
Equity The a2 Milk
Company (A2M)
Milk sector 100000 10.32
Equity Adelaide
Brighton (ABC)
Real estate sector 50000 4.27
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Equity AGL Energy
Limited (AGL)
Energy Sector 50000 20.6
Dendy Park Tennis Club had also purchased the Debenture amounting of $200000,
having fixed interest rate of 10% and invested in money market securities amounting of $100000
in treasury bills and commercial papers amounting to $ 50000 each for short term flexibility of
fund (Parker, 2012). This all mixture of investment in equity shares of different sectors that is
milk sector, real estate sector and energy sector, debenture having fixed interest rate of 10% and
money market securities of treasury bills and commercial papers makes the portfolio of Dendy
Park Tennis Club well diversified (Mell, 2016).
Part 4 Evaluation of performance of portfolio of Dendy Park Tennis Club
This report contains the investment portfolio of Dendy Park Tennis Club, where initially
investment policies is framed in the starting of the month of December, 2018 and then
investment mix is decided in middle of the month of December, 2018 that is 40% is invested in
shares, 40% is invested in debenture and remaining 20% in money market securities and
thereafter at the end of the month of December, 2018, on the basis of the diversification benefits,
investment in various companies of different sectors and debentures and money market securities
are made (MacLean, Thorp and Ziemba, 2011).
Performance of the investment portfolio made by Dendy Park Tennis Club can be
measures on weekly basis from January 2019 to February 2019 on projected basis are as follows:
WEEK The a2 Milk Company
(A2M)
Adelaide Brighton
(ABC)
AGL Energy Limited
(AGL)
Price per share ($) Price per share ($) Price per share ($)
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1-7 January 10.48 4.28 20.61
8-14 January 10.52 4.25 20.58
15-21 January 10.6 4.23 20.65
22-28 January 10.58 4.26 20.49
29 January – 4
February
10.44 4.31 20.55
5-11 February 10.11 4.32 20.69
12-18 February 9.81 4.28 20.88
19-25 February 9.45 4.27 21.2
25 February -3 March 8.88 4.19 21.11
Performance chart of The a2 Milk Company (A2M) shares:-
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Performance chart of Adelaide Brighton (ABC) shares:
Performance chart of AGL Energy Limited (AGL) shares:
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The Dendy Park Tennis Club have a constant performance in all the shares in its portfolio
except The a2 Milk Company (A2M). Due to well-diversified portfolio, the reduction in price of
A2 Milk Company (A2M) is compensate with the securities and debt since the value of debt is
same throughout the period of January and February. The performance of the club is compared
with the benchmark portfolio, then also it is concluded that the club's performance in its portfolio
is stable only and only if it has the well-diversified portfolio.
CONCLUSION
From the above report it is concluded that in making investment, portfolio management is
necessary and this process include selection, construction and weights or proportion of the
securities of the portfolio. If a portfolio is well-diversified then it will maximise the worth of the
shareholders. In the above project, portfolio analysis of Dendy Park Tennis Club of Australia is
done which have $500000 for investment. 40% of this amount is invested in shares of A2 Milk
Company (A2M), Adelaide Brighton (ABC) and AGL Energy Limited (AGL), 40% in debenture
containing 10% interest and 20% of $500000 is invested in money market securities of treasury
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bills and commercial papers equally. The performance of portfolio is also evaluated in last part
of this project.
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REFERENCES
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Hill Irwin.
Capelle‐Blancard, G. and Monjon, S., 2012. Trends in the literature on socially responsible
investment: Looking for the keys under the lamppost. Business ethics: a European review. 21(3)
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Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Chen, S., Ni, X. and Tong, J.Y., 2016. Gender diversity in the boardroom and risk management:
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Chorafas, D.N., 2011. Wealth management: Private banking, investment decisions, and
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Della Croce, R., 2012. Trends in large pension fund investment in infrastructure.
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In Proceedings of the 2nd Workshop on Managing Technical Debt (pp. 31-34). ACM.
L. Bogan, V., R. Just, D. and S. Dev, C., 2013. Team gender diversity and investment decision-
making behavior. Review of Behavioral Finance. 5(2) pp.134-152.
MacLean, L.C. Thorp, E.O. and Ziemba, W.T., 2011. The Kelly capital growth investment
criterion: Theory and practice (Vol. 3). world scientific.
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Mell, I., 2016. Global Green Infrastructure: Lessons for successful policy-making, investment
and management. Routledge.
Merna, T. and Al-Thani, F.F., 2011. Corporate risk management. John Wiley & Sons.
Parker, D., 2012. Global real estate investment trusts: People, process and management. John
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Pompian, M.M., 2011. Behavioral finance and wealth management: how to build investment
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Reilly, F.K. and Brown, K.C., 2011. Investment analysis and portfolio management. Cengage
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