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Current Investment Portfolio Evaluation

The purpose of the report is to advice Mr. Sharp, a client for the firm regarding the current investment portfolio and the proposed changes to the current asset allocation of the client based in the financial and economic scenarios. The report commences with the evaluation and analysis of the current constituent securities of the client’s portfolio representing the 3-year and 1-year returns earned by the securities and other fundamental metrices.  Based on the current performances and the expected direction of the economy an alteration in the portfolio is proposed in the second question. The final part of the report assesses the retirement scenarios of the client and proposes a suitable asset allocation policy which would be sufficient to meet client goals and objectives.

Stocks

The client's present portfolio consists mostly of firms in the banking and financial industries in the United Kingdom and the United States, as well as retail shares from large supermarkets in both countries. The equities are thought to have been purchased on April 1, 2019, with three-year and one-year performance reviews completed. The portfolio's three-year return was estimated using data from April 1, 2021 and April 1, 2022, and the one-year return was computed using data from April 1, 2021 and April 1, 2022. The next section looks at each stock's financial performance, as well as the gains and losses it has seen over a three-year and one-year timeframe. The whole portfolio returned 15.90 percent based on last year's pricing, whereas the portfolio returned 23.72 percent based on the market price of securities seen in the year 2019 at the time of acquisition. Due to the risk of concentration, the portfolio is heavily weighted in banking and financial shares, which might result in a capital loss.

Lloyds Bank – The bank's income has been consistent over the last several years, with a little blip in 2020, owing to the pandemic's influence. The net profit margin has been decreasing since the beginning of the year 2018, with an increase in the profit margin in 2021. Over the course of three years, the stock lost 24% of its value. The stock has returned 10.80 percent in the last year due to increased profitability. The stock now has a P/E ratio of 6.04, and the income statement dividend yield is 4.32 percent.

Royal Bank of Scotland – The company witnessed a fall in price of in the year 2019 and the net profit margin of the company was dragged downwards in the year 2020 exhibiting negative profits. The company began the recovery in the year 2021 where it showed a jump of around 30 percent. The return from the stock for the past three year was equal to -13.42 percent but the company has witnessed a return of 10.80 percent in the past one year which was greater than the past three years. The dividend yield of the stock is equal to 4.68 percent which is considered to be quite healthy and the stock is currently trading at a P/E ratio of 8.26 which makes it comparatively cheaper than its peers.

Proposed Alteration in Portfolio

HSBC – The company was able to streamline its processes and maintain a stable source of revenue and was successfully able to beat the negative impacts of the Covid 19 pandemic. The net profit of the company was equal to GBP13,917 million in the year 2021 and following which the stock price of the company witnessed steady rise. The stock price jumped by around 25 percent in the most recent year and the earning per share of the company was very less at GBP 0.58 with a dividend yield income provided to the investors equal to 3.78 percent. The Price to earnings ratio at which the stock is currently trading at is equal to 10.51 which is on the higher side.

Imperial Brands – This company can be considered as the major reason for the loss contributed to the portfolio as it has lost around 36 percent in value from the day it was included into the portfolio by the client. The company has streamlined its operations which has resulted in the growth of profit and a margin of around 18 percent in the year 2021. The stock’s return for the past two years has been negative but it can be cancelled of with a positive performance in the recent year with a profit earned equal to 5.12 percent. The stock is also one of the highest dividends paying stocks with a dividend yield of around 8.39 percent. The current P/E ratio of the stock is equal to 18.4 and it is considered to be equal to the average P/E ratio of the industry the company is operating into.

Barclays – The bank is diverse across various operations and the source of revenue for the company is not limited to a single source or is concentrated in nature. The bank is one of the leading banks around the world and the company was able to hold the profits for the year 2020 in which the covid 19 pandemic struck the world. The profit margin equaled 30 percent for the firm in the year 2021 but it was not reflected in the portfolio value of the stock. The 3-year return for the stock was equal to 9.66 percent in the year which was then catapulted to 20.09 percent loss in value in the year 2021.The current P/E ratio of the stock was fairly less as 3.96 and it is considered to be towards the category of cheaper stocks.

BAT – The stock of the company is currently trading at a P/E ratio of 11.19 which is fairly good and the dividend yield of around 6.52 percent. The EPS of the company is equal to GBP 2.97 which is taken from the latest financial statement published by the firm. The company is one of the largest retailers operating in the world operations in multiple countries. The stock has yielded significantly in the past few years and is one of the few stocks having a positive return compared with the values of 3-year and 1-year returns. The stock yielded around 18.50 returns in the recent year and when it is compared with the prices three years ago it has yielded around 3.40 percent.

Suitable Asset Allocation Policy for Retirement Scenarios

Tesco – The profit of the company was significantly hit in the current year as compared to the margins of 2021. The stock was currently trading at a P/E ratio of around 13.78 and it depicted that the company is in demand amongst the investors specially being a retail stock. The current profits of the company is equal to 2.41 percent way low than what it had earned in the year 2021. The dividend yield of the company was equal to 4 percent on an annual basis and the three-year return from the stock that the portfolio earned was equal to 10.86 percent which was then improved when compared to the one-year return of 22.40 percent.

Sainsbury’s – The three-year return from the stock was equal to 4.23 percent and the one-year return from the stock was equal to 4.32 percent. The dividend policy of the company was maintained at a consistent level and a dividend per share value of around GBP 0.03 per share. The company has improved upon its profits compared to the year 2020 where it witnessed a loss of around GBP 189 million but rebounded in the year 2021 with a profit of GBP 389 million. The stock is one of the consistent yielding stocks which is a part of the portfolio and it belongs to the retail sector.

Marks and Spencer – The company has been suffering losses but has been able to maintain the level of revenues this year. The company had witnessed a loss of around 2.16 percent in the year that ended in 2021. The negative earnings of the company were expected to impact the stock price performance of the company with the company losing 14.71 percent in value from the date of its purchase. Although the company has recovered well in the past one year which is supported by a one-year return equal to 3.64 percent. The dividend yield of the stock was equal to 4.38 percent in the year 2021 and the stock was risky as it was trading at a P/E ratio of 90.06.

Schroders Ordinary Shares - In the last three years, the firm has returned 11.80 percent, while the stock has lost roughly 9.80 % on a one-year basis. The firm's P/E ratio is now 11.01, and the firm's EPS was GBP 217.10. The firm's profit after tax has already been continuously increasing over the last three years, with the most recent profit of GBP 623.80 million.

RSA Insurance – The company is not currently earning any profits and the losses of the company are expanding since the year 2020. The loss that was booked by the company in the year 2021 was equal to GBP 261 million which was way higher than the loss of the company in the year 2020 which was equal to GBP 19 million. The stock of the company has been contributing losses to the portfolio compared to the prices when it was purchased and the prices that exited a year ago.

JP Morgan Chase – The company earned a significant profit margin of around 40 percent in the year 2021 which is one of the highest amongst peers. The bank is one of the primary banks in the world in terms of operations and has been earning consistent profits in the past few years. The past three-year return of the stock was equal to 28 percent and the past one-year return was equal to 7.12 percent.

Walmart Inc – The dividend yield of the stock is equal to 3.42 percent and the company has been investing its profits back into the business for expansion of the operations across the globe. The stock of the bank was trading at a P/E ratio of 23.47 percent and the EPS of the company was equal to $6.57.

Fidelity China Special Sit fund - The fund's primary purpose is to concentrate on long-term capital growth, which is similar to the client's objective. The fund has achieved above-average returns since its launch in the year 2019. The fund, however, has lost value as a result of the pandemic and China's economic uncertainties because it is primarily invested in Chinese companies. The fund returned 6% over three years, after losing the majority of its value in the prior year, resulting in a negative 39 percent return.

Barclays Plc Bonds – The bond has been providing negative returns compared with 3-year and 1-year prices. The 3-year loss was equal to 6.70 percent whereas the last year return for the stock is equal to 8.28 percent which is even higher.

Treasury Gilt – The bond issued by the British government has been yielding negative returns of 2.93 over the past three years whereas the last year return from the bond was equal to -2.06 percent.

Seven Trent Utilities - During the last three years, the company's bond has returned a minus 10.07 percent, with a one-year loss of 11.67 percent.

The investment objectives of the client include earning a long-term sustainable growth rate

As GDP of the world has been witnessing the detrimental affects of the pandemic that was unfolded in the year 2020, the recovery of the globe is expected to take place from the year 2022 (JP Morgan, 2022). The consumer spending behavior and the confidence built up amongst the residents would be the primary driving factor of the recovery that is anticipated. The increased spending on goods and services by people across the globe is expected to raise the level of inflation in the world which includes United Kingdom and the United States and as a result central banks of these countries are expected to raise the interest rates to tackle the inflation level (King, 2022). If a scenario where interest rates are raised happens, the sector that would benefit from the change is going to be the banking and financial institutions. Also, some of the banks that are included in the portfolio have a strong balance sheet and are market leaders in respective segments (Fitch ratings, 2022). A rise in technological advancement and move to digitalization increase the return prospects from the banks in the future periods. The current portfolio has significant exposure to the banking sector which is consistent with the economic and interest rate outlook of the world. But since, the client is not willing to take excessive risk, the portfolio that is concentrated in the banking sector may be riskier proposition for the client. Economies of the globe are expected to witness volatility due to the uncertainty regarding the Covid-19 pandemic and mainly due to the war between Ukraine and Russia. As we know that the banking sector is heavily dependent on the performance of the economy, hence it becomes another reason to reduce the exposure of the portfolio from the banking sector.

The second most important sector that the portfolio is exposed into is the retail sector with stocks of BAT, Walmart Inc, Tesco, and Sainsbury’s representing the biggest players in the segment. Consumers are expected to spend more now that the pandemic restrictions have been lifted, implying that the retail sector would outperform the market. The retail business is prepared to raise product and commodity prices and stop delivering promotional incentives of any kind in order to boost profits and recover any losses sustained during the outbreak (Deloitte.com, 2022). Because there are only a few stocks in the retail sector, we believe the portfolio is underexposed to it. The other changes that are recommended includes removal of companies from the portfolio which are loss-making and has weaker financials. The capital received from selling of those companies would be used to increase exposure to retail sector stocks like Walmart Inc and BAT.

The amount of GBP 250,000 that was available to the client should be used to increase exposure to retail companies and a part of it should be used to buy government bonds and securities. As discussed above, using the GBP 250,000 capital increases the opportunity to buy more shares of retail companies which are expected to outperform the market in the future periods. To keep the portfolio stable and maintain a balance between risky and risk-free securities, we opted to put a portion of the money into government bonds, which decreases the portfolio's volatility. The addition of bonds to the portfolio might also be justified by the requirement to diversify the portfolio across asset classes. Due to the client's choice for not investing in other asset classes such as private equity, hedge funds, or real estate, bonds were left as the sole option for achieving the advantages of diversification.

The proposed changes in the portfolio is shared below:

 

Keeping in mind the retirement scenario of the client the aims and objectives of the client is expected to change. The risk tolerance level of the client is expected to change as the client will be willing to look towards a stable source of income and reduction in the level of risk (Schooley & Worden, 2016). To avoid any significant risk and to retain a solid source of income, the share of bond portfolios must be increased. Government bonds, also known as treasury securities, should be the major focus of the bond allocation since they offer a stable source of income and are essential in delivering the appropriate liquidity to the customer upon retirement. We understand the client has no specific liquidity needs, but we feel the existing portfolio overstates the client's risk tolerance, given the client's retirement planning. The client's current asset allocation favours equities from the United Kingdom and the United States, which is a high-risk strategy. The recommended asset allocation of the client based on the needs of him during retirement period is represented in the table below:

Current Asset Allocation

Amount

%

Equity

411454.5

94.79%

Bond

22621.22

5.21%

Changed Asset Allocation

Amount

%

Bond

303853

70%

Equity

130222.7

30%

The asset allocation that is suitable to the client must hold bonds to the extent of 70 percent of the total capital and 30 percent of the capital should be invested in stocks (Treasury direct, 2022). The best bonds for clients are Treasury gilts and investment grade funds issued by global blue-chip corporations operating in defensive fields such as defense, healthcare, and retail. The customer's money should be spread over a variety of funds that would provide both balanced capital growth and long-term income. Funds that invests in capital growth and providing a stable source of income should be chosen for the purpose investment.

Conclusion

The assignment was focused upon analyzing the existing investment portfolio of a client and making recommendations to alter the portfolio according to the economic situations and desires/goals of the client. The current portfolio of the client yielded 15.65% of returns during the 3-year period but the past one-year results were equal to -6.18 percent. The portfolio was concentrated in banking stocks which was considered to be risky. According to the economic scenarios which are more favorable to banking stocks and retail stocks, some of the portfolio capital was shifted into stocks related to retail. The loss-making stocks were sold and the capital used were used to buy stocks of banks and retail already included in the portfolio. The concluding part of the report was focused towards suggesting an asset allocation keeping in mind the retirement of the client. Capital needs to be shifted in bonds from equities to reduce the risk of the portfolio and provide a stable source of income which is beneficial in retirement.

Conclusion

Based on the analysis conducted in the report, it was found that the current portfolio of the client required shifting capital from certain stocks and sectors to other outperforming sectors and a need for reducing concentration was felt. The client's current portfolio has returned 15.65% over the last three years, but has lost 6.18 percent in the prior year. Banking shares, which were considered risky, were strongly weighted in the portfolio. Based on expected economic situations in the future, the allocation in banking stocks and retail stocks was deemed appropriate but to achieve diversification some of the loss-making banking stocks were sold and the proceeds were used to re-invest in the stocks of retail industry like Walmart Inc and BAT Plc as we felt that there was an underexposure in the stocks of retail industry despite the expectations of their outperformance in the immediate future. To cater the after retirement needs of the client and to adjust the portfolio according to the expected changes in the risk behavior of the client, it was deemed appropriate to reduce the exposure of the client from equities and overweight the bond class allocations. This strategy would help the investor to achieve the goal of safety of capital and regular stream of income.

References

(2022). Retrieved 29 April 2022, from https://www.fitchratings.com/research/sovereigns/global-economic-outlook-march-2022-21-03-2022

2022 Market Outlook | J.P. Morgan Global Research. Jpmorgan.com. (2022). Retrieved 19 March 2022, from https://www.jpmorgan.com/insights/research/market-outlook-2022#:~:text=We%20expect%2010%2Dyear%20yields,the%20USD%20index%20in%202022

2022 Retail Industry Outlook: The Great Reset. (2022). Retrieved 23 March 2022, from https://deloitte.wsj.com/articles/2022-retail-industry-outlook-the-great-reset-01643745108#:~:text=To%20learn%20more%20about%20challenges,growth%20of%205%25%20or%20more.

Individual - Treasury Bonds. (2022). Retrieved 29 April 2022, from https://www.treasurydirect.gov/indiv/products/prod_tbonds_glance.htm#:~:text=Treasury%20bonds%20pay%20a%20fixed,through%20a%20bank%20or%20broker.

King, B. (2022). Interest rates rise again to counter higher prices. BBC News. Retrieved 19 March 2022, from https://www.bbc.com/news/business-60763740#:~:text=Interest%20rates%20have%20increased%20for,2020%2C%20when%20Covid%20lockdowns%20began.

Schooley, D. K., & Worden, D. D. (2016). Perceived and realized risk tolerance: Changes during the 2008 financial crisis. Journal of Financial Counseling and Planning, 27(2), 265-276. DOI: 10.1891/JFCP-19-00022

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[Accessed 15 July 2024].

My Assignment Help. 'Investment Portfolio Analysis And Recommendations Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/mn5612-investments-and-portfolio-management/advice-mr-sharp-regarding-the-investment-portfolio-file-A1E7D6A.html> accessed 15 July 2024.

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