Portfolio Construction For Secured Income: Asset Allocation, Investment Philosophy, And Evaluation

Proposed Portfolio Investment

Discuss About The Investment Portfolio Construction Financial?

The assignment describes that how a portfolio can be developed to meet the specific requirement of a client like developing a secured source of income tax. The assignment also describes how the assets should be chosen and a combination of assets can be developed so that not only the underlying corpus of the portfolio remains intact but the portfolio can achieve positive growth by offsetting the loss with the help of profit making assets(Elton et al.,2009).

Here the portfolio manager is trying to build a portfolio that will contain some good stocks that are expected to provide good return (Duong et al., 2009). The portfolio will be build in the context of the Australian Stock Exchange (ASX).Therefore the majority of the investments will be made in to the stocks that are listed in ASX. However the portfolio is also open to the investment of the international stocks that are expected to do well. The main objective behind developing a carefully developed portfolio is to create a secured source of income for the client who has provided $2,000,000 for developing the portfolio as he wants a secured source of income in his retirement days (Vanstone et al., 2012).

Out of the total investment of $2,000,000, 50% [1000000] has been invested in the three Australian large cap companies that are included in the 100 top listed large-cap companies of the Australian stock exchange [ASX]. As per ASX a company is categorized as Large-cap if the market capitalization of that company lies between minimum $20,992.00m and maximum of $119,739.43m.The benefit of choosing the large-cap companies is that these companies are expected to provided stable return over period in terms of their stock prices. The ASX listed large cap stocks that are chosen for the portfolio are “AGL Energy Limited [AGL]”(Market capitalization:$ 16,386,700,000), “Aristocrat Leisure Limited (ALL.AX)”[$ 13,945,800,000], “Ansell Limited (ANN.AX)”[$ 3,427,630,000].The underlying reason strategy behind the selection of these stock is that that due to large market capitalization, these st5oicks will be least affected by the market volatility and will provide a stable return. More over these stocks are listed among 100 top listed stocks of ASX. Therefore it is expected that these stocks will provide good or stable return in near future. Because of these reasons these stocks has been included in the portfolio (Asx.com.au, 2017)

The portfolio manager as well as the investor is having a bullish attitude with respect to the US economy as the elected president Donald trump has taken some positive financial steps which is expected to pull up both the US as well as the global stock market. That is why the portfolio manager has decided to invest 10% of the portfolio corpus [$200000] in some good stocks that are listed in New York Stock Exchange [NYSE].The stocks that are included in the portfolio and are listed in NYSE as one of the most active stocks (with respect to providing good returns) are Bank of America Corporation (BAC) and GENERAL ELECTRIC CO. Registered (GEC.SG).

Underlying Philosophy and Strategy for Choosing the Assets for the Portfolio

The portfolio manager has also then invested 20% of the portfolio corpus [$400000]in the “Listed Investment Companies”[LIC].The LICs  are the portfolio of shares that are managed or overlooked by a manager. The manager of a LIC first raises money through the issue of IPO, and then the raised fund is invested in some promising stocks which are expected to yield good return(Au.finance.yahoo.com, 2017). The share holders of the fund can get cash dividend as a source of income and also get some tax benefit but they are free to trade those stocks in the ASX (Liu, 2012). The characteristics of this portfolio or fund is that the underlying corpus of the fund does not change with the sell or cancellation of the share by a share holder of the fund, as the shareholder does not get the redemption of investment money from the portfolio manager while selling those shares [as the portfolio manager is not buying back those shares].Rather the seller only has to stay happy by whatever he gets from selling those shares (Balatbat et al.,2010). The three LICs in which the portfolio manager has invested 20% of the total investment value are “Carlton Investments Limited (ASX: CIN)”, “WAM Capital Limited (ASX: WAM”, “Australian Leaders Fund Limited (ASX: ALF)” and have yielded an average annual return of 9.7%, 9.4%, 9.3% respectively for a period of last 10 years (Motley Fool Australia, 2017). Thus it is seen that underlying reason behind investing in these LICS is that these LICS has recorded the three highest returns for the past 10 years and are offering secured return in comparison to the stocks in a worldwide low growth environment (Subramaniam et al., 2009).

Another 20% of the portfolio corpus [$400000] has been invested in cash management trust as a liquid and secured investment. The investment has been made in the “AMP Cash Manager” “Cash Management Account” which is currently providing a return of 1.50% per annum as per the preference of the investors. The benefit of investing in the “cash management account” is that this account does not lock the cash but still help the investor to earn a good annual return. In this case the AMP Cash Management Account is providing an annual return of 1.50%, on the basis of which it can be calculated that the monthly return is around 0.12%.Thus this investment allows the investor to earn over the invest while keeping the investment in liquid and secured form as debit card is offered with respect to the investment account so that the investor can carry out the necessary transactions (Inderst, 2014).

Portfolio Structure

The above discussion describes that the overall objective of building the portfolio is to develop a source of secured return for the investor for the long run. Thus the investment in LIC and Cash Management Account has been made in order to provide a source of secured income for the investor. On the other hand looking at the high risk tolerance of the investor, a large portion of the total corpus of investment [around 60%] has been invested in top performing Australian stock as well as international stocks listed in NYSE. The stock investment is quiet risky with respect to the investment in LIC and Cash Management Account. More over in order to protect the value of the portfolio the port folio manager has avoided the stocks of the commodity market both in Australia as well as global context as there is enough price volatility in the commodity market across the world (Musiela and Zariphopoulou, 2009).

The value of the S&P/ASX 200 on 10.7.2017 was around 5724.4.Again the value of the S&P/ASX 200 on 11.8.2017 was around 5693.1.Thus it can be said that during this period the value of the portfolio has been enhanced by 1%

The above portfolio evaluation defines that among the different assets of the portfolio, invested in ASX stocks has resulted in 3% loss, investment in NYSE stocks has resulted in 1% growth, investment in Australian LICS has resulted in 12% growth and investment in Cash management account has resulted in 0.12% growth. As a whole the portfolio has resulted in 1% growth.

While comparing the performance (return) of the portfolio in comparison to the return of S&P/ASX 200 index, it can be seen that both of them has made a 1 % progress for the period from 10.7.17 to 11.8.17.Thus it can be said that the portfolio has performance is a standard performance in comparison to that of the bench mark index of S&P/ASX 200

Conclusion:

From the above discussion it can be said that carefully selected assets for a portfolio are well capable to give a stable return and to protect the portfolio to make loss. In case of the above portfolio it can be seen that the loss incurred by the investment is ASX stocks has been well offset by the investment in NYSE stocks, Australian listed investment companies as well as in cash management trust. Thus as a whole the portfolio has managed to generate 1% growth. Thus this portfolio is a good example of balanced portfolio where loss making assets are balanced with profit making assets (Dierkes et al.,2010).

Reference:

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Dierkes, M., Erner, C. and Zeisberger, S., 2010. Investment horizon and the attractiveness of investment strategies: A behavioral approach. Journal of Banking & Finance, 34(5), pp.1032-1046.

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Liu, J., 2012. Board monitoring, management contracting and earnings management: an evidence from ASX listed companies. International Journal of Economics and Finance, 4(12), p.121.

Motley Fool Australia. (2017). Investor-Update. [online] Available at: https://www.fool.com.au [Accessed 12 Aug. 2017].

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Pension fund investment in infrastructure: lessons from Australia and Canada. Browser Download This Paper.

Subramaniam, N., McManus, L. and Zhang, J., 2009. Corporate governance, firm characteristics and risk management committee formation in Australian companies. Managerial Auditing Journal, 24(4), pp.316-339.

Vanstone, B., Hahn, T. and Finnie, G., 2012. Momentum returns to S and P/ASX 100 constituents. JASSA, (3), p.15.