Investment Management: Analysis and Portfolio Recommendations (FIN201)

This report, prepared for FIN201 Investment Management, focuses on developing an investment policy for a senior citizens recreation club. The report begins with an executive summary outlining the objective of providing a regular income through investments in equity, debt, and secured funds, with a low equity ratio to mitigate risk. The literature review explores investment policy statements, risk tolerance, and asset allocation strategies. The analysis section identifies suitable equity stocks like Cadence Design Systems, Anadarko Petroleum Corporation, and Advanced Micro Devices, along with debt instruments like the SPDR S&P/ASX Australian Bond Fund. Justifications for these selections are provided, considering factors such as potential returns and risk profiles. The report recommends a diversified portfolio with allocations to equity, debt, hybrid instruments, and liquid assets, tailored to the needs of senior citizens with a focus on defensive strategies and short-term to medium-term investment horizons. The goal is to optimize returns while minimizing risk exposure, considering the specific financial goals and risk tolerance of the target demographic.

KOI Cover Sheet
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FIN201 Investment management T219
Assessment 2
Subject Title: Investment Analysis and Portfolio Management
Subject Code: FIN
Trimester Number
Assignment Title: Investment management
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Executive Summary
The objective of every investment policy is dependent on the investor. Present investment policy
has been framed after considering regular and healthy flow of income to the senior citizens in the
recreation club. Investment has been made in equity, debt as well as secured funds. The ratio of
equity has been kept low as the investors are not in condition to bear high risk. Overall plan
regarding investment management has been made considering various factors which will have
significant impact on the short-term as well as the long-term income of the senior citizens.
Eventually, an attempt has been made to provide them optimum return with available sources
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TABLE OF CONTENTS
Introduction......................................................................................................................................6
Literature Review............................................................................................................................6
Analysis...........................................................................................................................................9
Equity stocks for investment.......................................................................................................9
Debts for investment..................................................................................................................10
Justification for selected investment options.............................................................................10
Recommendation...........................................................................................................................13
Conclusion.....................................................................................................................................13
References......................................................................................................................................14
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INTRODUCTION
The present study is based on the formation of portfolio by considering debt, equity and cash,
which will be followed by obtaining information regarding the funds, their costs and policies and
any other factor. The study follows the tracking and graphing of weekly values of the selected
investment options from 1stfeb 2019 to 31st July 2019.The investment policy is developed with
the objective of helpingmembers of local senior citizens recreation club in having the best
returns, attaining their overall financial goals and lowering the risk exposures.
LITERATURE REVIEW
An investment policy statement is stated as a document, held among an investor and helping
investment manager, listing the agreements of the two parties that comes across related with
better management of the investor’s money(Vassallo, Fisher, and Kingston, 2016). Similarly, the
statement will help in formulating sound strategies that will help the investor in better
management of their money to meet their financial goals. For this aspect, useful information and
data will be presented on investing problems such as risk tolerance, capital requirement and asset
allocation.
The overall objective of this investment policy statement is to ensure a regular and healthy flow
of income to the senior citizens in the recreation club. The plan has been made considering
various factors that may affect the short-term as well as the long-term income of the senior
citizens. Considering the profile of the senior citizens, it is important to invest in those segments
that can provide ample liquidity(Evansand Razeed, 2019). The lock-in period shouldn’t be stiff
and shall fall within 1-3 years of time frame. Also, there has to be a withdrawal option for
redeeming the funds when necessary. It is also crucial to undertake the exit load which shall not
be high in order to retain good amount of liquidity.
Considering the age group of the investors (senior citizens in this case), there is a need to prepare
an investment policy which is defensive in nature as there risk tolerance level is comparatively
low. The investment horizon will be short-term, staying within the time frame of 1-3 years. The
expected returns, in this case, will be low, since the time allowed is much lower in this case. The
senior citizens shall expect an inflow of about 2-3% per year. Online savings account and term
deposits are two good options that can be considered here that will give reasonable returns
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considering the time allowed on the investment. The online savings account gives the freedom to
achieve cash whenever required, while the term deposit will give advance information about the
lock-in period(Kingstonand Thorp, 2019).
Considering the short-term investments and the products (Term Deposit and Online Savings
Account) used for investment, the risk and the relative volatility will be low. There will be very
less chance of losing the money due to market changes and also the volatility is unlikely to hurt
the balance of the initial investment(Evansand Razeed, 2017). However, if the time horizon is
increased to 4-6 years, the volatility and the relative risks will be enhanced. No doubt, the returns
will also be increased due to the increased risk factors. In this case, the average return on
investment will be 4-5% per year.
In the case of medium-term investment of 4-6 years, Management Investment Scheme or simply
the Managed Funds will be a good option. Though the risks will be higher, they will be
compensated by higher returns that can go up to 4-5% per year. They are better than bank
accounts as they provide better yields in a similar time frame. It is also possible to pump more
money into the investment(Spicer, Stavrunova, and Thorp, 2016). It’ll also help to recover from
the negative returns that arose during the short-term investment periods.
It is further important to consider the commissions, tax planning aspects and other charges
involved in the investment. If the funds are borrowed, then the borrowing cost shall be taken into
consideration to extract the optimum returns(Gerrans and et al., 2018). Also, the financial and tax
situation of the senior citizens will be different in comparison to other citizens depending upon
their work and income. Hence, the relevant legal and tax matters have been taken into
consideration for determining the retirement investment policy statement.
Cited investment policy statement helps in establishing and recording policies in better future
decision making to maintain stability and clarifying expectations. Further, a well-established
statement comprises a breakdown of targets of asset allocations; it helps in specifying the target
allocation among selected bonds and stocks.
Since asset allocation is the most difficult decision for investor, in this situation portfolio
management really works, and helps investors in attaining their defined goals and objectives.
Therefore, the asset mix has to be tailored according to the client’s nature, the prevalent
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government policies, the likely changes in the economic condition of Australia, and also the
expected returns of the client. Considering that the asset allocation strategy has to be designed
for senior citizens, more defensive options like debt (including money market instruments) will
be preferred. Government Bonds, Commercial Papers, and Debentures are some of the good debt
options to take into consideration(Towart, 2018). They provide reasonable returns without
exposing the funds to a higher degree of volatility. The overall investment risk will be under
control, and the value of investment won’t be depreciated by a lot.
The inflation rate in Australia is likely to touch 1.70% by the end of the third quarter. Further, it
is expected that the inflation rate will size up to 2.20% in the long run. Hence, the stability factor
is likely to be impacted as a result of the increase in inflation (Australian investment council,
2019). As discussed above, the short-term investments will fetch around 2-3% of returns on the
investment. This will not be a viable option as the Real Return on Investment (Actual Rate of
Return – Inflation) will be just around 0.5%. In case of medium-term investments, however, the
Real Return on Investment will be better. The risk exposure will be controlled, and the cost of
handling the investments will be manageable(Australian Investment Council, 2019).
Considering that the clients are senior citizens with likely lower risk tolerance, more exposure to
debt and related instruments is recommended. The amount of $500, 000 can be distributed over
different types of investment options with different risk factors to optimise the returns and
minimise the overall investment risk. For achieving a balanced portfolio that pays well and
doesn’t contain high risks, the equity exposure will be kept at 10%. This will ensure a regular
inflow of income exposing the funds to some volatility. Also, the Australian government is set to
promote the SME and large industry players, which are likely to boost the equity yield (Fanand
Wiafe, 2018).
Next, the debt exposure will be around 70%, as this will ensure a regular (though lower) flow of
income without much exposure to risks. Next, 10% amount can be invested in hybrid instruments
that will ensure low risk and better pay. However, a defensive hybrid instrument will be targeted
to reduce the risks to an acceptably low level (Foo,2017). For immediate liquidity purposes, the
remaining 10% of the amount can be invested in liquid assets such as marketable securities or
can be even kept in hard cash for mitigating emergency requirements.
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The asset allocation defined above – Equity (10%), Debt (70%), Hybrid Instruments (10%), and
Liquid Assets (10%) – is done for the purpose of achieving the maximum return on investments.
Since the investment horizon is likely to float between 1-6 years, which is not a very long
duration of investment, it is essential to go defensive. This allocation will be appropriate for the
club members as it suffices their investment needs and promises a decent yield, without a heavy
exposure to risks.
ANALYSIS
For the purpose of portfolio establishment, 3 best performing stocks and 2 bonds and one mutual
fund has been considered for better optimal maximization of earnings and better management of
risks for local senior citizens recreation club.
Equity stocks for investment
Cadence Design Systems (CDNS)
Cadence Design Systems (CDNS) is an international company based in America, and it is a
leading company of electronic automation software and engineering services, established in
1988. The company offers software technology, consulting services, design as well as
technology. In addition to this, it also licenses its electronic design automation software
technology while offering an array of professional services(Bloomberg, 2019). The design
realization of Cadence is employed to design and develop complicated chips as well as electron
is systems inclusive of semiconductors. The company has seen a double-digit share increase in
price of more than 10% in previous months, for a potential investor, this share is a worth buy it
is because it would see a 15% increase in next few years, and would yield strong cash flow in
future.
Anadarko Petroleum Corporation (APC)
Anadarko Petroleum Corporation (APC) is a company dealing in hydrocarbon exploration, andit
offers products that include petroleum, natural gas and natural gas liquids. Its operations in
terms of oil as well as gas exploration corporate, and it obtains, explores, establishes,
manufactures and trade oil as well as natural gas which are served to customers on global
basis(Yahoo Finance, 2019). The shares of company have considered a double-digit rise in price
of more than 10% in the previous months, and it can be seen that stock is fairly valued presently.
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In the upcoming year the earnings of the company are likely to rise by 67.09%, showing an
optimistic future head, leading more robust cash flows and higher share value.
Advanced Micro Devices (AMD)
Advanced Micro Devices, Inc is an international semiconductor company based in America that
develops computer procedures and technologies for business entities and customer markets. It
produces products that are inclusive of chipsets,microprocessors,graphics,embedded
microprocessors, multimedia and video products, and its products are offered globally. It has
operations through segments of Embedded & Semi-Custom and Computing & Graphics and
Enterprise(Bloomberg, 2019). The company has made tremendous gains, its stock is rising, and
revenue has climbed, it would be a great buy for investor, it is because it has staged remarkable
turnarounds over the past few years and is charged by new products and improvised profitability.
Debts for investment
SPDR S&P/ASX Australian Bond Fund is stated as an exchange-traded fund which helps in
tracking and monitoring the overall performance and progress of the S&P/ASX Australian Fixed
Interest Index (ETF Watch, 2018). It is primarily an exchange-traded fund that is investing in the
fixed-rate bonds of Australia and is attempting to offer investment outcomes that are
corresponding to the prices and capitulate performance of S&P/ASX Australian Fixed Interest
Index. It belongs to the fixed-income industry and is focused on corporate bonds, it objective to
is to inspect, before fees and expenditures, the returns of S&P/ASX Government Bond Index. It
has documented effective performance over the past few years and is likely to yield better
performance in future.
Justification for selected investment options
Selected investment options assist in offering returns to individuals in accordance with their
criterions of holding period, capacity of taking risk, and budget etc.The investment has been
within the securities after the assessment of their past performance and their existing
specification by a financial analyst. From the above analysis, it can be viewed that the diversity
concept has been considered in a suitable way at the time of construing the portfolio. It can also
be stated that sufficient investment has been made in terms of bonds, i.e. SPDR S&P/ASX
Australian Bond Fund(ASIC Australian Securities and Investment Commission, 2019). In this
way, some of the securities which emerge from the highly volatile nature have been considered
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as a part of the portfolio with the aim to improvise the percentile of return that is; Cadence
Design Systems (CDNS), Anadarko Petroleum Corporation (APC), and Advanced Micro
Devices (AMD). Therefore, conclusion can be drawn that a suitable integration of risk-free and
minimum risk securities have been used to accomplish maximum return rate from the portfolio.
It can be justified that in future, it would be valuable and beneficial for the potential investor to
make investment in these shares and bonds to increase their income.
It is initially essential to consider the best assets; simultaneously their price performance and
price factors are also required to be considered. The constant monitoring of risks is mandatory to
gain best returns, and if ignored then these can drag down all of the investment returns(Drew,
Walk, and West, 2016). Therefore performance and movement of selected investment have been
as follows:
Date/ price CDNS APC AMD SPDR
1/28/2019 48.68 48.45 24.51 26.29
2/4/2019 50.91 41.84 23.05 26.48
2/11/2019 52.580002 45.23 23.68 26.48
2/18/2019 56.57 43.69 24.36 26.53
2/25/2019 58.139999 44.4 23.68 26.49
3/4/2019 59.16 42.07 22.01 26.62
3/11/2019 60.990002 44.55 23.29 26.72
3/18/2019 61.759998 43.23 26.37 26.92
3/25/2019 63.509998 45.48 25.52 26.81
4/1/2019 64.199997 47.01 28.98 26.67
4/8/2019 64.980003 61.78 27.85 26.72
4/15/2019 63.369999 64.18 27.68 26.64
4/22/2019 68.220001 72.8 27.88 26.94
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4/29/2019 70.269997 72.72 28.22 26.96
5/6/2019 69.360001 73.06 27.96 27.04
5/13/2019 68.660004 72.61 27.5 27.11
5/20/2019 63.939999 71.99 26.44 27.34
5/27/2019 63.57 70.37 27.41 27.41
6/3/2019 65.57 70.05 32.41 27.38
6/10/2019 67.720001 69.83 30.36 27.57
6/17/2019 71.370003 70.31 29.1 27.73
6/24/2019 70.809998 70.56 30.37 27.65
7/1/2019 74.410004 71.04 31.5 27.69
7/8/2019 75.019997 73.11 33.21 27.56
7/15/2019 72.919998 73.38 32.51 27.66
7/22/2019 75.910004 73.62 34.02 27.83
7/29/2019 75.540001 74.04 33.87 27.87
The selected stock had provided exceptional performance, but they are still risking; however
same is compensated by less % of weight in overall equity. All the three stocks had provided
performance in past seven months and on the basis of their future projects and overall operations
they are able to stabilize their returns. In addition to this selected bond is providing 2% per
month which is comparatively high then cash maximizer and it covers 70% of investment which
makes overall investment less risky and more stabilized. Further, this portfolio will be further
modified by diversifying investment in risk-free securities to reduce further risk of portfolio.
Apart from the capital benefits, club will also be able to get dividend by companies as part of
revenue earnings.
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