Unformatted text preview: Investing for the future
Constructing an Investment Portfolio Oct. 15, 2009 portfolio
• Portfolio construction in its simplest form is merely the process of blending various assets to achieve diversification that is compatible with an investor’s risk profile and long term investment objective. Portfolio
• Active vs passive investment management • • Value vs growth investing • • The optimal number of managers to use to reduce manager risk •
• Individual tailored portfolios to manage cash flow and taxation • • Fees • • Ongoing monitoring to ensure integrity of style management objective
The object is to achieve an outcome that will perform well in most market conditions and that will be competitive relative to your benchmarks based on the five different risk profile categories and to consider the following: objective
To maximize income and capital growth from investments while retaining a strong emphasis on security of capital Minimize the costs of administration and manager fees of the funds To reduce risk through diversification of investments Managed investments
• Mutual Funds • Family of funds for break point advantage
• Change within the family at no charge 5 Step process
Step Investment Review Portfolio Asset Allocation Product Research & Analysis Investment Blending Investment Weightings Ongoing process
Ongoing Risk Management Constant Review Risk management
• Investments into managed funds should be spread, with a minimum of three fund Managers being used
• Maximum investment into any one fund is 34% of portfolio. • Alternative Investments A limit of 25% of a client’s portfolio in a ‘fund of fund’ strategy. liquidity
At all times a minimum of 40% of total investments must remain in liquid investments such as managed funds, listed securities or Bank Instruments and must be liquefiable within 14 days. If liquidity is not an issue for you,then funds greater that 60% can be held in illiquid assets Blending assets
• Blending asset can enhance returns.
• Study shows that during the period from 1973 to 2001 the best asset class performance was from US Stocks.
• By blending equal allocations to US Stock, Non US Stock, Real Estate Securities and Commodities the return can in fact be improved
• efficient frontier theory suggests that by blending asset class you can reduced volatility but may also reduce overall performance. performance
• Diversification should not only be used as a risk reduction strategy but can in fact enhance overall performance of our client’s investments. Risk tolerance
• Portfolio Asset Allocation Analysis Studies confirm that people generally do not accurately estimate their own risk tolerance. • While the pattern of estimates is scattered, there is a slight overall tendency to under estimate one’s tolerance for risk Test risk tolerance
• There are questionnaires that are widely used by financial advisors to determine a client’s risk tolerance.
• Clients are often surprised by the outcome.
• Results drive the asset allocation Risk tolerance
• Moderately Conservative
• High Growth Direct shares
• provide clients with a better tax position when compared to the realized gains that can be passed on to investors via unit trust investments. • provide a rising dividendyield with capital growth which out performs the market. • looking for a strong history of dividend payment. • long term buy and hold strategy. rebalance
• If a stock has risen by more than 50% during 3 years you should review the position to decide if the stock should be sold or profits taken and reallocated back to origin allocation. Quality assessment
• Evaluate using the categories that give an indication of the historical performance of each company, and the direction these variables are trending. • Growth calculate five year compound average growth rates of: • Sales Revenue; Book Value; Dividends; Earnings & Share Price Financial condition
• Measured by reference to debt/equity ratios • Ability to pay interest on their debt •
• Cash flow ratio or the ability to convert accounting profits into cash • Quick ratio the "acid test" used to determine the adequacy of cash (and equivalents) to pay all current liabilities a measure of liquidity. Competitive advantage
• Return on capital employed a high figure is indicative of dominance or an established position • Profit margins an indication of competitive strength • Asset turnover is a measure of efficiency Competitive advantage
• The outlook for each company is based on an appraisal of statements from the company and also earnings forecasts collected from leading specialist investment analysts (a consensus analysts' view) classification
• The classification process takes into account not only the growth 'potential' of the company but importantly, also the quality attributes. • Dynamic Fast growth • Stalwarts Moderate growth • Slugs Slow growth • Cyclical – Bounces
• Turnaround Hope for recovery classification
• This is a more robust approach than simply classing a stock as "Value" or "Growth" on the basis of PE ratio or Price to Book Value
• For a company to sustain strong growth over a period, it must have sound quality attributes. Dynamic growth
• These companies have an expectation of producing strong growth, sustainable for quite a few years. Some fast growing companies can be quite risky, and the market will punish non performing growth stocks. • This classification criteria include a satisfactory financial condition, and competitive advantage, along with a promising growth outlook. stalwarts
stalwarts These are companies that are not as dynamic as maybe they once were or do not have sufficient quality or growth outlook to gain the Dynamic Growth status – but still capable of respectable growth at say twice the level of the economy at large. Many stalwarts can be quite defensive in nature and therefore should provide the core of a lower risk equity portfolio. slugs
Companies have a lifecycle and usually slugs are large companies well past middle age that struggle even to keep up with the general growth of the economy. Once upon a time today's slugs may well have been fast growing companies but either demand for their products slowed, management got past it or competition intensified. You will often find the high yielding stocks in this classification because the best use of their profits may be to pay generous dividends rather than reinvest in moribund activities. cyclicals
• These are companies that move directly with the business cycle; • Generally theyadvance as business conditions improve and decline when business slackens. • Mining companies are typically cyclical, along with developers, contractors and basic materials producers. Turn arounds
• These are companies that have difficulties. There is the potential to recover but also the possibility of bankruptcy.
• It is possible to obtain great rewards from this area of the market but the risks are also the greatest.
• Stocks in this classification may suit more aggressive investors or those with a contrarian bent. • Because this type of stock often 'does its own thing' regardless of the general market direction, they can provide very good diversification characteristics within a portfolio. Minimum stocks
• 12 Stock Portfolio $50K $150K • 18 Stock Portfolio $150k $250K
• 20 Stock Portfolio $250K plus
• No Stock to be more than 15% of allocation to direct shares ...
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This note was uploaded on 09/12/2011 for the course FINANCE 101 taught by Professor Staff during the Spring '10 term at Temple.
- Spring '10