Kaplan: FPC008 Investment Advice Report for Tex Matdasu

This report provides investment advice for Tex Matdasu, a 32-year-old financial analyst with a superannuation portfolio. The analysis covers the efficient market hypothesis, asset allocation strategies including fixed income and alternative investments, and platform and product considerations. It delves into fund manager investments, indirect cost ratios, and margin loans. The report also examines tactical asset allocation, buy-and-hold strategies, and the differences between passive and active funds. The objective is to provide recommendations to optimize Tex's portfolio, considering his risk aversion and financial goals, including potential property investment in five years, and to align with the current market conditions and investment opportunities available through ABC Super.

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Investment Advice
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INVESTMENT ADVICE
1: EFFICIENT MARKET HYPOTHESIS
(a) (i) Efficient market hypothesis (EMH) is a process of analyzing goods on fair
prices making it difficult for investors to outperform the market, they aim of identifying goods
with more profit than others then separating but consistent alpha generation is hard. The process
is important in finance sectors of an organization since pricing mirrors important details of the
assets. Goods are marketed at fair prices making it impossible for investors to buy and sell goods
at low prices and they end up purchasing riskier stock. EMH is the cornerstone to financial
theory despite believed that it’s useless to search for cheap goods and predict market through
technical research. (Hamid, et al, 2017)
(ii) Investors investing in a low cost market and passive portfolio could make
more profit because of the randomness of the market. Morningstar compiled and compared data
on active mangers returns and the results shown that every year only two groups of managers
outperform passive funds. The duty is to the investors to identify stocks for a long term period
since stock picking consumes much time and a lot of work whereas they can do better things
with the resources. EMH assists investors in selecting potential source of market. (Ţiţan, 2015)
(iii) Portfolio management of fund managers continue to enjoy service and the profit
from the sales, from the article, high incremental fees has haunted the investors while brokers
continue to make more profit.
2: ASSET ALLOCATION
(a) Fixed income is purposely used by investors to diversify their portfolio since the
process reduces the overall risk of allocating their assets. For Tex, he did not invest in fixed

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income due to the bad experience he had but with the securities like certificates of deposit, it is
stable and purely equity holding which he can trust. The benefits of fixed interest are that;
 There is a regular income return within a specified period of time hence the investor
expect large shareholder dividends.
 Initial investment is repaid on maturity and this will be an added advantage to Tex who
planned on investing on property of $ 500000 in a period of 5 years.
 The investors continues to earn higher initial rate of interest till maturity incase interest
rate fall.
(ii) The benchmark process with International fixed interest is issued in a country by
foreign investors where interest is paid in specific intervals and just like other investment the
initial amount is paid to the investor at maturity. The investments are only used in a country
where the currency is foreign to the investor and vary depending on the economic conditions and
exchange rate between domestic and foreign country. The investor has a chance to diversify
portfolio and familiarize with foreign securities. The currency should be hedged to ensure that
there is control of money supply and reduce the exchange rate which may hinder the investors.
Currency hedge for international gives the investors a chance to claim assets in case of
bankruptcy. Aberdeen standard Australia fixed income fund may be considered by investors
since the initial investment is till maturity. (Yin, 2016)
(iii) Fixed interest has various risks involved such as prepayment risk, credit risk,
liquidity risk and yield curve risk. The prices variation in fixed interest affects the portfolio and
damage investors like bank, insurance companies and assets managers. Fixed interest can be
volatile depending on the credit rating and the company may end up losing much of their
investment.

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(b) For alternative investment rate higher than expected in the issuing company credits
later becoming bankrupt. For partners group global value fund and wholesale fund is an
alternative to global equities with an aim of minimizing exposure to diverse portfolio, volatility
and monthly liquidity. The fund is only restricted to investors who are not used to volatility and
have an element of illiquid asserts in their portfolio. Pástor, Stambaugh, & Taylor, 2015)
(iii) Property component are managed to ensure that;
 Risk is balanced against performance.
 The process determines the strength and opportunities
 It is a threat to debtors’ investment at equity and international level.
3: PLATFORM AND PRODUCTS
(a) Fund manager investment has benefits to the investors since;
 There is diversification of risk making since it easy to hold funds from various issuers.
 The team has professional management team who specializes in maintaining the funds
and is able to keep in touch with the market they invest in the fund manager since they
are diverse.
 They can easily buy in bulk and the prices may lower when they negotiates. Private
investors can easily access market and easily invest their money across the world with
the help of the fund managers.
 The fund managers are believed to have worldwide information network which direct
investment cannot provide to the investors. (Jenkinson, Jones &Martinez, 2016)
Despite the benefits of fund managers there are shortcoming which an investor
should understand and include;

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 The investors are charged fees to pay the higher professional where they invest their
funds.
 Performance on investment is not guaranteed to the investor as compared to the direct
investment where the investor is assured where to invest.
 High rate of taxation are experienced since fund managers are expected to pay in case of
any capital gain according to the law.
(ii) Indirect cost ratio is the approximate cost for investing in funds assets and are reduced from
investment and not paid directly by the fund.
Indirect cost rate=indirect cost pool/direct cost base
Indirect cost pool
Renting property $2000
Living expenses $2000
Emergency cost $25000
Total $29000
Direct cost base
Personal cash balance $350000
Monthly income $100000
Total $450000
Indirect cost ratio 15%
Indirect cost in Tex’s portfolio ranges to approximately 15%, with this he can easily
invest within the period of five years.

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Pros
Margin loan will give an investor a chance of diverse opportunities to invest their money
since the investor can borrow as much as they need for the investment. Diversity limits the
investor to unnecessary risks since they get exposed. The investor can easily access their funds
by selling their assets to get the money
Cons
Market decline can lead to reduction of your investment portfolio hence market
volatility should be taken care of. Margin call forces the investor to add more funds or assets
especially when the outstanding balance surpasses the borrowing limit.( Sestito & Viviano,
2016)
(b) Gearing investment has the following advantages;
 It is tax saving especially when losses arise from a negatively geared investment is offset
against other income.
 Potential cash benefit occur when investment are not physically paid for since they are
natural. The investor after reduced tax duties will be in a better investment position.
There are disadvantages like;
 The return of investment may lack or reduce and the investor is bound to experience high
financial risk when additional source of income are reduced.
 Margin calls happen mostly when interest rate increases.
(ii) For an investor to meet a margin call they need to decide whether to deposit cash or assets,
the investor need to decide what kind of stock they need to deposit in their account and are
expected to meet the requirement of the investment company margin calls. The investor could
also sell securities in order to achieve the additional equity requirement. Lachlan can plan on

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closing the business that lead to the margin call and utilize the proceeds in reduction of the
additional cash.
4: TACTICAL ASSETS ALLOCATION
(a) Buy and hold is the process of buying and holding it indefinitely without rebalancing it.
There are no any considerations of marketing in the fund. Investors can easily outperform active
management and defer capital gain taxes. The constant rebalancing is purposed to maintain a
ratio depending on the asset classes. The process involves buying securities when the prices are
low and later selling them when the prices arise. When the market is in a long and treading
period then the buy- and- hold strategy is believed to do better compare to constant rebalancing
strategy.
(ii) Constant rebalancing experience less losses since the investor continues to sell risky assets in
an increasing market and buys stock as the fall. Tex has applied buy and hold tactic whereby he
plans to buy a property in five years time and this will give time to the market fluctuation
depending on the property he decides to buy.
(b) Tactical Asset Allocation (TAA) involves shifting of assets held in various categories and
taking advantage of the strong market sector. The process is short term hence deals with
exceptional investment opportunities. Strategic asset allocation (SAA) is limited since it works in
buy and hold strategy. Tactical strategy demands full attention and ability to predict short term
opportunities and rebalance long term assets position. The investor should clearly reflect the goal
depending on the market and fluctuation. Managers creates additional source of income by
balancing between assets classes. ( An, Ang & Collin-Dufresne, 2015).
(ii) With the current situation and strategic assets allocation the investors are expected to
manage their own risk and invest time frame in their account. SAA sets target and the investors

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need to balance the expectation often. Tex’s current ABC portfolio meets the requirement with
the income ranging to $ 73000.
(c) Falling domestic interest happens when the exchange rate goes down making investment in
other country cheaper. The economy of the country increases since the investors have the ability
to invest effectively. Falling of domestic interest makes it hard for foreign investors to invest in
the country. The rising of the US interest makes the market less competitive and lowers the cost
of investment improving the domestic investment. (Busse, et al, 2018).
(ii) Asset allocation has helped financial planners on distribution of finances and they consider
altering long term investment into short term like TAA. Introduction of mix of assets and weight
has helped the investors to reach them goals ranging 6% of the asset class. The investors shift
large capital into the asset class to take advantage of the opportunity. (Bahmani, et al, 2016)
5: PASSIVE VERSUS ACTIVE FUNDS
(i) Passive management is an investment process where the investors are expected to
make a long term investment with less or no influence of short term implications. Tex and
planned to invest $ 100,000 dollars, but due to risk aversion he invests $73,000 and later stock in
portfolio may increase and decides to sell some of the products. Passive relies mostly on
fundamental analysis behind securities the investors intend to invest. Passive is considered to be
cheaper since it demand low commission, advisory fee and less demand to tax benefits. In
passive, security prices are rarely influenced by past event hence hard to outperform the market.
(Appel, Gormley & Keim,2016)
(ii) Active management creates a platform to increase investment by involving fund
managers. The managers need to research on the market and forecast on the trend of the market
for the investment to be successful. The active funds can easily be debate in stock passive funds.

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Active managers have a conscious risk control since they are not required to reflect changes in
the market but can control risk by avoiding overexposure. Active management easily aligns with
the investors’ interest and protects them in case they bound to make any mistake in terms of
market. (Arbaa, & Benzion, 2016)
(iii) Assets allocation fund is a simplification application with varying allocation of
funds. Balance fund is an example of portfolio investment that shows a balanced allocation of
equities and fixed income. Target date funds are part of portfolio fund that gives the investor a
chance to make retirement plan. Tex, for example had planned to retire at the age of 60, so he is
advised to use life cycle fund. Antipodes Investment Company help in reducing errors and
creating efficiency and involves unified managed account, separately managed account, mutual
fund advisory and exchange traded funds. (Bernstein, Colonnelli & Iverson, 2019).
6: CORE SATELLITE VERSUS BLENDED APPROACH
(a) Core satellite is portfolio method aimed to minimize cost, tax and volatility and
depends on strategic and tactical allocations of assets. A satellite includes active managers,
emerging economies and overweighing into growth market investment. Core satellite focuses
more on strategic allocations and allows active portfolio management. A blended portfolio deals
with growth and value funds. Blended portfolio involves other form of investments brought
together and constructing assets. To construct a blended portfolio the management is set to
discuss on the quantity of investment and select the appropriate mix for better result.( Louton,et
al, 2015)
(iii) Assets classes suited for blended portfolio are expected to provide higher returns
hence the assets are tested to determine negative returns, return less than cash rate and returns
lower than inflation. MFS blended core equity seeks capital from growth and value stocks. Core

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portion help in minimizing costs since it deals mainly with passive investment. Volatility is one
the risk most investors avoid hence with the help of beta the investors are able to measure stock
market volatility. (Bernstein, Colonnelli, & Iverson, 2019)
(b) Factor ETFs, inflation linked bond and emerging and frontier market ETFs help in
identifying assets that diversify portfolio. There are different styles of fund that boost the
performance of the investment, for equity funds, the horizontal axis shows valuation where this
is in matrix form.
(c) Socially responsible investing that involves socially conscious investment with
positive impact and has a social responsibility as the demand of the business. The profit made
there is measured in terms social impact and tries to match up with political and social climate of
time. Community investing is an example of social responsible investing and aims on helping the
community by providing affordable housing. The investors mainly focus on corporate
governance, environmental concern, human rights youths’ rights.
(d) Style drift deals with divergence of funds from it purposes. Capital appreciation and
variation in management of funds can result to style drift. Extensive of funds parameter different
from the stated investment objective can lead to style shift investing. When the investors use
their remaining funds in investing outside the primary objective then it can be considered as style
drift. Hedge funds are at higher risk of experiencing style drift. Standard investment due to
diligence has a great influence in helping the investors to reallocate their investment funds.
(ii) Monitoring of style drift will demand the investors to use an index or other passive
funds and help them in avoiding style drifts. The investors should assess historical style which
will help them detect drift in future. A change in cost may lead to change in fund style. The

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investor should perform a return base analysis due to diligence and risk management. (Kamstra,
et al, 2017)
(iii) The investor should understand the best fund by deciding whether to invest in active
or passive, understand fund managers charges and have ability of rebalancing and managing
portfolio.( Bouchey & Pritamani, 2017)
7: CHANGE MANAGEMENT
(a) Change in management is very essential in any organization in order to appoint
reliable leaders who can market the business. The organization should communicate the changes
expected to the employees to give them easy time and quick adjustment to the changes. The
communication should be made simple and clear. The information should be open and prompt
and the organization should open a communication channel in case of any misunderstanding, the
information can be quickly cleared up. The organization should be honest about the change
expected without sugar coating in case there members who will lose jobs, they should be
informed in advance and dialog kept open. (Sestito &Viviano, 2016).
The organization should have a very high level of accountability on the changes intended
to take place. Clear vision is necessary since each employee should understand why the
organization is undertaking the changes. The employee should engage and participate since
everyone in the organization will be affected by the changes intended to happen. The
organization should motivate its employees to accept the major changes and to continue working
in the organization. The organization should evaluate the change expected by measuring KPIs
and seeking feedback from the staff. (Baydur, 2017)
Management changes are very costly since they are associated with communicating to the
employee’s reason for the change and this helps in retaining the employees. Branding process

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that comes in with the changes may be costly especially providing stationery and transportation.
The organization will require training their employees on how to adopt the new changes. New
employees also need to be trained on how to perform their duty and this could cost the company.
(Drouin, et al, 2015)
The company should deal with fund managers for easy investment to avoid unexpected
losses. The company should be able to identify the ability and experience of the new employed
management. The company should understand the profession of the new employees.