Active And Passive Portfolio With Straits Times Index As Benchmark, Essay.

Passive Portfolio Management

The report aims to present two portfolios i.e., Active Portfolio and Passive Portfolio both of which have Straits Times Index as benchmark. The passive portfolio is a replication of Index with weights of Assets Similar to that of Index and comprise of 30 securities so that risk and return characteristic of the portfolio matches with that of Index. On the other hand, in case of Active Portfolio only six securities have been selected from 30 companies Index based on number of factors encompassing the industry, fundamental performance, market sentiments etc with an intention to beat the benchmark in a short time frame. The trading period involved is short duration is two weeks for testing the performance of Active and Passive Portfolio starting from 28^th March, 2022 and ending on 8^th April, 2022. Further, the report aims to present strategy for constructing a passive and an active portfolio and then evaluate the investment performance of each in terms of absolute and relative return, risk and attribution effects.

Passive Portfolio comprise of thirty stocks whose weight of stocks are similar to that of STI so that the risk and return characteristics are similar. The Strait Time Index is a market capitalisation weighted index which tracks the performance of top thirty companies listed in Singapore Exchange. Accordingly, for the purpose of creation of portfolio market weight allocated to each thirty stocks in the index has been considered and accordingly, the weight of each stock in the portfolio has been presented as under:

Based on above data, it may be inferred that portfolio shall be market weighted for passive portfolio creation and shall be tracked as near possible to the index. There shall be low to nil churning in the portfolio so that the risk return characteristic of the index matches with that of portfolio. Also, due monitoring of the portfolio shall take place to undersee whether any security is dropped from the index or new security is added. Also, a quarterly rebalancing of the portfolio may be carried out to ensure perfect replication and tracking of the portfolio to that of Index as index does not provide dividend while securities do. Accordingly, the passive portfolio shall be mirrored to the Index.

Active Portfolio creation is a complex process and the objective of such portfolio creation is to constantly manage the churn the portfolio with an intention to generate higher returns than the benchmark. Under the active portfolio the securities under the benchmark portfolio are selected and varied weights are allocated so that of benchmark so as to generate higher return as compared to index and the higher return generated due to such weight allocation is called manager’s alpha. Under active portfolio management, there is regular buying and selling of securities unlike passive management and the risk and reward characteristic of such portfolio is different and higher from that of Passive Portfolio Management.

In the present case, six securities have to be selected from the list of 10 securities for the purpose of Active Portfolio Management. The detailed analysis of the securities has been presented as under:

Active Portfolio Management

It is a Singapore based global tech, Défense and engineering company. The principal segments of company comprised Commercial Aerospace (CA), Urban Solutions & Satcom (USS), and Defence & Public Security (DPS).

The Commercial Aerospace involves airframe, engines and maintenance of component, overhauling and repairing of equipment, manufacturer of original equipment for nacelles.

The Urban Solutions & Satcom is involved in smart mobility, utility and infrastructure, urban solution to environment and satcome involvement.

The Defence & Public Security segment is involved in Défense, safety and security of public at large, critical information solution to infrastructure and others.

It provides its services across various continent with customers present in more than hundred countries. (reuters.com, 2022)

The tech engineering industry has seen a rapid growth in the past years and has been in demand ever since the pandemic. The industry has been outperforming and is expected that similar trend shall continue in near future. It is expected that global information industry shall grow at the rate of 4% over the period in future and a positive outlook is expected from the industry. Further, the sector is competitive but margins are high which make the sector very lucrative. On an overall basis the market sentiment for the industry is positive. (researchandmarkets.com, 2019)

The industrial and capital good industry is expected to perform well with the revival of economy after the Covid and is expected that this industry shall make a sharp comeback. 

The stock has been performing well and has generated return of 8.31% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable net and gross margin with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus the stock has been selected in the active portfolio and a weight of 10% has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 1.9%. 

Singapore Airlines Ltd is a Singapore based company that is involved in passenger and air transportation through cargo. The company basically provides these services under the brand name Singapore Airlines with focus on full-service passenger segment which serve short and also long -markets in haul. The principal segment comprised SilkAir segment, Budget Aviation segment and SIAEC segment.

The Silk Air segment provides air transport services to its passenger under the brand name SilkAir with principal focus on full-service passenger segment which serves regional market

The other Budget Aviation Segment provides air transport passenger services under the brand name Scoot brand with a principal focus on low-cost segment of passenger. (reuters.com, 2022)

The other segment is SIAEC segment. 

The Airline industry has been worst hit industry from the pandemic and as the pandemic has become endemic in many countries, the global movement without restrictions has started causing airlines business to resume to normal after a period of two years which is a positive sign for the industry. In the short term the sector is experiencing a strong revival which shall boost the profit and revenues of the company. The airline industry is expected to operate at 80%- 90% capacity with opening up of major economies and resumption of travel globally. Further, the sector is competitive but margins are low which make the sector less lucrative. On an overall basis the market sentiment for the industry is positive.

The stock has not been performing well and has generated return of (6.86) % over the historical period of 5 years and the volatility in the stock has been high at 28.65%. The fundamental factors of the company depict that company has improving gross margin and a sharp decline in the net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown a downtrend over the period which is not a good sign and thus the stock has not been selected in the active portfolio and no weight has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 2.4%.

The company is listed in Singapore and is a leading global real estate investment manager. It has various real estate class of asset which cover integrated developments, office, retail and various new economy sectors like business park, industrial data and logistic aspect. (a-itrust.com, 2020) 

The Real estate Sector has been worst hit industry from the pandemic and as the pandemic has become endemic in many countries. Further, resumption of offices and the global movement without restrictions has started causing real estate sector business to resume to normal after a period of two years which is a positive sign for the industry. In the short term the sector is experiencing a strong revival which shall boost the profit and revenues of the company. The real estate industry is expected to operate at 70%- 80% capacity with opening up of major economies and resumption of travel globally. Further, the sector is competitive but margins are low which make the sector less lucrative. On an overall basis the market sentiment for the industry is positive.

The stock has been performing well and has generated return of 57.84% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable gross margin and a sharp uptrend net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus the stock has been selected in the active portfolio and a weight of 20% has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 4.7%. 

The company is an investment holding and management company. The principal segment comprised Off Shore and Marine, infrastructure and others, urban development of same, better connectivity, management of asset and involved corporate and others. (reuters.com, 2020)

The industrial and capital good industry is expected to perform well with the revival of economy after the Covid and is expected that this industry shall make a sharp comeback.

The capital good industry during the pandemic has seen a fall as no new projects were undertaken during the pandemic causing companies to perform poorly. However, the situation has changed with resumption of business and a series of expansion activities the industry is expected to see a strong revival.

The stock has been performing well and has generated return of 5.26% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable gross margin and a sharp uptrend net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are decreasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus stock has been selected in the active portfolio and 5% weight has been allocated for the purpose of generating active return. In the passive portfolio the weight of the stock is just 3.6%.

It is a Singapore based company which is involved in holding of investment and also provision of services related to management. 

The Fast-Moving Consumer Good industry has been one of the stable industries and have been duly hit by the pandemic. The companies are seeing the revival with increase in purchasing power of people and increased demand from the public. The sector has seen price and demand rise. Further, the top and bottom line of the company is improving causing margins and performance of the sector to improve. The FMCG industry is expected to operate at 80%- 90% capacity with opening up of major economies and outlets. Further, the sector is competitive but margins are low which make the sector less lucrative. On an overall basis the market sentiment for the industry is positive. 

The stock has been performing well and has generated return of 11.83% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable gross margin and a sharp uptrend net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are decreasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus the stock has been selected in the active portfolio and a weight of 5% has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 2.6%.

It is involved in technology related services to its customers and provide wide range of products and solutions to its customers  

The information industry has seen a rapid growth in the past years and has been in demand ever since the pandemic. The industry has been outperforming and is expected that similar trend shall continue in near future. It is expected that global information industry shall grow at the rate of 4% over the period in future and a positive outlook is expected from the industry. Further, the sector is competitive but margins are high which make the sector very lucrative. On an overall basis the market sentiment for the industry is positive.

The stock has been performing well and has generated return of 17.42% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable gross margin and a sharp uptrend net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are decreasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown a downtrend over the period which is not a good sign and thus the stock has not been selected in the active portfolio and no weight has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 1.5%. 

The company is basically involved in investment of property, management and also company development. The principal segment comprised commercial property, residential property and also corporate. 

The Real estate Sector has been worst hit industry from the pandemic and as the pandemic has become endemic in many countries. Further, resumption of offices and the global movement without restrictions has started causing real estate sector business to resume to normal after a period of two years which is a positive sign for the industry. In the short term the sector is experiencing a strong revival which shall boost the profit and revenues of the company. The real estate industry is expected to operate at 70%- 80% capacity with opening up of major economies and resumption of travel globally. Further, the sector is competitive but margins are low which make the sector less lucrative. On an overall basis the market sentiment for the industry is positive.

The stock has been performing poorly and has generated return of (2.30) % over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable gross margin and a sharp downtrend net margin along with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown a downtrend over the period which is a good sign and thus the stock has not been selected in the active portfolio and no weight of has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 2.3%.

It is a Singapore based derivative and security market. The operation comprised of equity, fixed income, currency and involved commodity markets. (reuters.com, 2022) 

The financial sector is the barometer of the economy and the financial sector is an evergreen sector which moves up with the economy and the downfall is limited with the fall in the economy. The sector is promising and a strong growth is expected in the same. 

The stock has been performing poorly and has generated return of 11.46% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable net and gross margin with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus the stock has been selected in the active portfolio and 40% weight of has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 3.2%.

It is an investment company and operates its function through DBS Bank ltd (subsidiary company) 

The financial sector is the barometer of the economy and the financial sector is an evergreen sector which moves up with the economy and the downfall is limited with the fall in the economy. The sector is promising and a strong growth is expected in the same. 

The stock has been performing poorly and has generated return of 18.33% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable net and gross margin with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign. However, stock performance has been poor as compared to risk return analysis and thus stock is not selected.

It is a property company. It has a wide range of portfolio and property related to investment, various hotel suites, Oceania, Europe and North America too. (reuters.com, 2022)

The Real estate Sector has been worst hit industry from the pandemic and as the pandemic has become endemic in many countries. Further, resumption of offices and the global movement without restrictions has started causing real estate sector business to resume to normal after a period of two years which is a positive sign for the industry. In the short term the sector is experiencing a strong revival which shall boost the profit and revenues of the company. The real estate industry is expected to operate at 70%- 80% capacity with opening up of major economies and resumption of travel globally. Further, the sector is competitive but margins are low which make the sector less lucrative. On an overall basis the market sentiment for the industry is positive.

The stock has been performing poorly and has generated return of 8.94% over the historical period of 5 years and the volatility in the stock has been high. The fundamental factors of the company depict that company has stable net and gross margin with underutilisation of asset efficiency and thus there is potential to harness the asset to generate higher returns in a short frame of time. The liquidity front of the company is good and the company is in a position to meet the obligations as and when due. The debt obligations of the company are increasing and the wage rate increase in the company is also satisfactory. (Refer Excel for detailed analysis)

The company Return on Equity has shown an uptrend over the period which is a good sign and thus the stock has been selected in the active portfolio and 20% weight of has been allocated to the stock for the purpose of generating active return. In the passive portfolio the weight of the stock is just 1.3%.

Risk return analysis of the stock has been carried out by considering the performance of the index vis a vis the stock over the period of two weeks i.e., from 28^th March, 2022 to April 8, 2022. The period has been highly volatile with Fed rates rising and the global oil shortage along with Russian Ukrainian Crisis looping in the corner. The overall return of the active portfolio has been 1.36% while the return of the passive portfolio stood at 4.48% as none of the ten-stock performed in the index while the remaining twenty stocks which were not analysed

Further, the active return from the stock selected and weighing has been negativing as the other companies have performed better. The allocation effect has been 1.23% positive on account of overweight of certain stock while the selection effect has been negative 4.35% which caused passive portfolio to surpass the active portfolio.

The goal has not been achieved as the portfolio underperformed the index on account of selection effect as twenty stocks were not considered for the purpose of analysis which has caused active portfolio to underperform while passive portfolio generated similar result as that of index.

Conclusion

On an overall basis it may be inferred that portfolio underperformed to index and the passive portfolio on account of selection effect while the allocation effect has been positive for the portfolio. On an overall basis the active return has been lower as compared to passive portfolio.

References

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researchandmarkets.com, 2019. Singapore Information Technology (IT) Market, Size, Share, Outlook and Growth Opportunities 2020-2026. [Online]
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reuters.com, 2022. UOL Group LimitedUTOS.SI. [Online] Available at: https://www.reuters.com/companies/UTOS.SI
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