Case Study: Investment Portfolio Construction & Management

This case study presents an investment portfolio proposal developed for a high-net-worth client seeking to invest $1,500,000 in the Australian market with a long-term capital growth objective. The proposal outlines an investment philosophy prioritizing risk tolerance and capital appreciation, favoring medium-sized firms with growth potential while minimizing exposure to the volatile resource sector. The recommended portfolio components include a mix of equity shares, listed investment companies (LICs), and exchange-traded funds (ETFs) to achieve diversification and manage risk. Short selling and future contracts are employed to hedge equity exposure, with a portion of funds held in cash for margin requirements. The portfolio's performance is evaluated, demonstrating a positive return over a one-month period, with anticipated future improvements. The proposal concludes with a recommendation to implement the portfolio strategy, subject to adjustments based on changing market conditions. The document includes references and an appendix detailing portfolio performance metrics.

Investment Portfolio Proposal
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Introduction
Portfolio of investment comprises different types of investment components such as
equity shares, bonds, exchange traded funds (ETFs), pension funds, listed investment companies
(LIC) etc. The main purpose of construction of portfolio is to optimize the risk and return for the
investor. An investor always looks for higher returns with the minimal risk. However, when the
return rises, the risk also goes high and therefore it is crucial to strike out a proper balance
between the risk and return (Mack, 2014). This document presents an investment portfolio
proposal being prepared for a client based on his specific risk and return requirements. A
portfolio of investments has been prepared in this proposal for a client looking to invest an
amount of $1,500,000 in Australian market for longer term view point.
Investment Philosophy and Strategy
The investment philosophy refers to the set of principles and beliefs that provide the basis
for selection of investment alternatives and strategy formulation for optimization of the risk and
return. There are various investment philosophies such as value investing, growth investing,
fundamental investing etc. In the current case study, the investor is looking to invest to fund his
retirement with a longer term view point. The investor is willing to take risk and looking for
capital growth stocks that can provide high returns in the long term. The investor is not
concerned about the regular income flow and tax savings. Thus, based on the risk, return, and the
time horizon requirements of the investor, there are various alternatives available for investment
such as equity shares, LIC, ETF.
Among the equity shares, the investor is particularly interested in the medium sized firms
which showcase the potential of capital growth in long term. However, the investor would want
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to keep minimum investment in the resource sector firms as the same seems to be highly volatile
during part few years. Australia is one of the biggest exporters of the natural resources,
particularly coal and iron ore, and the biggest importer of these resource has been China.
However, during past few years, the demand of coal and Iron ore from China has been declining
which is causing downfall in the stocks of resource companies in Australia (Regan, 2018).
Therefore, considering the risk and return preferences and market conditions, the investor
wants to keep not more than 50% of the total funds in equity shares. Further, in order to achieve
good diversification so as to reduce the risk, it has been decided not to invest more than 10% in
any individual stock. Further to enhance the diversification, it has been decided to invest up to
20% in LIC and ETFs. The investment in LIC and ETF would compensate with the volatility of
the stock market of Australia and USA. Apart from this, it has also been decided to hedge 75%
of the equity risk exposure using future and option contract derivatives. The investor is also
willing to go for short selling to gain from exploiting the market inefficiencies. However, a sum
up to 20% of the total funds would be required to be kept in cash to meet the margin
requirements.
Recommended Portfolio Components
The portfolio components have been identified in the table given below. The portfolio
components have been identified considering the risk and return requirements of the investor. In
order achieve the best diversification; the components have been selected from different sectors
and industries.
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Assets Code
Price (26th
Feb 2018) Nos Cost
Equity- Buying positions (Total
50% to 55%, individually not
more than 10%)
BHP BILLITON BHP.AX 29.82 2,515.00 74,997.30
AUS.AND NZ.BANKING GP.
A:ANZX(P
) 28.84 5,201.00 149,996.84
ARISTOCRAT LEISURE A:ALLX(P) 23.41 6,408.00 150,011.28
BAPCOR A:BAPX(P) 5.73 26,178.00 149,999.94
CHALLENGER A:CGFX(P) 12.32 12,175.00 149,996.00
SEEK A:SEKX(P) 20.29 7,393.00 150,003.97
QANTAS AIRWAYS
A:QANX(P
) 5.66 2,635.00 14,914.10
839,919.43
Equity Shares – Short Sales
BHP BILLITON BHP.AX 29.82 1,000 (29,820.00)
AUS.AND NZ.BANKING GP.
A:ANZX(P
) 28.84 500 (14,420.00)
(44,240.00)
LICs and ETFs Units (20% of
total)
GLOBAL MASTERS FUND A:GFLX 2.23 22,000 49,060.00
AUTHORISED INVESTMENT
FUND A:AIYX 0.03 4,545,455 150,000.02
Vanguard Australian Fixed Interest
ETF (VAF.AX) 48.57 2,000 97,140.00
296,200.02
Hedged Position (75% of equity
investment)
Future sell-ASX Index ASX 144,162.50 3.00
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432,487.50
Cash required 108,121.88
In Cash Management Trust
(Maximum 20%) 300,000.00
Total 1,500,001.32
Alignment of Recommended Portfolio Components with the Strategy
BHP Billiton is a company engaged in the resource industry having operations across the
globe including Australia with major operations (Yahoo finance, 2018). Recently, due to
pressure on demand of coal and iron ore, the company has been facing decline in the capital
appreciation however the company is backed by the huge funding and resources and thus, it is
expected to bounce back in long term. But, since the investor wants minimum exposure to the
resource sector hence only 5% of the total funds has been invested in it. Further, to diversify the
portfolio, investments have been made in the banking and finance sector. Australia and New
Zealand Banking Group is one of the oldest banking companies in Australia with wider reach
and huge funding back up (Yahoo finance, 2018). Though, high returns are not expected from
the stock but it is quite useful stock in the portal because it optimizes risk with low volatility.
Hence, 10% of total funds have been invested in this stock.
Aristocrat Leisure being the leading gaming solutions provider is one of best options in
context of buying and holding the investments. Its digital business has contributed significantly
to the increase in its share prices by almost 3% (Mickleboro, 2017). Hence, 10% of total funds
have been invested in this stock. Challenger limited is one of the best financial companies listed
on the Australian stock exchange and it deals in the security that offers guaranteed income
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stream for defined and unlimited term as well (Montgomery, 2017). The recent past track record
of the stock’s price shows that this stock has immense potential to grow rapidly in future. The
stock’s price was A$4.13 in 2012 which reached to A$13.70 in the year 2018. However,
currently the stock has been on decline which appears to be temporary. Hence, 10% of total
funds have been invested in this stock.
As seek limited is one of the top 100 Australian companies which is offering the largest
job portal, its share price has risen tremendously in last few years and is also expected to grow
more in the coming years due to its total market dominance in the entire industry (Richardson,
2017). As job-seeking market is of the emerging market in both Australian and New Zealand
economy, Seek Limited has a plenty of growth and expansion opportunity in overseas market.
10% of total funds have been invested in this stock. Bapcor Limited, the Australian company is
operating the largest business of the auto parts. It has reported a revenue growth of
approximately 48% and EPS growth of approximately 36.4%. Hence, it is considered to be good
investment opportunity. The growth potential in FV 2018 is even expected to be more as its
management has performed excellent job in integrating the businesses acquired by the company
in last few years. The increased EBITDA margin from 11.2% to 11.6% in year 2017 indicates
the higher growth prospects of the company (Harrison, 2018). Hence, 10% of total funds have
been invested in this stock.
In order to achieve further diversification, few funds have been infused in Qantas
Airways which operates in the Airline industry. The company holds capability of growing fast in
future and hence it has been considered as an important component in the portfolio. However,
only 1% of total funds, which remained in the quota after distribution to other stocks, was
infused in the stock.
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Apart from the equities, investments have been made in Global Master Fund and
Authorized Investment Fund. These both are the most promising listed investment companies in
Australia hence a sum of approx 13% has been invested here. A further sum of 6% has been
invested in Vanguard Australian Fixed Interest ETF which provides stability to the portfolio
income.
Further, in order to reduce exposure of the equity market, short selling and future
contracts have been used. Short selling has been used on BHP Billiton and Australia and New
Zealand bank as these two stocks are being observed declining in short run. Further, a future
contract on S&P 200 has been taken to curve out 75% of the equity exposure.
Portfolio Performance
It could be observed that the portfolio earned a return of 6.09% (Appendix) over the
period of approximately one month which is phenomenal. However, the leading stocks like BHP
Billiton and Australia and New Zealand bank are yet to perform, therefore, far better returns can
be expected in future from the portfolio.
Conclusion and recommendation
It can be concluded from the discussion in this investment proposal that the
recommended portfolio components are appropriate considering the risk and return preference of
the investor. However, alterations in the composition of the portfolio can be made in future in the
light of change in the market conditions and economic situation.
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References
Harrison, T., 2018. Why I think the Bapcor Ltd share price is a buy today. [Online]. Available at:
https://www.fool.com.au/2018/01/24/why-i-think-the-bapcor-ltd-share-price-is-a-buy-today/
[Accessed on: 04 April 2018].
Mack, I.M. 2014. Energy Trading and Risk Management: A Practical Approach to Hedging,
Trading and Portfolio Diversification. John Wiley & Sons.
Mickleboro, J., 2017. Aristocrat Leisure Limited lands a Big Fish. [Online]. Available at:
https://www.fool.com.au/2017/11/30/aristocrat-leisure-limited-shares-rise-on-bumper-profit-
growth-and-acquisition-plans/ [Accessed on: 04 April 2018].
Montgomery, R., 2017. Four reasons to buy challenger. [Online]. Available at:
https://rogermontgomery.com/four-reasons-to-buy-challenger/ [Accessed on: 04 April 2018].
Regan, J. 2018. Australia forecasts 20 percent iron ore price drop in 2018 as China demand
eases. [Online]. Available at:
https://www.reuters.com/article/us-australia-resources-forecast/australia-forecasts-20-percent-
iron-ore-price-drop-in-2018-as-china-demand-eases-idUSKBN1EW0VH [Accessed on: 04 April
2018].
Richardson, T., 2017. SEEK Limited shares drop as it plans to invest for growth. [Online].
Available at: https://www.fool.com.au/2017/08/16/seek-limited-invests-for-growth/ [Accessed
on: 04 April 2018].
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Yahoo finance. 2018. Australia and New Zealand Banking Group Limited (ANZ.AX). [Online].
Available at: https://finance.yahoo.com/quote/ANZ.AX/history?p=ANZ.AX [Accessed on: 04
April 2018].
Yahoo finance. 2018. BHP Billiton Limited (BHP). [Online]. Available at:
https://finance.yahoo.com/quote/BHP/history?p=BHP [Accessed on: 04 April 2018].
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Appendix
Portfolio Performance
Assets Code
Price (26th
Feb 2018) Nos Cost
Price
(31st
Mar
2018) Return
Equity- Buying
positions (Total
50% to 55%,
individually not
more than 10%)
BHP BILLITON BHP.AX 29.82 2,515.00 74,997.30 28.21 (4,049.15)
AUS.AND
NZ.BANKING GP.
A:ANZX(
P) 28.84 5,201.00 149,996.84 26.55
(11,910.2
9)
ARISTOCRAT
LEISURE
A:ALLX(
P) 23.41 6,408.00 150,011.28 24.30 5,703.12
BAPCOR
A:BAPX(
P) 5.73 26,178.00 149,999.94 5.58 (3,926.70)
CHALLENGER
A:CGFX(
P) 12.32 12,175.00 149,996.00 11.26
(12,905.5
0)
SEEK
A:SEKX(
P) 20.29 7,393.00 150,003.97 18.32
(14,564.2
1)
QANTAS
AIRWAYS
A:QANX
(P) 5.66 2,635.00 14,914.10 5.82 421.60
839,919.43
Equity Shares –
Short Sales
BHP BILLITON BHP.AX 29.82 1,000 (29,820.00)
AUS.AND
NZ.BANKING GP.
A:ANZX(
P) 28.84 500 (14,420.00)
(44,240.00)
LICs and ETFs
Units (20% of
total)
GLOBAL
MASTERS FUND A:GFLX 2.23 22,000 49,060.00 2.23 -
AUTHORISED A:AIYX
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INVESTMENT
FUND 0.03 4,545,455 150,000.02 0.06
131,818.2
0
Vanguard
Australian Fixed
Interest ETF
(VAF.AX) 48.57 2,000 97,140.00 48.95 760.00
296,200.02
Hedged Position
(75% of equity
investment)
Future sell-ASX
Index ASX 144,162.50 3.00
432,487.5
0
Cash required 108,121.88
In Cash
Management Trust
(Maximum 20%) 300,000.00
Total
1,500,001.3
2 91,347.07
Return on
Portfolio (%) 6.09%
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