Investment Portfolio Analysis and Management Report, FIN30016, 2019

This report presents an analysis of a student's investment portfolio, constructed based on specific asset classes including A-REITS, infrastructure funds, and an international ETF focused on gold miners. The portfolio's performance is evaluated over a 36-month period, with the ASX 200 used as a benchmark. The analysis includes the computation of average monthly and annual excess returns, as well as tracking error. The report examines the influence of factors such as the US-China trade war, the 2020 US Presidential Election, and global economic growth on the portfolio's performance. Furthermore, it investigates the correlation between the portfolio's returns and the Dow Jones Industrial Average (DJIA). The findings reveal a negative correlation between gold and equities, contributing to the portfolio's underperformance relative to the benchmark. The report also explores the risk-return profiles of the selected funds, suggesting adjustments to optimize the portfolio's risk-return ratio. Finally, it references several academic sources to support the analysis and conclusions.

FINANCE PORTFOLIO MANAGEMENT
STUDENT ID:
[Pick the date]

Based on the requisite considerations highlighted, selection has been made for the portfolio
which is summarised below.
a) A-REITS: SCG Scentre Group (Portfolio Allocation: 20%)
b) INFRASTRUCTURE FUND: AST AusNet Services (Portfolio Allocation: 15%)
c) INTERNATIONAL ETF: BetaShares Global Gold Miners ETF – Currency Hedge
(Portfolio Allocation: 55%)
CASH: Australian Government 10-year Bond (Portfolio Allocation: 10%)
Question (i)
1) The two largest infrastructure assets held by the selected infrastructure fund during the last
two financial years are given below.
 High Voltage Electricity Transmission Network in Victoria
 Gas Distribution Network in Victoria
2) (i) In the recent times, it has been seen that the global economy is increasingly vulnerable
to economic shocks as the impact of any economic problem in a certain part of the world
essentially has global impact. This is apparent from the global financial crisis in US,
sovereign debt crisis in Europe and now the trade wars between US & China. In such
uncertain times, there is an increased tendency on the part of the investors to view gold as
the perfect hedge to this risky environment. This had led to significant increase in the gold
price over the last decade or so.
Instead of taking exposure to gold as a commodity, I rather wanted to invest in gold miners
whose profits and valuation would essentially be a function of the gold prices. Unlike
commodity funds which tend to be volatile, the share price of the gold miners would be less
volatile since any small change in the gold price does not immediately get reflected in the
stock price. Also, the selected ETF is currency hedged thereby ensuring the currency risk is
non-existent. This is a pivotal consideration owing to the volatility in all currencies against
USD seen over the last year or so.
(ii) Three potential factors which would impact the performance of this fund over the next 12
months are as follows.

 Resolution of US –China trade war – If the trade situation between US & China does
improve, then it is expected that global recession would be prevented. However, if
there is no trade deal between US and China over the next 12 months, then slowdown
is imminent owing to which gold prices would surge. This would result in superior
performance of the selected fund.
 Result of the US Presidential Election 2020 – It has been witnessed that President
Trump has led to increased risk in the global asset markets over to his mercurial
decision making and not averting from pressure tactics. As a result, if he is re-elected,
then it is likely that the prices of gold would inch higher, thereby having significant
influence on the fund’s performance.
 Global Economic Growth – It has been empirically seen that there is a negative
correlation between returns on gold and returns on equity. If the global economic
growth continues to witness fall over the next 6 to 12 months, then the risky asset
classes such as real estate, equities would underperform. In such scenario, it may be
expected that there would be a higher amount of inflows into gold for hedging the
recessionary fears which would enhance the performance of the fund.
Question (ii)
1) The excess return on the portfolio has been computed using the ASX 200 as the
benchmark index. For each of the 36 months, the excess returns is obtained by subtracting
the expected returns on the ASX 200 index from the expected returns of the portfolio. This
is summarised as follows.

Based on the above computations, the average monthly excess return has been computed
which has come out as -0.11%. The average annual excess returns has been obtained as -
1.30%.
2) The tracking error has been computed by measuring the standard deviation of the excess
returns for the portfolio formed over each of the 36 month period. This has come out as
4.65% per month but when annualised yields 16.11%.

3) Considering that average excess returns is negative, it implies that our portfolio has
underperformed over the last 36 month period when compared to the benchmark (ASX
200) index. One of the key reasons for the same may be the superior performance posted
by equities during the last three years and underperformance by gold. It is only in the last
three months or so that there has been a spurt in the gold price. Since more than 50% of
the portfolio allocation is in international ETF which is dependent on the gold price, hence
the portfolio as a whole has clocked a marginally inferior performance in comparison to
the index (Lasher, 2017).
With regards to the tracking error however, the value is significant which implies that our
portfolio has not closely tracked the ASX 200 index. This is not surprising as 55% of our
portfolio allocation is in international ETF linked to the stock price of gold miners.
Empirically, gold and equities do not perform together and tend to share a strongly negative
correlation. This essentially is the reason for significant divergence in the portfolio returns
and the index returns. If the allocation to the gold based international ETF is reduced, then it
is quite likely that the portfolio performance would improve and track the ASX 200 index
more closely (Parrino and Kidwell, 2014).
Question (iii)
 In order to determine if there is any significant relationship between the Dow Jones
Industrial Average (DJIA) returns and the investment portfolio performance over the last
24 month period, correlation analysis has been conducted. The requisite results are
summarised as follows.

It is evident that the correlation coefficient of DJIA returns and investment portfolio returns is
0.01 which implies that there is essentially no relationship between the given two variables.
As a result, the investment portfolio returns over the last two years seem to have been
independent of the performance of DJIA index. This is also confirmed from the scatter plot
where there is no particular trend that is visible in the positioning of the scatter plot. Also,
the R2 (coefficient of determination) is zero which implies that DJIA returns are not able to
explain any of the changes seen in the investment portfolio returns (Brealey, Myers and
Allen, 2014). The above observation does not come as a surprise as it is unlikely that any of
the portfolio components would be driven by the performance of DJIA. Also, the
performance of the US stock market has been in aberration with the increasing risk aversion
visible globally, Thus, it can be concluded that the investment portfolio returns over the last
24 month period has been independent of the performance of DJIA.
 Based on the last 36 month performance of the various funds that have been selected for
the investment portfolio, the following matrix of return per unit risk for the three funds has
been obtained.
It is evident from the above that the most superior performance in terms of risk return
tradeoff is offered by AST which offers the highest positive returns per unit risk. As a result,

if there is a desire to improve the risk return profile of the investment portfolio, then the
international gold miner ETF contribution should be brought down and infrastructure fund
contribution ought to be increased (Petty et. al., 2016).
However, the objective is the given case is to lower the return to risk ratio. This may be
accomplished by increasing the contribution of the fund which would lower the return while
increase the risk at the same time. This would the SCG Scentre Group since the average
returns are negative while there is associated risk. As a result, if the share of this fund is
enhanced at the cost of AST (infrastructure fund), then it would be possible to lower the
returns to risk ratio by the desired 1% (Damodaran, 2015).

References
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015) Applied corporate finance: A user’s manual. 3rd ed. New York:
Wiley, John & Sons.
Lasher, W. R., (2017) Practical Financial Management. 5th ed. London: South- Western
College Publisher.
Parrino, R. and Kidwell, D. (2014) ,Fundamentals of Corporate Finance,4th ed., London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2016)
Financial Management, Principles and Applications. 6th ed. NSW: Pearson Education, French
Forest Australia.