Investment Fund Objectives - Essay Example

Portfolio Management al affiliation: Introduction Long term investments are diverse to minimize the chances of potential loses unless it is determined by the concerned parties such as the finance committee. The long term portfolio purpose could be served effectively with no diversification due to certain special situations. Utilization of funds is in a productive manner. In this case short term funds should provide return, liquidity as well as safety (Aggarwal and Wysocki 2005). Investment manager are required to make an effort of preserving capital and they should keep in mind that there may be losses in individual securities (Carmichael and Pomerleano 2002). The investment managers are required to stick to investment management styles which are their responsibility (Catalan and Musalem 2000). Investment Fund Objectives The major objective of investment fund is to offer a current income that is high enough through investing in securities with fixed income. The investment fund aims at capital appreciation but on condition that it is in line with the core investment objective. The limitations and objectives of the investment fund which are at a low level in investment restrictions are considered to be key policies which could not be altered without being approved by the holder’s outstanding majority shares (Gompers and Metrick 2001). For the needs to be met long term investment strategy is required to put more emphasis on total return; these include interest income, dividend and aggregate return as a result of capital appreciation (Aitken et al. 2007). Asset allocation strategies In terms of money investment, there is consideration of long term financial goals as well as risk tolerance (Carmichael and Pomerleano 2002).The strategies to be considered in this case include; asset allocation across key asset classes that include cash, bond and stocks. This enables appropriate handling of optimal returns for the risks to be undertaken (Harvey et al. 2003). Asset class diversification which gives an opportunity of various investments styles like value stock and growth as well as market sectors like corporate bonds and government (Scherer 2002). Portfolio allocation could be shifted by market activity and rebalancing could help in maintaining the allocation of interest (Scherer 2002). Benchmarking This is considered to be a tool for investment professionals and investors and it is used in evaluating the investment manager results (Markowitz 1991). The process of benchmarking is known to be straight forward and it is very easy to match any investment to a standard of required benchmark like (Bernstein and Wilkinson 1997). The action of the manager could be obscured by common methods of determining the relevant benchmark (Markowitz 1991). This is considered to be the only appropriate way of selecting a benchmark that is relevant as well as proceed accordingly. It is pertinent to note that when benchmarks (Markowitz 1991). Constraints High interest rates could lead to consideration of alternatives to traditional bond funds that include fixed income that is nontraditional or unconstrained. Funds of such kind are free from constrains emerging from benchmark that gives an opportunity in terms of global markets as well as sectors. Furthermore, derivatives are actively transacted than the traditional core-bond. The size of fund could influence the way managers transact in credit market as well as in global fixed income. In this case, large funds could gain access through derivatives contracts. Rationale behind portfolio construction Constructed effective portfolio is very critical for the success of long term investment. Holding assets with expected returns that is high are seen not to correlate with each other and are known to be the major elements for the returns as well as risk management of the portfolio. Diversification is also considered to be a key factor and it is measured by the level of holdings correlation in a portfolio Characteristics of the portfolio This is a moderate portfolio since it is relevant for an investor who has a risk tolerance that is moderately high as well as having a time horizon which is longer than five years. Moderate investors tend to accept moderate market volatility periods. The portfolio tends to provide income as well as capital appreciation in 3 key areas that include cash, bonds and stocks (Carmichael and Pomerleano 2002). The portfolio seems to hold huge positions in stock when compared with conservative allocation portfolio. In this case, such kind of portfolio usually has 50 to 70 percent assets in equities and the extra in cash as well as fixed income (Carmichael and Pomerleano 2002). Mean Annual Total Returns Date CRH DIAGEO EASYJET CAPITA CARNIVAL CENTRICA SKY BT GROUP BUNZL BRITISH LAND Portfolio* 1/1/2014 7.6% 14.7% 447.5% 2.2% (2.5%) 32.6% 40.8% 85.8% 64.2% 72.0% 76.5% 1/2/2014 111.5% 57.2% 9.4% 104.7% (7.7%) 217.1% 17.6% 8.7% 18.7% 202.0% 73.9% 1/3/2014 (39.3%) (52.0%) (32.8%) (59.4%) 53.7% (75.2%) (22.7%) (56.8%) (63.0%) (71.1%) (41.9%) 1/6/2014 28.8% 24.5% 5.9% 28.8% (0.1%) (18.3%) (15.2%) 20.2% (11.8%) (22.9%) 4.0% 1/7/2014 17.4% (1.5%) 10.8% (4.8%) 29.3% (5.0%) 26.2% 15.2% 10.4% (31.5%) 6.7% 1/8/2014 (10.6%) 31.8% 2.5% 67.0% (11.8%) 2.6% (3.6%) (22.0%) 4.3% 151.6% 21.2% 1/9/2014 59.1% 5.0% 24.6% 12.9% 32.3% (40.1%) (36.0%) 11.4% 28.2% (18.4%) 7.9% 1/10/2014 158.1% 80.9% 86.5% 215.1% 43.5% 151.4% 76.5% 95.4% 25.3% 201.5% 113.4% ANNUAL RETURN( 41.6% 20.1% 69.3% 45.8% 17.1% 33.1% 10.5% 19.7% 9.5% 60.4% 32.7% Std Dev 61.2% 37.3% 146.3% 78.6% 23.8% 93.5% 34.8% 47.3% 34.3% 104.5% 47.4% 66.2% CORRELATION MATRIX   CRH DIAGEO EASYJET CAPITA CARNIVAL CENTRICA SKY BT GROUP BUNZL BRITISH LAND CRH 1.0000 DIAGEO 0.8357 1.0000 EASYJET 0.7284 0.7304 1.0000 CAPITA 0.8727 0.9371 0.7274 1.0000 CARNIVAL 0.0598 (0.3921) 0.0434 (0.0968) 1.0000 CENTRICA 0.8155 0.8299 0.5234 0.7946 (0.2941) 1.0000 SKY 0.5725 0.6371 0.7796 0.6661 0.0184 0.6635 1.0000 BT GROUP 0.6137 0.6483 0.9421 0.5663 (0.0827) 0.4882 0.7857 1.0000 BUNZL 0.4409 0.5695 0.7488 0.3698 (0.4099) 0.4400 0.5169 0.7937 1.0000 BRITISH LAND 0.6607 0.8702 0.5515 0.8533 (0.4202) 0.8670 0.6226 0.4344 0.4690 1.0000 COVARIANCE MATRIX   CRH DIAGEO EASYJET CAPITA CARNIVAL CENTRICA SKY BT GROUP BUNZL BRITISH LAND CRH 0.3742 0.1911 (0.0231) 0.4199 0.0093 0.4665 0.1214 0.1766 0.0917 0.4216 DIAGEO 0.1911 0.1394 0.0628 0.2758 (0.0344) 0.2897 0.0824 0.1136 0.0722 0.3391 EASYJET (0.0231) 0.0628 2.1406 (0.0284) (0.0948) 0.1585 0.2411 0.4770 0.3577 0.2481 CAPITA 0.4199 0.2758 (0.0284) 0.6185 (0.0178) 0.5855 0.1830 0.2118 0.1006 0.7019 CARNIVAL 0.0093 (0.0344) (0.0948) (0.0178) 0.0568 (0.0650) 0.0011 (0.0101) (0.0341) (0.1044) CENTRICA 0.4665 0.2897 0.1585 0.5855 (0.0650) 0.8745 0.2156 0.2151 0.1405 0.8468 SKY 0.1214 0.0824 0.2411 0.1830 0.0011 0.2156 0.1212 0.1294 0.0617 0.2264 BT GROUP 0.1766 0.1136 0.4770 0.2118 (0.0101) 0.2151 0.1294 0.2238 0.1288 0.2147 BUNZL 0.0917 0.0722 0.3577 0.1006 (0.0341) 0.1405 0.0617 0.1288 0.1177 0.1681 BRITISH LAND 0.4216 0.3391 0.2481 0.7019 (0.1044) 0.8468 0.2264 0.2147 0.1681 1.0912 MINIMUM VARIANCE PORTFOLIO MINIMIZED RISK MAXIMIZED RETURN Equal- Min Long 0% to 25% 5% to 15% -100% to Long 0% to 25% 5% to 15% Weighted Var Only Weights Weights +100% Only Weights Weights Stock Portfolio Stock Portfolio Portfolio Portfolio Portfolio Stock Portfolio Portfolio Portfolio Portfolio CRH 10.00% CRH (43.08%) 0.00% 0.00% 5.00% CRH 100.00% 0.00% 25.00% 15.00% DIAGEO 10.00% DIAGEO 87.99% 16.98% 25.00% 15.00% DIAGEO 100.00% 0.00% 0.00% 15.00% EASYJET 10.00% EASYJET 7.72% 0.00% 0.00% 15.00% EASYJET -100.00% 0.00% 0.00% 5.00% CAPITA 10.00% CAPITA (14.02%) 0.00% 0.00% 5.00% CAPITA 100.00% 0.00% 25.00% 15.00% CARNIVAL 10.00% CARNIVAL 70.77% 59.67% 25.00% 15.00% CARNIVAL -100.00% 0.00% 0.00% 5.00% CENTRICA 10.00% CENTRICA 18.61% 0.00% 0.00% 5.00% CENTRICA 100.00% 0.00% 25.00% 15.00% SKY 10.00% SKY (28.90%) 0.00% 25.00% 15.00% SKY -100.00% 0.00% 0.00% 5.00% BT GROUP 10.00% BT GROUP 1.61% 0.00% 0.00% 5.00% BT GROUP 0.00% 0.00% 0.00% 5.00% BUNZL 10.00% BUNZL 5.13% 23.35% 25.00% 15.00% BUNZL -100.00% 0.00% 0.00% 5.00% BRITISH LAND 10.00% BRITISH LAND (5.83%) 0.00% 0.00% 5.00% BRITISH LAND 100.00% 100.00% 25.00% 15.00% WEIGHTS(SUM) 100.00% Sum of Weights 100.00% 100.00% 100.00% 100.00% Sum of Weights 100.00% 100.00% 100.00% 100.00% EXPECTED RETURN 32.71% Expected Return 11.20% 15.83% 14.29% 29.00% Expected Return 94.62% 60.40% 45.23% 36.46% STANDARD DEVIATION OF PORTFOLIO 47.36% Std Dev 9.70% 14.12% 21.40% 41.21% Std Dev 353.00% 104.46% 78.43% 57.00% References Harvey, Campbell R., John C. 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