Mutual Funds Selection
The following table represents the name of the mutual funds that are chosen for the purpose of investment:
Type of fund
PH&N Bond Fund O
Fixed Income fund
RBC Select very conservative fund A
PH&N US Multi-Style All cap equity Fund
Large market cap fund
Mawer Global Small Cap series
Mid/small market cap fund
BlueBay Emerging Markets Corp Bd O
Emerging market funds
The mutual fund investment universe was diversified across various types and sectors with distinct features and capabilities of each fund. The following sections summarizes the key features of each fund selected and the rationale behind the decision to select those funds:
- PH&N Bond Fund O – This fund belongs to the Fixed income fund category and is one of the best funds in the category. The net assets size of the fund is equal to $10 billion and has provided the highest one-year return from its competitor funds with a return of around 8.35%. The fund invests in fixed income securities belonging to Canada and has handsome three-year and five-year returns (RBCgam.com 2022).
- RBC Select very conservative fund A – The fund belongs to the conservative fund category, which tries to focus on reducing risks with earning maximum possible returns. The fund provides higher one-year return of around 4.03% from its competitors and also charges a management fee of 1.45% which is lower than the RBC Select conservative fund A and RBC select balanced portfolio, two of its competitors (Bloomberg 2022).
- PH&N US Multi-Style All cap equity Fund – The funds falls under the category of Large market cap funds with a total asset under management of around $6.5 billion. The fund outperforms its peer funds in terms of one-year, three-year and five-year returns with a return of 10.48%, 9.07% and 10.3% respectively. The fund primarily invests in US equity Large Cap stocks which is fairly riskless and has great return potential.
- Mawer Global Small Cap series – The fund falls under the category of small and mid-market cap category with a net asset value of $2 billion. The fund has earned a one-year return of 8.96% which is superior to its competition. The fund has outperformed its peers in terms of five-year returns as well with a double-digit return of around 11.07% which is higher than that of Mackenzie US Mid cap Growth fund (10.90%), Edge point Global portfolio Series F (4.83%) and Edge point Global portfolio Series A (3.64%) who are in direct competition in this category.
- BlueBay Emerging Markets Corp Bd O – This is the best fund in this category compared to its peers and it invests in the emerging market fixed income securities. The purpose of selecting this fund is the fixed income investment universe of the fund as fixed income securities are considered to be risk less compared to equity funds. The fund similar to all other funds in the portfolio have outperformed its peers in terms of one year, three year and five-year returns.
The volatility of a company's stock price in relation to fluctuations in the wider market is measured by its beta. A beta of more than 1 suggests that the stock is volatile than the benchmark or the market as a whole and would move upwards or downwards more than the market does, whereas a beta value of less than 1 suggests that the stock is less volatile than the broader market. A stock with a low beta acts as a diversifier and can be included in a portfolio for the purpose of reducing the overall portfolio variance. Beta
The beta of Shopify's stock was calculated using the regression approach. The company's stock price was regressed against the S&P TSX 60 indices for the period commencing on March 3, 2021, and ending on March 3, 2022. The stock price of Shopify was used as the dependent variable y, while the index price was used as the independent variable during the time period in question. According to the regression, the stock's beta is about 0.86, which is lower than the 1.63 projected by (Yahoo finance| SHOP 2022). The beta of the stock provided by Yahoo Finance was computed using five years of data, therefore there is a discrepancy between the beta determined by us and the beta advised by Yahoo Finance.
The dividend discount model (DDM) is a quantitative asset valuation method which is used to value a company and find out the intrinsic value of the stock of a company. The DDM method is used by various investors and analysts to find out the fair value of a stock to help in the process of decision-making regarding investment in the particular stock (Pinto 2020). The DDM model assumes that the fair price of a company is the sum of all the future dividend payments that the company would be making after discounting it with an appropriate discounting rate. The discounting rate can be estimated using various techniques and represents the required rate of return from the investors. If the value obtained by employing the DDM method is greater than the current market value of the stock, then the stock is said to be cheap and vice versa.
The stock of Newmont Corporation is picked from the investing universe for the purpose of completing DDM calculations. Newmont Corporation has a dividend yield of 3.19 % which is fairly good and would be used in performing DDM calculations. An appropriate growth rate which could help determine the future value of the dividends paid by the company needs to be estimated based on the performance of the company. The following section summarizes the estimations and assumptions used in calculating the intrinsic value of the stock.
- Growth rate – We used the sustainable growth rate approach to determine a suitable growth rate for the organization. Variables including return on equity, dividends paid, and earnings per share are employed in this strategy. The company's earnings retention ratio must be computed using dividend per share and earnings per share, and then multiplied by the return on equity to arrive at the growth rate using this approach. In the year 2020, the firm paid a $1.45 dividend per share on earnings of $3.52 per share. Using this strategy, we determined a 5.77 percent annual growth rate for the organization. We projected a 5.77 percent annual growth rate for the first three years, finally attaining a terminal growth rate of 2%. In the years ahead, the terminal growth rate was projected to be comparable to Canada's average GDP growth rate.
- Required rate of return – We utilized the Capital Asset Pricing Model (CAPM) approach to determine the needed rate of return sought by the company's investors. The CAPM is a mathematical formula that describes the link between a stock's systemic risk and its predicted returns (Fernandez 2015). Various experts in the financial industry utilize the model to price hazardous securities and offer an estimate of the projected return from the stock. The CAPM considers three variables: risk-free rate of return, market return, and stock beta. The return on the S&P TSX 60 for the previous year was used as a proxy for market return, while the 10-year government bond yield was used as a proxy for risk free rate of return (Bank of Canada 2022). (Yahoo finance| SHOP 2022) was used to find out the stock's beta. The needed rate of return was computed using the CAPM technique and was found to be 5.47 percent.
The intrinsic value obtained using the DDM approach was about CAD 80.03. The stock's current market price is CAD 92.67, which is near to the intrinsic value but more than the intrinsic value. The intrinsic value suggests that the company’s stock is currently overvalued by the market and going by the recommendations of the DDM method, the stock should be sold in the market.
We divided the investing portfolio between stocks and mutual funds using the 60/40 rule, which is a common investment strategy that has shown to be successful in the past (Seeking alpha 2022). The guideline specifies that we should invest 60% of our cash in stocks and the other 40% in bonds, which have been substituted with mutual funds in this case. According to this technique, the total amount invested in equities is $600,000, whereas the total amount invested in mutual funds is $400,000.
The above explains the percentage of capital invested into ten equities selected. The investment in each of the stock amount wise is shared in the table below:
The mean variance optimization approach was used to arrive at the optimal asset allocation, with the goal of minimizing the portfolio's variation. A proper asset allocation was determined based on the daily returns obtained by each stock for the past one year.
Capital was equally divided between each of the mutual funds for the purpose of diversification. The total amount of capital that was to be invested into the mutual fund portfolio was around $400,000 and it was equally distributed amongst five funds with each fund getting $80,000 as investment.
The following table represents the risk and return comparison between the S&P/TSX 60 benchmark return and the portfolio consisting the stocks selected, over the last year:
The stock portfolio returned around 2% in the past year which is higher than the return provided by the benchmark with a return of around 1.4%. The risk level associated with the portfolio was around 0.52% represent in terms of Standard deviation. The returns of the benchmark exhibited more deviations with a SD of 0.88%. The stock portfolio has outperformed the benchmark in terms of returns earned and taking low levels of risks. The major contributor to the total return of the portfolio was the stock of Shopify with an arithmetic daily average return of 0.28%. which was assigned a weight of around 25%. The second most profitable stock for the portfolio was the stock of Royal Bank of Canada with an arithmetic average return of 0.27% on a daily basis and an assigned weight of around 5%.
The Sharpe ratio is a metric for calculating risk-adjusted return. The risk adjusted return is the industry's standard method for computing returns (Economic times 2022). To the overall risk, it is the additional average return received over the risk-free rate of return. By subtracting the risk-free rate of return from the mean return, the performance of risk-taking activity may be determined. The Sharpe ratio of the portfolio was equal to 0.97 which explains that the portfolio would be able to earn 0.97% of returns by taking one extra unit of risk measured in terms of SD. The benchmark Sharpe ratio was significantly lower than the portfolio Sharpe ratio which and is equal to 0.14. The following presents the comparisons between the portfolio and benchmark Sharpe ratio.
The purpose of this course was to analyse and understand the various types of risks faced by an organization and how to identify them for the purpose of mitigating them. The course further required us to understand the process of construction of a stock portfolio which starts by preparing and investment policy statement which includes the details about the clients, including personal information, goals and objectives. The course taught us to find out the Behavioural biases in the approach of an investor and the process of identification and mitigating them. A stock portfolio was created using stocks listed in the Toronto Stock Exchange and rationales behind selecting each of the stock was discussed in detail. The final part of the course required us to identify five mutual funds for the purpose of investment and the rationales behind the decision to select each fund was discussed in detail. Asset allocation between the equities and mutual funds as performed using mean variance portfolio optimization technique and 60/40 heuristics approach respectively. The course in the concluding sections taught us to analyse the performance of a portfolio comparing the performance with the benchmark portfolio using various appraisal techniques.
Bloomberg - Are you a robot? (2022). Available at: https://www.bloomberg.com/quote/RBCSVYCA:CN (Accessed: 4 March 2022).
Fernandez, P., 2015. CAPM: an absurd model. Business Valuation Review, 34(1), pp.4-23.
PH&N Bond Fund - RBF5110 (2022). Available at: https://www.rbcgam.com/en/ca/products/mutual-funds/RBF5110/detail (Accessed: 4 March 2022).
Pinto, J.E., 2020. Equity asset valuation. John Wiley & Sons.
Selected Bond Yields (2022). Available at: https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/ (Accessed: 4 March 2022).
The Economic Times: Business News, Personal Finance, Financial News, India Stock Market Investing, Economy News, SENSEX, NIFTY, NSE, BSE Live, IPO News (2022). Available at: https://economictimes.indiatimes.com/defaultinterstitial.cms (Accessed: 4 March 2022).
Time To Ditch The 60/40 Rule (2022). Available at: https://seekingalpha.com/article/4395045-time-to-ditch-60-40-rule (Accessed: 4 March 2022).
Yahoo is part of the Yahoo family of brands (2022). Available at: https://ca.finance.yahoo.com/quote/SHOP.TO/?p=SHOP.TO (Accessed: 4 March 2022).
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2022). Investment Analysis. Retrieved from https://myassignmenthelp.com/free-samples/fnce3151-portfolio-and-equity-analysis/the-mutual-fund-investment-file-A1DBA4D.html.
"Investment Analysis." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/fnce3151-portfolio-and-equity-analysis/the-mutual-fund-investment-file-A1DBA4D.html.
My Assignment Help (2022) Investment Analysis [Online]. Available from: https://myassignmenthelp.com/free-samples/fnce3151-portfolio-and-equity-analysis/the-mutual-fund-investment-file-A1DBA4D.html
[Accessed 25 February 2024].
My Assignment Help. 'Investment Analysis' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/fnce3151-portfolio-and-equity-analysis/the-mutual-fund-investment-file-A1DBA4D.html> accessed 25 February 2024.
My Assignment Help. Investment Analysis [Internet]. My Assignment Help. 2022 [cited 25 February 2024]. Available from: https://myassignmenthelp.com/free-samples/fnce3151-portfolio-and-equity-analysis/the-mutual-fund-investment-file-A1DBA4D.html.