Investment Advisory Services: Design Effective Investment Plan

Discuss about the Investment Advisory Services for Design Effective Investment Plan.

Investment advisory services in rapidly getting popularity as the investment advisors play important role in guiding the investors to design effective investment plans by providing essential expertise to the investors so that the investors’ investment potentiality use to be improved. The investment advisors greatly contribute to the investors by minimizing the risks of investments as well as to maximize the return from the investment (Chong, 2004). The advisors use to make several different strategies as per the need of the investors and the strategies help the investors to optimize the investment profit and at the same time the strategies are helpful to minimize the investment risk. The equity or stock market is extremely volatile and highly risk prone investment as there are several factors, which influence the fluctuations of the stock market. Therefore, the investment advisors should have the required knowledge about the potential risks of the investment (Cornell, 2011). Besides they should have adequate knowledge of market, the potential of the market, about the several investment components of the market and the risks and potentiality of the investment components so that they can suggest the clients’ most effective investment option as per their requirements, which best suited to the investors’ profile.

Investment philosophy and strategy

Investment policy is defined as the set of the principles that shapes and informs the individual’s decision’ making process and thereby it also helps in the creation of appropriate investment philosophies for the individuals. The investment philosophy includes value investing, growth investing, and socially responsible investing with the technical investing process (Fabozzi and Markowitz, 2011). The investment policy helps in the formation of the coherent thinking of the markets with thereby considering the various types of the mistakes and also helps in the creation of belief with the consideration of the investor behavior.  With the consideration of the brief introduction, an investment policy is seemed to be defined as the generation of the new strategies with the removal of the old ones.  The ingredients of the investment philosophy determine the various steps that are the investment policies and thereby the investment policies are also view with the enhancement of the learning providing the view of human frailty (Elliott and Elliott, 2008). The generation determines the tactical views of the market with judging the efficiency of the market. It can be only seemed to be possible with the creation of foundation for the investment policy and thereby the strategies that are created reflect the beliefs. The categorization of the investment philosophies helps in the creation of market timing versus asset selection and thereby the activist investing with the passive investing and the time horizon (Bower and Gilbert, 2005). The investment policy helps in the creation of the market timing strategies, asset selectors and the arbitrage based strategies. The asset selectors help in the creation of chartists and value investors and the growth with the investor’s increment. The investment policy helps in the enhancement of the investment policy with the various steps that are the acquiring the tools of the trade, development of the point of view with about the market work and the break down work and the philosophy provision with providing the best fit for you.

Investment philosophy and strategy

The tradeoff between risk and the return with the evaluation of the risk and thereby the models are measured for the enhancement of the qualitative measure. The traditional usage of the quantitative measures is indicated by the measurement of the risks in the terms of the volatility and the consideration of the standard deviation (Hiriyappa, 2008). The deviation also helps in the creation of the strategies in order to mitigate the risk factors regarding the investments made. The investments are made in such a way so that the risks are arranged with the consideration of the low risks and thereby the measurement of the objectives regarding the portfolio increases. The increment of the current income helps in the achievement of the goal with the enhancement of the policies and thereby the reduction of the volatile risks in seen in the case (Holton, 2012). The hedging process is also planned in the period of the investment which seemed to be a part of the strategy. The investment strategy also helps in the creation of the appropriate management process with the usage of the SPI features (Jones, 2011). The bull and the bear of the market determines the increment of the profit with the increment of the risk factors and the bear determines the decrement of the profit with the decrement of the risk regarding the investments made in the market. These are the strategies that are planned for the appropriate creation of the investment portfolio with thereby helps in the enhancement of the return per annum.

The amount of fund that need to be manage = $1,000,000

• LICs, ETPS and Shares

Amount of money invested in shares

• Minimum = $1,000,000 * 40% = $4, 00,000
• No maximum, it will depends on invested amount in shares as 50% of share exposure should be hedged

Individual company shares

• Maximum = $1,000,000 * 10% = $100,000
• At maximum level could invest in only 9 companies
• 1000 shares is minimum purchase parcel and purchased shares should be multiple of 100

Brokerage cost is excluded assuming that it is being externally covered. Selling shares that is being not purchased by the client should be purchase with the hope of falling price of share over the period (Stittle and Wearing, 2008). 

• Short selling

Selling shares that the client had not yet purchased but buying them back with the hope of falling share prices over the period. Short selling ensures that sufficient cash is available in CMT to repurchase the shares at the end of the period. The short sales of AMP limited 10,000 shares @5.17. It represents cash inflow and should be held for repurchase of amount $51,700 in October.  

• Future contracts and options

SPI future contract will provide an option to hedge the portfolio and speculating on change in market index by using SPI future contracts traded on ASX.

Portfolio Components

Acting as a buyer or seller of SPI 200 contract of December 2016

Current trading value is 5,336

A settlement account should be open at $10,000 per 200 SPI contract. Purchasing future contract would give exposure to the investment value of ($25*5336*5)= $667000 will require investment margin of ($10,000*5)= $50,000

Contract price of SPI represents $25 value change

SPI Options

SPI option allow to hedge the market index change

SPI option is similar to the future contracts excepts they are not contractual

The client has to pay purchase premium and provide margin account with the future contract

Option value is (SPI value *$25) per contract

Purchase premium is (premium *$25) per contract

5 SPI 200 purchase call option will give exposure to investment value of (5,336*5*$25)= $6677000 and would cost premium of (5*$49200$$25)= $61500

Investment in cash management trust

Total investment in CMT

Minimum = $0

Maximum = $1,000,000 * 20% = $200,000

Selection of asset

The selection of asset is important in order to create value over the investment.

The value of portfolio at the end of the period> The value of the portfolio today

The client can select assets on the basis of:

Price of shares and performances over the period of time

Fundamental factors (dividends, beta, NTA, P/E ratio)

News announcements

Economic conditions that may suit particular industries or companies

It applies equally to ETFs, LICs and future and options   

Situations

Expect increase in share price over next 3 months

Purchasing share, ETP or LIC directly

Purchasing call options on underlying share 

Purchasing 200 SPI future contracts or 200 SPI call option if in general market will fall

Expect decrease in the share price over next 3 months

Purchasing put options on underlying share

Short selling the shares

Selling 200 SPI futures contract or purchasing 200 SPI if in general market will fall

Purchases - Equity Shares	Cost ($)	($)
BlueScope steel (10,000@$6.47)	64700
Fortescue Metals Group (20,000@$3.63)	72600
Newcrest Mining (3,000@$24)	72000
Treasury Wine Estates (7,000@$9.28)	64,960
Domino’s Pizza Enterprises (1,000@$68.82)	68,820
Aristocrat Leisure (5,[email protected])	67,200
Cimic Group (2,000@$35.95)	71,900
REA Group (1,000@$59.23)	59,230
Cochlear (600@$121.29)	72,774
Vocus Communication (6,000@$8.42)	50,520	664704
Short Sales- Equity Shares
Santos (5,000@$4.63)	23,150
BHP Billiton (2,000@$19.09)	38,180
Ansell (2,000@$18.54)	37,080
Woolworths (1,000@$20.74)	20,740
Woodside Petroleum (1,000@$26.64)	26,640	-145,790
ETPs and LICs
Platinum Capital (30,000@$4.63)	48,300
WAM Capital (20,000@$2.23)	44,600
SPDR ASX/S&P 200 Fund (1,000@$49.14)	49,140
I Shares S&P 500 ETF Fund (250@$282.03)	70,508
Beta Shares Gold Bullion ETF (5,000@$14.14)	70,700	283,248
Hedged Position for the ASX Equity Investments
200 SPI  Futures contract value =5336*$25=$133,400
Sell 200 SPI future contract on 4 dec @5336	40000	40000
Cash Investment in the Cash Management Trust
Cash Holding		157838
		1000000

The investment profile can be designed with potential equity securities of listed investment companies, besides this, exchange traded fund such as exchange traded gold fund, S&P/ASX 200 - PRICE INDEX which are potential investment tools and provide effective investment option to the investors as per the requirement of the investors(Knill, 2010). The particular investor of the case study want to invest the money $1000, 000 in growth market thus can achieve considerable growth of the fund. His main requirement is to invest around 40% of the total investment into the physical equity investments in the highest quality securities in order to ensure the profitability of the investment. The top quality shares are usually high performance share and assured a certain guarantee of the returns. Means, if there is not any big changes happened then the companies’ equity will provide significant amount of profits to the investors (Mahone et al., 2009). Besides this, investors will be recommended to invest in Bullion market in gold ETF as the bullion has huge potential and as the investment will be for long term thus, the potentiality of the gold fund will be greater. The company must not invest more than 10% of total investment in a particular share or equity, because in this case the risk can increased as if the performance of the share declined then the investor has to face substantial amount of loss thus the investor has to divided his/her investment profile in several different parts so that the risk can be divided and thus the risk can be managed (Wolf, 2008). Besides this the investors can invest in the Australian direct share investment components which are usually less risk prone and high growth investment tools as by the investment tools the company investment fund will be improved significantly and thus the potentiality of the investment portfolio will be enhanced substantially (Holton, 2012). The investor can invest in equity index futures which are high growth fund in order to increase the investment opportunity of the investment portfolio of the company and thus the company can provide additional finance facilities to the employees of the company, which help the employees in their retirement plan. The investor can invest in future and option investment tools in order to mitigate the risk of the investment as these are the tools, which help the investors in hedging, which minimize the risk of the investment so that the company’s investment prospects will be improved(Wong, 2011). Several effective strategies bull spread or cover call as well as butterfly strategies can be applied, which effectively reduce the risks of the investment as well as improve the potentiality of the investment. 

Conclusion

The decisions to make investment in the companies are very critical and crucial. Therefore, it is very important for the investors to determine and analyze the financial performance of a company. The share price of companies varies and fluctuates in the business environment. Therefore, it becomes important for the investors to take decision in which companies they should invest in order to get maximum returns. The new client should take decision on the basis of the performance of the companies. The main focus of the investors is to earn maximum profits and take appropriate investment decision. The investment portfolio of the investor shows that the performance of S&P/ASX 200 index had the closing value of around 5,388.50 as on 13/7/2016. The investment decision of the client is appropriate and high profit earning is the main focus. 

References

Bower, J. and Gilbert, C. (2005). From resource allocation to strategy. Oxford: Oxford University Press.

Chong, Y. (2004). Investment risk management. Chichester, West Sussex, Eng.: John Wiley & Sons.

Cornell, B. (2011). Invited Editorial Comment. The Journal of Portfolio Management, 37(4), pp.3-5.

Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.

Fabozzi, F. and Markowitz, H. (2011). The theory and practice of investment management. Hoboken, N.J.: John Wiley & Sons.

Hiriyappa, B. (2008). Investment management. New Delhi: New Age International (P) Ltd., Publishers.

Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.

Jones, P. (2011). Strategy mapping for learning organizations. Farnham, Surrey: Gower Pub.

Knill, A. (2010). Does Foreign Portfolio Investment Reach Small Listed Firms?.European Financial Management, p.no-no.

Mahone, A., Woo, C., Williams, J. and Horowitz, I. (2009). Renewable portfolio standards and cost-effective energy-efficiency investment. Energy Policy, 37(3), pp.774-777.

Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.

Wolf, M. (2008). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.

Wong, M. (2011). The risk of investment products. Singapore: Hackensack, NJ.