Index Investing And Commodity Futures - Investment Strategy And Portfolio Construction

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Discuss about the Index Investing and Commodity Futures.

The overall research philosophy mainly complies with the requirements of the investors, who are focused in making investments in Australian equity market with adequate measures. Furthermore, the investment strategy also holds relative feature such as average returns to identify the overall adequate stocks for investment. The overall usage of technical analysis is mainly conducted in the overall investment strategy, as it helps in identifying the relevant stocks, which have provided adequate returns from 2010 to 2017. In this context, Berndt, Bilolo and Meynhardt (2015) mentioned that investors with the help of technical analysis are able to pinpoint trend of the company, which could help in making adequate investment decisions. On the other hand, Barton (2017) argued that technical analysis mainly loses its friction, when adequate analysis is not been conducted by the investor.

The investment philosophy also addresses US stocks, as one of the ideal investment strategy. The economic movement after the selection of Donald Trump has rapidly in client in US, which is directly seen through rising stock market. This could eventually help investors to generate higher return from investments in the US economy. Therefore the portfolio consists of 20% of US stocks enlisted in Australia. Furthermore, investments are directly conducted on large cap stocks which are enlisted on top 100 stocks in ASX. The use of large caps mainly insures liquidity in this stock if any problem arises in near future. Blume and Keim (2014) stated that use of high volume stocks mainly allows organisations to quickly sell of their investments if the prediction is not conducted accurately. However, Betermier, Calvet, and Sodini (2017) mentioned that growth prospects in low cap stocks are relevantly higher, as it has higher risk and provides higher return from investment.

Furthermore, the investment philosophy also includes the use of hedging, which will allow the portfolio to adhere the risk from Australian capital market. Hedging process allows investors to reduce the rising risk, which is portrayed by an investment in both short and long term. This allows the Investors to adequately reduce risk from the portfolio and attain higher return from investment. Thus, by using technical analysis process investors could adequately identify stocks that could generate high return from investments. However, alternative strategy could also be adopted by the investor such as fundamental analysis, which could help in identifying the overall financial capability of the organisation providing the relevant returns in future.

Technical Analysis for Australian Equity Market

Appendix 1 mainly represents constructed investment portfolio, which could be used by the investor to increase its overall return from investments. The constructed portfolio mainly consists of all the requirements that is portrayed by the investor and complies with all the restrictions for formulating the portfolio. Furthermore, portfolio is divided into 5 sections, which comprises of Australian equities, us equity fund, International investment, cash and hedging. The 5 sections mainly help in getting the overall return from investments. However, the use of hedging section could eventually allow the investments in portfolio to be protected from adverse capital market movement.

Moreover, Appendix 1 adequately depicts the investments in Australian equities, which could allow the investor to invest in the Australian market. The proportion of investment value is mainly restricted to 10% of the allocated portfolio value of 800,000 to the Australian equity. Therefore, 10 Australian Equity stocks were chosen that was used in creating the overall portfolio Australian stocks. However, due to the restrictions of capital asset allocations only 80,000 values was granted for it stocks. In this context, Bodie, Kane and Marcus (2014) stated that diversified portfolio mainly allows investors to reduce the risk from investment and increase its return. On the other hand, Fitzgibbons et al. (2016) argued that investors with vast diversified portfolio are not able to provide the returns provided from a particular investment, as losses and profits are being conducted simultaneously.

In addition, the second division of the portfolio mainly consists of US equities, which comprises 10% of the overall portfolio. This mainly indicates that investment in US securities is conducted with an overall value of 200,000. However there is no segregation or restriction that is imposed on investing in US equities. Therefore, 40% of segregated value is mainly transferred to 'BetShares S&P 500, while 10% of the value is transferred to 'BetShares US Dollar and the rest 50% is transferred to iShares S&P 500. According to Houweling and Van Zundert (2017), US economy after selection of Donald Trump as President has relatively boosted due to his views on capitalism and growth in business sector.

International investment section is also conducted in a Portfolio, which comprises of 20% of the overall portfolio value that is 400,000. However the restrictions on the oval investments that could be conducted on shares with international linkage, which is why the highest return provider is mainly chosen from them slot. Therefore, with the use of appendix 1 relevant share that needs to be evaluated can be identified. McCann (2014) stated that investments conducted based on technical analysis allows investors to predict the trend and make adequate returns from investment. On the contrary, Meade and Beasley (2014) argued that investment conducted without adequate hedging procedures or measures could hamper the investment capital.

Investing in US and International Equities

The second last portfolio section comprises of the hedging measure, which is only conducted due to the requirements portrayed by the investor. Moreover, 21% of the total portfolio value is contributed towards the hedging processes, which are 424,725. The hedging process is mainly conducted on SPI 200 Futures Contract, which is mainly used to hedge shares of the Australian share market. This could eventually help in reducing the risk that might affect capability of the portfolio to generate adequate returns from investment. In this context, Nofsinger (2016) stated that the use of hedging process allows investors to reduce the risk from capital market volatility, which could hamper returns of the portfolio. On the other hand, Pappas and Dickson (2015) argued that without adequate research investing further in risky investments could increase losses of the investor.

The last section of the portfolio mainly consists of cash reserve balance, which needs to be maintained by investor for smoothly conducting investments in different sectors. The section also consists of two subdivisions, which are AMP Cash Manager Cash Management Account and Margin movements of Hedges. Therefore, investments in AMP Cash Manager Cash Management Account are conducted, where a return of 1.50% per annum is fixed. The cash management is relevantly adequate, as investors need to understand the trend and meet adequate investment decisions which could hedge their exposure in the market. Stoll and Whaley (2015) stated that cash reserves mainly allow investors to comprehend the changing investment environment and make adequate decisions, which could protect them from volatile condition.

The overall components that is been used in drafting the portfolio mainly allowed the investor to generate adequate returns from its investment. According to appendix to 2, returns provided from each of the portfolio stock is recorded, which helps in identifying the total returns that is generated from the investment. Total of 1.67% return is mainly generated from an investment period of 10-07-17 to 10-08-17. This specified time interval mainly helps in identifying significance of the overall portfolio that has been created for the investor. Investor being bullish on US stocks faces the maximum loss on that investment. Nevertheless, the other loss on investment mainly came from the hedging procedure, which was conducted for the Australian shares. However, after the evaluation it is understood that the overall value of the portfolio mainly rose from 2,000,000 to 2,002,790.04 in the brief period of 1 month. This only indicates the overall viability of the portfolio and the measures that were taken to adequately formulate portfolio creation.

Therefore, the components used in the formation of the portfolio are mainly justified, which adequately allowed investor to increase its return from investment. Furthermore, the use of technical analysis in the creation of the portfolio also allows the investor to adequately identify stocks that might provide highest return from investment. However, there are certain problems regarding investments conducted in US and international equities, as they are not hedged and the risk from those capital markets could hamper overall portfolio value. Hence, adequate measures need to be conducted on each of the investments, which are depicted in the portfolio.

Reference:

Barton, D., 2017. Refocusing capitalism on the long term: ownership and trust across the investment value chain. Oxford Review of Economic Policy, 33(2), pp.188-200.

Berndt, T., Bilolo, C. and Meynhardt, T., 2015. Investing in Legitimacy: A Performance Analysis of Public Value Stock Portfolios.

Betermier, S., Calvet, L.E. and Sodini, P., 2017. Investors’ striking migration from growth to value investing over their life cycle. ©LSE Business Review.

Blume, M.E. and Keim, D.B., 2014. The changing nature of institutional stock investing. Critical Finance Review, 7.

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Fitzgibbons, S., Friedman, J., Pomorski, L. and Serban, L., 2016. Long-Only Style Investing: Don't Just Mix, Integrate.

Houweling, P. and Van Zundert, J., 2017. Factor investing in the corporate bond market. Financial Analysts Journal, 73(2), pp.100-115.

McCann, B., 2014. Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives. John Wiley & Sons.

Meade, N. and Beasley, J.E., 2014. Consistency Regions and Frontiers: Using Density Forecasting to Find Consistent Portfolios.

Nofsinger, J., 2016. The psychology of investing. Routledge.

Pappas, S.N. and Dickson, J.M., 2015. Factor-based investing. Valley Forge, Pa.: The Vanguard Group.

Stoll, H.R. and Whaley, R.E., 2015. Commodity index investing and commodity futures prices.