FINANCE CASE STUDY - INVESTMENT PORTFOLIO CONSTRUCTION
You work for a well-known stockbroking company, and you manage the accounts, relationships and investment portfolios for a group of high net-worth clients. These clients pay advisory and investment return commission fees to your company in return for you providing initial investment planning and evaluation services, ongoing investment and related advice and development and management of investment strategies and portfolios on their behalf. You have recently been allocated a new client who is looking to invest $1,500,000 outside of their employment-based superannuation account to provide an additional nest-egg and funding source as they transition towards retirement. The client has provided the following brief and guidelines associated with their investment requirements:
- They have a reasonable level of risk tolerance, and are willing for their funds to be invested in individual equity securities, listed investment companies (LICs) or exchange-traded funds (ETFs), equity market option securities or futures contracts, and cash. They are open to investment exposure to the Australian financial markets. They are looking for the development of an investment portfolio with a capital growth focus, and are less concerned about the receipt of ongoing income or the tax-effectiveness of the portfolio.
- They have a preference towards a range of middle sized segment of the market, and request that physical share investments are limited to listed ASX 200 companies on the Australian Securities Exchange (Company list is given in the provided spreadsheet file).
- However, they would also like minimal exposure to the Australian resources sector given the currently volatility in underlying commodity prices, unless they are presented with a convincing investment strategy justifying direct equity or indirect investment in this sector.
- At least 50% of the total investment funds are to be invested in individual company equity (share) securities and, to ensure a prudent level of diversification, no more than 10% of the total available funds are to be invested in any one individual company.
- Observing substantial market turbulence in the beginning of 2018 in the world financial market, they are a bit concerned about the US and Australian economy in the near future. To minimize risk, they are open to indirect, diversified investment in other segments of the Australian share market through holdings in LICs or ETFs (list of preferred LICs and ETFs is provided in the spreadsheet file), but request this investment component to be limited to a maximum of 20% of the available funds.
- They would also like a minimum of 75% of the Australian direct share investment component (excluding LIC and ETP investments) to be hedged using market futures or option securities to provide some protection again adverse market movements.
- They have indicated that short-selling of securities expected to decline in value is also permissible, although sufficient cash reserves are required to be held in a cash management account to meet re-purchasing requirements.
- They have also approved the use of equity index futures contracts and option securities for speculating or hedging purposes. Futures contracts and options for hedging include various SPI Futures contract, SPI index 200 call and put options. You can find the latest information about these securities from the ASX website provided below.
- They have indicated that a maximum of 25% of the total funds can be maintained in a cash management trust as a liquid and secure investment. The preferred cash investment is the MCU Cash Manager Cash Management Account.
The performance of the recommended investment portfolio proposed will be evaluated relative to the performance of the S&P/ASX 200 index.
Required:
This case study requires the preparation of an investment portfolio proposal document to be provided to the client, which provides the following information:
Do market research and download relevant data from the following sources provided.
An explanation of the underlying investment philosophy and strategy for the development of the portfolio, which is consistent with the indicated requirements of the client. Explanation and justification for this strategy, individually or relative to alternatives, should be provided.
A description, in table or similar format, of the recommended portfolio components, indicating the selected assets / securities and the magnitudes of investment in each.
A brief explanation of how each of the recommended investment components aligns with the overall investment strategy.
Assume this portfolio construction is done on February 23th 2018, which means your portfolio value generation will be based on the closing prices of all securities on that day.
Also noticed that you need to trace the performance of your portfolio throughout this semester after portfolio generation. This will facilitate the base information provided for Case 5 study on portfolio performance analysis.
Attachment:- Assignment Files.rar