Investment Policy Statement
The return objective of the portfolio will be calculated on the basis of the Internal Rate of Return Approach. The required return evaluated from the project is around 7.34%. The return on portfolio was calculated on the basis of the fact that the portfolio return will be generated from the invested 0.35million. The present value of all future expenses from the year 21 to the year 45 was done which accounted for expenses to be incurred for the rest of 25 years and the monthly expenses was taken as 40,000 which has an escalation of 4% per year to adjust and reflect economic reality. The future value of the cash flows was calculated then using the return that will be generated from the 0.35mn portfolio (Petri, 2018). The amount required for the evaluation of the future cash expenditure at the present value terms was around 7, 84,545.50. The same was taken as the required amount at the end of the year 20. The cash flows from the portfolio was then generated using the 7.34% and the relevant cash flow from the portfolio was calculated. The relevant per year cash flow generated from the portfolio was then carried forward using the relevant compounding factor. The amount required per year was around 25691 from the year1 to year 20. Thus the return objectivity of the client could be meet by investing into balanced fund approach of investing where the portfolio would have to yield at least 7.34%.
The risk objective for the Taylor’s Investment Policy Statement would be moving towards a more conservative approach of valuation and evaluation of the portfolio. The portfolio will be delivered according to the constraint risk strategy and the portfolio will be developed on the basis of conservative fund like the approach and use of the balanced fund in the portfolio allocation of the funds (Kaiser, El Arbi & Ahlemann, 2015). The balanced fund approach will mark the asset allocation and classification of fund toward a more secured class of assets like bond, cash and cash equivalents and others. The risk objective from the viewpoint of the investor Mr. Taylor will be seen as declining due to increasing age and moving toward retirement age. The factors would be crucial to identify before developing the investment and portfolio strategy for Mr. Taylor. The other factors like moving of Andrew to high school or university and the following rising expense from the same and the rising health care expenditure of Mr. Taylor should be accounted while assessing the portfolio and assets class of investing for the Taylor Portfolio. The key risk factors of the portfolio will also be that of the assets class in which the fund is invested. The superannuation fund or the portfolio had a concentration on the growth strategy where around 85% of the fund is invested into assets classes, which are risky and provides a better return risk trade of for the investor. The move towards the balanced fund approach will make sure that the investor will not be exposed too much of the Equity asset class divergence with the changes in the capital market scenarios. Assets class like real estate, large equities and benchmark equities funds are usually volatile and the amount of investment in the same should be dependent according to the portfolio strategy of moving of investor risk preference towards below or average risk taker (Liu et al. 2015).
The investment constraint for Taylor’s Portfolio will be dependent on key factors like the time horizon for Taylor, Liquidity needs, special needs, tax concerns and the investment guidelines strategies:
Investment Time Horizon: The investment time horizon for the Taylor’s portfolio is around for 20 years but since Andrew is moving to University and the net savings of Taylor’s Family will affect the expense for the same so the total investment horizon considered was around 16 years.
Liquidity Needs: The liquidity concern for the Taylor’s Portfolio was not found as the investor is having no mortgage loans and other spending needs like Andrew college education fees an expenses and the health care spending are usually meet from the savings of the income they generate.
Special Needs: There were no special needs found while assessing the client. Several concerns like Taylor’s Health condition and rising health expenses may be one crucial factor to keep in view. The tailors spending life and the expense requirement of around $40,000 will be met by the return factor of the portfolio. Thus, no special needs or requirements were identified during the assessment of the client.
Tax Concerns: The tax bracket for the Taylor was identified to be around 30%, which is usually considered a very high tax bracket for the client. The portfolio allocation will be towards the balanced fund and the assets class such as treasury bills and treasury bonds should be given more weightage and focus as the income generated from the same will be tax exempt.
Investment Guideline and Strategy:
The Investment Guideline Strategy for the Portfolio was considered to be a type of Balanced Fund Approach where the risk constraint of the investor. The investor has an approach of investing of the asset class towards the balanced fund approach because of the upcoming retirement age of the investor. The Taylor has focused on investment in asset class such as Australian Equities, Australian Real Estate, US Large Equities, and Australian Government Bonds. The generation of the interest from the portfolio will be made from assets class, which has coupon or interest paying nature. The assets class that will be selected for the investment asset class will be made on the basis of the historical data and historical analysis of asset classes that has provided returns which are helpful and has provided long-term capital growth.
Standards for Evaluating Portfolio Measures
The standards for evaluating the portfolio measures and performance was evaluated on the basis of the Treynor ratio, which measures the performance of the portfolio in contrast of the risk and return of the portfolio. The two components of the risk is the general risk observed from the fluctuations in the market and risk arising from the changes and volatilities in the fluctuation in the price level of the securities (Bessler, Opfer & Wolff, 2017). The building of the development in the Capital asset pricing model is according to diversity provided by the CAPM model and the risk preference of the investors. The sharp ratio is the other technique and an important factor for determining the performance of the portfolio. The sharp ratio measures the extra market return earned over and above the Risk free rate of return while incorporating the standard deviation of the portfolio. The greater the better the performance of the portfolio and indicates the wealth creation for the investors. The Treynor ratio where measures the beta of the portfolio and calculates the systematic risk of the portfolio. The sharp ratio evaluates and uses the standard deviation to calculate the overall volatility of the portfolio. The sortino ratio helps in calculation for the portfolio average return generated in excess of the minimum accepted threshold return. Thus these above factors may be useful in evaluation and assessing the portfolio performance (DeMiguel, Nogales & Uppal 2014).
Bessler, W., Opfer, H. & Wolff, D., 2017. Multi-asset portfolio optimization and out-of-sample performance: an evaluation of Black–Litterman, mean-variance, and naïve diversification approaches. The European Journal of Finance, 23(1), pp.1-30.
DeMiguel, V., Nogales, F.J. & Uppal, R., 2014. Stock return serial dependence and out-of-sample portfolio performance. The Review of Financial Studies, 27(4), pp.1031-1073.
Kaiser, M.G., El Arbi, F. & Ahlemann, F., 2015. Successful project portfolio management beyond project selection techniques: Understanding the role of structural alignment. International Journal of Project Management, 33(1), pp.126-139.
Liu, H.C., You, J.X., Ding, X.F. & Su, Q., 2015. Improving risk evaluation in FMEA with a hybrid multiple criteria decision making method. International Journal of Quality & Reliability Management, 32(7), pp.763-782.
Petri, P.A., 2018. The interdependence of trade and investment in the Pacific. In Corporate links and foreign direct investment in Asia and the Pacific (pp. 29-55). Routledge.