You are responsible for managing a $500,000 portfolio for a local tennis club. The managing committee has heard that by investing in shares and other financial instruments, the tennis club could achieve a higher return than what is currently earned through an internet maximiser account. The committee has heard that you are currently studying a unit on security analysis and portfolio management. You are requested to build a portfolio of investments by the end of December, 2018, track the performance of your portfolio on a weekly basis and submit a report by 28 February 2019. You may consider the following steps in your portfolio construction and management:
Prepare an investment policy statement for the local tennis club based on what you learn in Topic 1. You may specifically consider the (i) liquidity requirements; (ii) return requirements; (iii) risk tolerance; (iv) time horizon; (v) tax considerations; (vi) regulatory and legal considerations; and (vii) unique needs and circumstances. Further given the sensitivities of the members of the organisation, you are asked to avoid investments that are seen to be socially and ethically NOT responsible.
The tennis club is considering a mix of equity, debt and cash (or money market securities). You are asked to determine a capital allocation strategy by considering the current and future economic situation, government policy and monetary conditions. You are required to suggest a capital allocation strategy. For example a mix of 40% equity, 40% debt and 20% cash (and marketable securities) may be suitable for an organisation or an individual pursuing a balanced portfolio. Prepare an account of why the chosen capital allocation is appropriate for the local tennis club.
Having decided on a mix of capital allocation, you are now required to choose specific investments for equity and debt. You may give due consideration to possible diversification benefits when considering investments from different sectors or industries. You are required to prepare an explanatory statement as to why the specific investments (shares, bonds and others) are chosen.
Prepare a report showing details of the above steps with timelines and tracking performance of your portfolio on a weekly basis at least for the months of January and February 2019. You may compare the performance of your portfolio with a bench mark portfolio such as the ASX All Ordinaries.
The investment portfolio is a crucial aspect in finance studies as the matter is considerate of lots of success-critical factors for the business (Chow, Kose and Li, 2016). The finance professionals develop client’s portfolio based on these factors which primarily define the risk landscape a well as return expectation of the clients (Bisetti et al, 2017). The given report delves into the case study where a sum of $500,000 of an Australia based tennis club will be managed through efficient portfolio design.
The report has been segregated in four different parts. The first part talks about the investment policy and why the client requires the development of such a portfolio. While doing this, the considerations that may be kept in mind to formulate investment strategy have been discussed. The second part of the study covers the capital allocation strategy with reference to the present economic condition and future projection of the economy as stipulated by the Central Bank. The third part of the paper discusses the different investments like debt and equity and their corresponding consideration in the entire portfolio along with their respective justification. The fourth and last part of the research puts emphasis on the portfolio performance and the researcher attempts to establish the appropriateness o such portfolio design by referring to its performance in next 1 year. Finally, the report is wrapped up with reference to the concluding note.
An investment portfolio is something where different types of stocks, securities, bonds and liquid marketable securities are clubbed to create a repository that may fetch the required return within the desired risk limit (Doshi, 2017). In other words, the portfolio management demands a strategic step towards investment management. However, for the purpose of formulating such strategies, the finance professionals need to consider several factors which are briefly mentioned herein:
In the given case, the interview has been conducted with the management of the tennis club and it has been assessed that the management requires incurring daily expenditure and for the same, they need sufficient liquidity in their hand. In other words, the allocable amount of $500,000 must have a certain extent of liquidity inbuilt so that the given portfolio may be used for business operation also.
It has been determined that the management is not aggressive towards growth and hence risk-averse. In other words, the “high risk; high gain” proposition is not applicable for the management and hence the investment should be accordingly chosen for the given portfolio where the risk is substantially low with comparatively higher return probability.Time Horizon
Capital Allocation Strategy
From the interview, it has been determined that the portfolio will be devised for a period of 10 years. Since the club is looking for long-term sustainable growth, a time horizon of 10 years will be ideal in the instant context.
It may be noted that the clubs in the country are generally registered under non-profit category and therefore are exempt from income tax. Though there have been regulatory requirements of GST, Fringe Benefits Tax, Gaming Tax etc. but the income is not charged to tax. However, in spite of the exemption, Australian clubs pay around $2.4 billion tax to the Government on a yearly basis (Clubsaustralia.com.au, 2019).
As per NSW regulation, the all the clubs in the given region are governed by the said Act. The Act covers the rules and regulations the clubs in the NSW region are subjected to. Therefore, the portfolio strategy should definitely consider the same while formulating the investment plan.
Apart from the above mentioned requirements, the club may need to consider certain points in terms of operational strategy. The tennis club may need opening a separate branch office in another city in the next couple of years. Besides, the committee is planning to undertake a loan which may be of 10 to 15 years term. The loan may be required for future expansion. For the purpose, the portfolio may need to be sound in terms of risk and return and there should not be any capital erosion.Present Economic Condition
The data in the tables in the appendices show that the Australian economy has been declining over the past few years. The growth projection though has been sound for the future, the existing market condition seems to be sluggish. The data also shows falling GDP from 1,516 billion USD in the year 2013 to 1,379 in the year 2017. As per the projection by the Reserve Bank of Australia, the inflation will stabilise and the economy will achieve growth because of consolidation.
As stated earlier, the future seems to be brighter as mentioned by the Central Bank. In their recent publication, it has been stated that the mining sector has been growing at a steady pace and there has been sufficient investment in the given sector for the last few years. Therefore, it is expected that the sector will start contributing to national GDP soon (Reserve Bank of Australia, 2019). In addition, the forecasted growth trajectory also seems to be moderate with caution for inflationary adjustments.
On the basis of the aforesaid assumptions and consideration, the investment strategy has been formulated in order to create an efficient portfolio. The break-up of total portfolio has been conceived to be the following:
- Debt: 60% [Corporate Bond 20%; Government Bond 80%]
- Equity 30% [ Corporate Stock 100%] and
- Cash: 10%
The reason for such break-up is because of the fact that the client is risk-averse. Therefore, most of the allocable fund will be invested towards Government bond and corporate bond. However, the same will reduce the risk consideration of the portfolio but reduce the return. In order to strengthen the return part, 30% equity investment has been planned. In addition, the liquidity requirement has also been taken care of and 10% of total fund balance has been set aside for the purpose of working capital.
The entire portfolio will consist of a proper mix of debt, equity and liquid cash. For the purpose, the necessary research will be carried out from the online journal publications, ASX website and also the discussion with the tennis club management. In other words, the entire research will be mix comprising both primary research and secondary research.
Since equity is volatile as well as rewarding, primary emphasis will be put towards a return. Secondary research has shown that there are few stocks that have produced more than average return in last 1 year in the ASX. These securities are listed and 5 such securities have been chosen which have fetched highest return as against their other competitors. A total fund of $150,000 has been allocated to those 5 stocks equally. These stocks are identified from ASX website and total return out of both the dividend and capital appreciation has been considered here.
Debt instruments are comparatively more secure than that of equity and hence the return requirements have been prioritised while selecting the debt instruments (Sigler, Searle and Martinus, 2018). It has been identified that corporate bonds are floating in the market and top 3 corporate bonds have been identified having the highest return. Similarly, the Government bonds are also worth selection as the same may be considered to be least risky. Top 2 such bonds have also been chosen based on the highest return in terms of coupon payment. Total allocation towards Government bonds is $240,000 equally spread among top 2 bonds and that of corporate bonds is $60,000 divided equally among top 3 bonds. The figure herein shows that bond MVTHA carries highest coupon rate of 8.00% p.a. and hence the same has been considered. An insight into the bond further reveals that the coupon is payable semi annuallyCash
As mentioned earlier, the club management wants sufficient in their hand and hence it has been decided that the entire sum of $500,000 will not be utilised towards the investment and rather 10% of the total allocable fund will be kept aside for the purpose of liquidity. In other words, the working capital requirement will be fulfilled with the help of $50,000 and hence it may be stated that the management will be in a better position to manage the daily routine operations with more efficiency in terms of short-term liquidity.
The analysis has shown that the portfolio has been performing fairly well in terms of overall return and risk as well. The management's aim towards the risk strategy has also been well met as the portfolio primarily considers Government bonds and corporate bonds with 60% proportion in total. However, the return out of portfolio majorly is reliant upon the return out of the top 5 performing stocks in the equity market. The stocks like Bravura has been giving more than 100% return in a period of 1 year and that that is the reason the overall portfolio return is substantially high as compared to the market. The tables in appendices show how the portfolio generates return out of corporate securities and stands ahead of the market.
In this context, it may be observed that ASX All Ord Index has not been performing well in last 1 year and data establishes the fact that the overall Index is on a declining mode. The Index has rather reduced considerably from January 2018 to December 2018 period which may again be substantiated from the figure below.
Based on the discussion and analysis performed in the previous sections of the paper, it may be established that the portfolio management is a challenging task for the finance professionals. There are different factors that may need synchronisation to create a common space for different financial instruments with corresponding required risk and return trade off. In this context, a point of caution may be made with respect to the cash position. Instead of keeping liquid cash in hand and at bank, the club could have invested the same in marketable securities which could have been utilised as good as cash. However, the interview conducted with the management revealed that they were reluctant to invest the entire fund into the stock and debt instruments and some cash therefore was kept aside. However, the issue was more of psychological and hence the same limited the efficiency of the given portfolio of $500,000 in its entirety. In conclusion, it may be noted that a well-planned portfolio contributes towards a sustainable long-term goal of the business (Foster, 2018).
Asx.com.au. (2019). On this page, you will find End of Month Values, Monthly Averages, No. of companies, Other Market Statistics. [online] Available at: https://www.asx.com.au/about/historical-market-statistics.htm [Accessed 17 Jan. 2019].
Asx.com.au. (2019). Security Prices Bonds. [online] Available at: https://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=CORPORATE_BOND [Accessed 17 Jan. 2019].
Bisetti, E., Favero, C.A., Nocera, G. and Tebaldi, C., (2017). A multivariate model of strategic asset allocation with longevity risk. Journal of Financial and Quantitative Analysis, 52(5), pp.2251-2275.
Chow, T.M., Kose, E. and Li, F., (2016). The impact of constraints on minimum-variance portfolios. Financial Analysts Journal, 72(2), pp.52-70.
Clubsaustralia.com.au. (2019). Taxation. [online] Available at: https://www.clubsaustralia.com.au/advocacy/policy-centre/taxation [Accessed 17 Jan. 2019].
Doshi, A., (2017). Economic analyses of microalgae biofuels and policy implications in Australia (Doctoral dissertation, Queensland University of Technology).
FocusEconomics | Economic Forecasts from the World's Leading Economists. (2019). Australia Economy - GDP, Inflation, CPI and Interest Rate. [online] Available at: https://www.focus-economics.com/countries/australia [Accessed 17 Jan. 2019].
Foster, G., (2018). Education Policy Reforms to Boost Productivity in Australia. Australian Economic Review, 51(2), pp.253-261.
Kizil, A. (2019). Top 10 ASX 200 Stocks Over The Past Year | Canstar. [online] Canstar. Available at: https://www.canstar.com.au/investor-hub/top-10-performing-asx-200-stocks/ [Accessed 17 Jan. 2019].
Reserve Bank of Australia. (2019). Economic Outlook | Statement on Monetary Policy – February 2018 | RBA. [online] Available at: https://www.rba.gov.au/publications/smp/2018/feb/economic-outlook.html [Accessed 17 Jan. 2019].
Sigler, T.J., Searle, G. and Martinus, K., (2018). Industrial location and global restructuring in Australian cities. Australian Geographer, 49(3), pp.365-381.
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