Bloomberg Terminal Risks Analysis - Essay Example

? Bloomberg Terminal This study will illustrate the relationship between four sample Bloomberg funds from four markets. The empirical portion of the study will include calculations by the Sharpe and Treynor performance indicators for each of the sample funds. The data sample is drawn from annual returns from chosen funds from 2009 to 2012. The study will estimate average return and risk indicators; and determine possible performance indicators for each fund. Lastly, an individual investment case study is developed based on chosen personal risk preferences. The case study will include an assessment of subsequent investment preferences and expected financial status upon completion of studies at the University of East London (UEL). Table of Contents Brache, A. (2008). Nine variables affect innovation within today's Enterprise Model. Tooling & Production. The Free Library. Nelson Publishing. Retrieved from http://www.thefreelibrary.com/Nine+variables+affect+innovation+within+today%27s+Enterprise+Model.-a0173644126 16 Value Click. (2013.) Book-To-Market Ratio. Investopedia US. Retrieved from http://www.investopedia.com/terms/b/booktomarketratio.asp#axzz2JE9l3c9G 17 1. Introduction Bloomberg provides the financial world with news, analytics, and financial data through several indices. After reviewing goldmines of financial data, investors must ultimately choose where to spend. Consistency during periods of recession is a string indicator of the health of most funds. Implementation of sustainability programs exist to ensure the long run success of the operations. This is considered true by Fiksel in his study of the strategies employed by top international corporations to attain superior business performance (Fiksel, 1999). According to Alan Brache, 9 variables affect strategy: knowledge management, human capabilities, organizational structure, business processes, issue resolution, culture, leadership and progress (Brache, 2008). Since shareholders know only what is reported to them, concerns about how the business should operate are written. The shareholders assume the agency is operating according to the specifications of the business relationship. When this is not the case, agency costs arise. United States government regulation of stock trading by the SEC is a preventive measure in an industry plagued with fraud. Only the strong survive in the bull and bear markets. Investors must acknowledge the proper protocol of investing which consists of due diligence and research before making investments. In the context of investing, due diligence is defined as ‘the process by which a potential investor obtains a sufficient understanding of a business to enable him to take an informed decision on investing in that business’ (Business Week, 2012). Beyond the recession from 2007 to 2009, the saga of financial turmoil for agencies in the United Kingdom continued. On April 20, 2010, an explosion in the Gulf of Mexico released British Petroleum (BP) oil all over the Gulf of Mexico. The incident made history as the largest accidental oil spill (New York Times, 2012). Enterprise Risk Management Risk is a reality that exists in every aspect of business. Risk velocity is the rate of speed that the risk can appear and begin to develop (Steinberg, 2011). The risk appetite represents the amount of risk the company can afford to accept. Risk velocity must constantly be offset. Key Risk Indicators (KRIs) affect the speed with which risk management can control risk issues (Steinberg, 2010). The fundamental concepts of ERM work together to strategize against risk through objectives. Prevention is of major focus. Setting objectives and following through is the first strategy. The following lists key ERM fundamental concepts (Flaherty, 2004): An on-going process Effects every level of the organization Applied in strategy setting at every level of the organization. A portfolio view of risk Risk identification and management within risk appetite Provide assurance to management, stakeholders, and board of directors Meet objectives in overlapping categories If the plan succeeds in managing risk and reducing legal liability, everyone will see an increase in growth and innovation. The Sharpe indicator is more reliable indicator as it takes into account all the risk involved in a particular investment while Treynor indicator only represents the market risk. Background After World War II, the European Economic Community (EEC) was created. Its purpose was ‘to foster economic cooperation: countries (would) become economically interdependent and more likely to avoid conflict’ (Europa, 2012). From the EEC, the European Union was born in 1993. Conscientiousness of limitations to trade had begun to inspire legislators to come together and take control. The European Currency System started the currency consolidation process with the ECU. However, by 2002, many European countries continued to use their local currencies. Germany used the Mark, France - the Franc, and Italy - the Lira. The Euro originated in 1999 as a European form of electronic currency. In 1999, the following European countries adopted the Euro as the official currency: Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland (Europa, 2012). By 2002, the European Central Bank had structured the Euro and it became the official, physical unit of tender; consolidating the currencies of 12 European countries (Euro, 2012). Definitions Average Return - is defined as ‘a measure of an investment's profitability. It is figured by total net earnings divided by the number of years the investment was held, then by the investments’ initial acquisition, to derive the annual income rate’ (All Business, 2013). A Balanced Fund - is defined as ‘a mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds is to provide a single mutual fund that combines both growth and income objectives, by investing in both stocks - for growth, and bonds - for income’ (Investor Words, 2013). Bloomberg - is defined as ‘A major global provider of financial news and information that is available 24 hours a day. The information includes real-time and historic price data, financials data, trading news and analyst coverage. A subscription includes professional analytic tools” (Investopedia, 2013). The Bloomberg Terminal – is defined as ‘an integrated platform that streams together price data, financials, news, trading data, and much more to more than 250,000 customers worldwide’ (Investopedia, 2013). A Bond Fund - is defined as ‘a fund invested primarily in bonds and other debt instruments. The type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities’ (Investopedia, 2013). An Emerging Market Fund – is defined as ‘mutual fund that holds mostly investments in developing nations or companies that earn the majority of their revenue from the sale of goods and services in those countries’ (Business Dictionary, 2013). An Equity Income Fund - is defined as a ‘mutual fund which seeks high dividend income and future growth incomes by investing largely in equity securities’ (Business Dictionary, 2013). Table x-1 Fund Types Type Definition Example Bloomberg ticker Bond funds Invested primarily in bonds and other debt instruments AMP Capital Australian Bond Fund AMPACB:AU Equity Income funds 65% of its assets in income producing equity securities Affirmative Equity Fund for Charities AFEQCHI:LN Balanced funds A mutual fund that buys a combination of stocks and bonds Architas MA Active Reserve Fund AMARANI:LN Emerging market funds Mutual fund that holds mostly investments in developing nations Wasatch Emerging Markets Small Cap Fund WAEMX:US 2. Quantitative Analysis To analyze quantitative data, measures of central tendency, mean, median, mode, measures of variability-standard deviation and variance, Chi square, t-tests of difference between means, and ANOVA are used. Data Sample Selected Companies: Schroder Standard Life Aberdeen Liontrust Pimco Western Asset AGG BND Fidelity Holland MFS Lazard Oppenheimer Period: Fiscal Years 2009 - 2012 Variables: Return Risk Sharpe Indicator Treynor Indicator Beta Annual Management Fee Front Load Fee Minimum Investment Data Analysis To determine the financial health of an agency, financial ratios are formulated to present a current portrait of profitability. The ratios are useful to compare against past performance and to other companies. Most importantly, it provides forecasting information which gives the agency an idea of where the organization will be financially, in the future. The operating expense ratio is an analysis of the agency’s bills; how much it costs to perform daily operations. During periods of recession, the costs of operating a business rise. It costs more to run the business, to borrow money, and to try new investment opportunities. The following ratios were compared between organizations for both periods include: Market Capitalization Costs of equity Asset Turnover Ratio Free cash flow Operating expense ratio Costs of debt The market capitalization provides a current outlook of where the agency is financially in the market. “Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures” (Value Click, 2013). To determine the expected growth of the companies’ shares next year, an average was taken of the Market Value for 2007 and 2009 for each year. The book-to-market ratio ‘identifies undervalued or overvalued securities by taking the book value and dividing it by market value’ (Value Click, 2013). The comparison of investments considered areas of operations, practices, and technological advantages as well as the financial statements. According to the AASB paragraph 118: “An entity shall disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets: (a) Whether the useful lives are indefinite or finite (b) Amortization methods used for intangible assets with finite useful lives; (c) Gross carrying amount and any accumulated amortization (d) Line item(s) of the statement of comprehensive income in which any amortization is included; (e) A reconciliation of the carrying amount at the beginning and end of the period showing” (AASB, 2009). Average returns and risk indicators for the sample funds: Table x-2 Stocks YEAR SCHRODER STANDARD LIFE ABERDEEN LIONTRUST 2009 0.1694 0.2612 0.4115 2010 0.1181 0.1526 0.1581 0.3611 2011 -0.0263 -0.0825 0.0106 0.0786 2012 0.1364 0.1514 0.0709 0.2214 RETURN 0.0994 0.120675 0.079867 0.26815 RISK 0.086447 0.144903 0.074158 0.149782 SHARPE 1.092 0.798293 1.00956 1.75689 TREYNOR 0.14704 0.1662 0.109294 0.443761 BETA 0.642 0.696 0.685 0.593 M.FEE 1.50% 1.50% 1% 1.75% M.INVE ?1,000 ?500 ?1M ?2,500 Table x-3 Bonds YEAR PIMCO WESTERN AGG BND 2009 0.135 0.2553 2010 0.0852 0.1168 0.063084 0.061444 2011 0.0386 0.0646 0.075562 0.077928 2012 0.1004 0.0824 0.037204 0.038457 RETURN 0.0898 0.129775 0.058617 0.059276 RISK 0.039992 0.086443 0.019565 0.019825 SHARPE 2.195457 1.478146 2.893725 2.889157 TREYNOR 0.092518 0.158924 0.060617 BETA 0.949 0.804 0.934 M.FEE 0.50% 0.40% M.INVE US$1000 US$0.00 Table x-4 Balanced Funds YEAR FIDELITY HOLLAND MFS 2009 0.2805 0.175 0.3026 2010 0.1376 0.0494 0.1398 2011 0.0168 0.0385 0.0513 2012 0.129 0.106 0.1319 RETURN 0.140975 0.092225 0.1564 RISK 0.108076 0.062615 0.105351 SHARPE 1.285897 1.440955 1.465582 TREYNOR 0.219203 0.149132 BETA 0.634 0.605 M.FEE 0.41% 0.75% 0.65% M.INVE US$2500 US$1000 US$1000 Table x-5 Emerging Market Funds Year LAZARD OPPENHEIMER 2009 0.6982 0.8173 2010 0.2281 0.2698 2011 -0.1775 -0.181 2012 0.2236 0.2085 RETURN 0.2431 0.27865 RISK 0.358062 0.410861 RISK FREE 0.002 0.002 SHARPE TREYNOR 0.264945 BETA 0.879 MIN INV US$1 000 M.FEE 0.79% 3. A Case Study Student B has graduated from the University of Money Matters. Currently, Student B lives at home with her parents, has $240 in a savings account, and $50,000 in student loans at a fixed rate of 3% for 5 years. After the 5 years, the loan interest rate will increase to 4.5%. Student B would like to purchase a small townhouse, make payments towards the student loans, and enter the Master’s Program at the University. Student B should first be concerned with the debt. Since the student loan interest is relatively low for the first 5 years, an ample payment plan would be the first step. Second, the Master’s program is going to generate more debt. While paying off the student loans, Student B can invest in a mutual fund account to save for the Masters to eliminate starting all over again with the loans upon graduation. Second, the savings account is a great idea, however student B could switch the low yield savings account for another fund account which will compound the $240 much more quickly than the average savings. Thirdly, student B would like to purchase a town home and leave the nest. Renting is no a sound investment in the long run, however, student be is not financially stable enough to maintain a mortgage. Again, the student loans should precede this move in importance. A better option is to find a townhouse with a lease purchase option – the middle ground between buying and renting. In the long run, all monies invested in the townhouse will be not be lost if Student B buys or leaves at the end of the lease. The choice of funds for student B include a semi aggressive mutual fund and an alternative fund to the low yield savings. Since this is the start of a new portfolio student B should try passive investing, picking her own accounts rather than using a broker or paid consultant. The following funds were chosen for student B’s first portfolio: To save for the Masters, student be will go with the College Counts 529 Fund. The fund is available to any United States citizen or resident alien over the age of 19. The maximum contribution is $350,000 with no limit for automatic contribution deductions. That’s $5,000 per year single. If student B marries the limits are increased to $10,000 per year. The American Chartered Bank offers an HAS account without the excessive fees. The accounts chosen for student B are College Counts 529, (apply through Alabama) HSA account, American Chartered Bank 4. Conclusion Economic trends have a profound effect on the growth or decline of most markets. Offering public stock, trading NASDAQ shares or Wall Street is not for everyone. Besides knowing what you are doing, you have to have money. Equity Crowd funding allows a group to absorb the risk rather than one company or partnership. Investors can stand a percentage of the risk as a group than as one corporate entity. Therefore, Equity Crowd funding allows smaller players into the game under an umbrella. Equity Crowd funding sells small amounts of equity to many investors. This form of crowd funding invests in NASDAQ IPO’s in groups and allows smaller investors into the game. Although many exchanges are capable of hosting IPO sales, the NASDAQ exchange is by far the most popular for Equity Crown Funding. The purpose of due diligence is to minimize investment risk. While some discount the need for it and use their own intuition instead, others realize the vulnerability is real. It has become so ingrained in the investment chain of events that due diligence is being outsourced as a service. Some company’s use attorneys to review the prospective deals, especially where Equity Crowd Funding is used because an entire group is subject to risk. “Because of the regulations involving an IPO and getting registered with a stock exchange, most companies hire attorneys. These firms have extensive experience in securities law and most are nearly as old as the New York Stock Exchange if not older” (Business Week, 2012) . The cost of the outsourcing, distributed across the group makes otherwise unaffordable ventures possible for the little guy. However, even with Equity Crowd funding, the same protocol applies, even though the risk is divided amongst the crowd. Bibliography AASB. (2009). AASB 138 Intangible Asset. The Australian Accounting Standards Board. P. 118-128; The Institute of Chartered Accountants in Australia. All Business. (2013). Average Rate of Return: Definition. Retrieved from http://www.allbusiness.com/glossaries/average-rate-return/4943129-1.html Bayer Pharma: About us/Corporate Profile. (2012) Bayer Health Care Pharmaceuticals. Retrieved from http://www.bayerpharma.com/en/company/about-us Biogen Idec: About Us: A Biotechnology Pioneer. (2012) Biogen Idec. Retrieved from http://www.biogenidec.com/about.aspx Biogen Idec: Financials: Annual Report. (2011) Biogen Idec. Retrieved from http://www.biogenidec.com/Files/Filer/USA/ar2011/financials on Biogen Idec: (2012). Biogen Idec: Investors: Balance Sheet. Retrieved from http://www.biogenidec.com/fundamentals_balance_sheet.aspx?ID=6036. Brache, A. (2008). Nine variables affect innovation within today's Enterprise Model. Tooling & Production. The Free Library. Nelson Publishing. Retrieved from http://www.thefreelibrary.com/Nine+variables+affect+innovation+within+today%27s+Enterprise+Model.-a0173644126 Business Dictionary. (2013). Emerging Market Fund: Definition. 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Retrieved from http://www.investopedia.com/terms/b/booktomarketratio.asp#axzz2JE9l3c9G Read More