Investment and Portfolio Management - Essay Example

?Investment and Portfolio Management Introduction Philip Capital is a charity oriented UK fund that was well managed in the past. The fund was established in the year 2006 with the primary focus of utilizing the value generated by the fund for meeting the university and school fees of children. But the market is not the same as it was in 2006. It has gone through a tough face since the last 5 years of its establishment. The portfolio has been altered and re-altered many times in the past by the managers. As of January 1, 2011 the fund holds ?22.5 million in assets. It was spread over a portfolio of 20% in UK equities, 30% in overseas equities, 25% in overseas corporate bonds, 15% in UK government bonds, and 10% in cash and short term instruments. Market has many economical and political events affecting the investment environment. What has happened in 2009 was not what awaited the market in 2010. Similarly, market has something else to happen in 2011. Though this cannot be predicted by anyone, cues can be made from the past and current investment environment. The present portfolio of Philip Capital needs be altered for making the best use of investment environment in 2011. This report will give a strategic insight into the current investment environment. Based on that the current portfolio of Philip Capital will be analysed and action plans will be set for the fund’s future direction. Current investment environment 2011 is going to be a challenging environment for investors all over the world. Specifically, investors with a global portfolio will have more factors to consider in 2011 that what they did in 2010. If it was economical challenges that affected the market more in 2010, 2011 is going to be a blend of political, economical and environmental issues. All the three factors having almost equal impact on the market. One past strategy that Philip Capital has to consider in the future too is Going Global on its investment. Before getting into the other strategies, some of the challenges and opportunities in the present and for the future markets can be analysed. Political issues: Political issue is one of the most impacting factors for the world markets in the beginning of 2011. It still impact on the market movement and will have it for long until a better solution is found for the same. The political turmoil in Libya is one of the most crucial among them. Asian markets were one of the most performing ones in the year 2010. The political unrest in Libya has casted a significant impact on the performance of Asian markets. “Asian currencies completed a weekly decline, led by the Taiwan dollar and South Korea’s won, as an uprising in Libya pushed up oil prices and sapped demand for emerging-market assets.” (Teso, 2011) Due to the serious political unrest in Libya crude oil climbed at a higher rate to $103.41 a barrel. This lead to fall of many Asian stocks as investors withdrew much higher than before. The situation impacted the currency market more than the stocks. It is very much evident that crude oil prices are one of the most important elements of market movement. Many developing nations’ market, especially in Asia is highly depended on the crude oil prices. Therefore, the future of Libya crisis is one of the most important concerns for investors across the world. Environmental issues: One of the greatest environmental factors that had affected the market recently is the earthquake in Japan. The fact that Japan is the world’s third largest economy will make the impact even worse. “The most direct impact is likely to be seen in Japanese exporters, like Honda, Toyota and Sony, whose production facilities will face disruption in the coming days.” (Schlesinger, 2011) Apart from the impact on major Japanese Automakers, the earthquake will impact the liquidity of many insurance companies. All largest insurance companies in Japan will be impacted heavily as they will now have to fund the insurers. As Japan is one of the largest economies in the world, big companies from across the world have significant business interest in Japan. The earthquake will definitely cast an impact on the profitability of all these companies. The after effects of the earthquake will also cast shadow on the commodity markets in the coming months. The fact that the quake led to nuclear power plant leak will make the situation even worse. “Steel, copper and zinc production warrant the closest examination based upon Japan’s market share for each of those three metals.” (Reisman, 2011) Japan’s JFE and Nippon Steel are among the world’s largest steel producers. Undoubtedly, the quake will have an impact on the world steel production. In terms of copper, though Japan is not among the largest producers, it is among the top in terms of Smelting Capacity. Since the quake has impacted few copper smelting companies in Japan, Copper will also be hit. Zinc prices will also be impacted for a while as Japan’s largest Zinc producer will be closed down for maintenance until May 15. Continuing European debt crisis: The continuing debt crisis in Europe is another fear factor for the market ahead. This is one factor that directs the investors from the UK market towards the developing countries. Market analysts are still not confident about a quick recovery in the region. The eurozone leaders have introduced various packages for the recovery of the economy. Euro Zone situations will be worsened due to the unrest and chaos in major oil producing countries. The unrest in oil producing nations is leading to price surge on oil prices. This means that the already cash stripped region will have to pay more for meeting their oil requirements. (Ames, 2011) Alternatives for strategic asset allocation The previous section had given an outlook on the various issues that the market will face in future. The future strategies of Philip Capital should be taken with utmost consideration of the above factors. Based on the above situation Philip Capital should make the three strategic investment decisions. They are Countries to invest, Instruments to invest and Sectors to invest. Countries to invest: This is one of the most important strategic decisions that Philip Capital should make. Based on the macro investment environment, it can be seen that better returns can be offered by developing nations. As per the economic outlook of the various regions it can be said that China and India are the two main growth power of the future. Compared to every other regions and economy, China and India is expected to face less risk in the coming days. Moreover, the immense potential and higher growth rate of the two nations offer a sure shot for all investors. “The world’s top economists collectively expect China and India’s economy to grow by 8.9% and 8.6% respectively in 2011, according to a new poll from The Economist magazine.” (Sagami, 2010) Most of the other developing Asian economies except Japan are also expected to offer better growth rate. Japan economy was badly hit and was at a very slow phase. The earthquake and tsunami that hit Japan recently has made the situation even worse for them. It is also seen that the oil price is surging at a higher rate. This is giving positive sign for the economy of major oil producing nations. “Asian stocks rose for a second day as oil climbed after the U.S., U.K. and France launched airstrikes in Libya, Japan made progress in tackling a nuclear crisis, and amid signs a U.S. economic recovery is strengthening.” (Raja, 2011) Instruments to Invest: This is the second major strategic decision to be made by Philip Capital. The various instruments for investing consist of Stocks, Bonds, Commodities, Stocks funds, bond funds and commodity funds. While formulating this strategy the risk and return aspects should be kept in mind. Funds should not be allocated more to the safe instruments as better returns cannot be expected there. Similarly, it should not be too aggressive as and prone to volatility. (Leitz, 2011) In terms of commodities, Gold has given a better return on investment for the investors in 2010. Gold was up 25% in the year 2010. Considering the overall economic outlook and the trends of gold buying by various nations, the yellow metal is expected to give better returns in 2011 as well. Therefore a considerable amount of investments can be made in gold and gold ETF’s. (Barisheff, 2011) Silver too is expected to rise for the year 2011. Silver has grown at a rate higher than that of gold in the year 2010. Silver is used greatly for industrial purposes. As the industrial output of major nations are expected to rise, silver will offer better returns in 2011 too. Philip Capital should have a considerable portion of investments in stocks too. Emerging market stocks will perform better in the year 2011. It is better to stay away from metal stocks mainly Iron and Copper as the tsunami in Japan has impacted the production and thereby the future price uncertainty. Stock investments should mainly be on India and China. In India and China too, it is better to avoid metal and oil stocks as these would be affected by oil and metal price rise in the world markets. Sectors to invest: The sectors to invest are the final strategy among the three. In India, the best sectors to look for in 2011 are auto, banking, hospitality, IT and paper sector. Auto sector is the fastest growing among them. (Articlebase, 2011) Companies that produce auto ancillary products are better investment options for 2011. Indian IT companies are also at a high growth pace. Indian IT companies had made huge hiring in the recent months. In China, the best stocks to pick up are from the infrastructure segment. Alternative strategies for investments Based on the above analysis, the following alternatives are available for Philip Capital. Alternative 1: Moderate Asset Percentage Equities   India 15 China 15 UK 20 Debts   UK Corporate Bonds 5 China Government Bonds 10 Singapore Government Bonds 15 Commodities   Gold 10 Cash and Cash Equivalents 10 Alternative 2: Aggressive Asset Percentage Equities   India 25 China 25 UK 15 Debts   China Government Bonds 10 Singapore Government Bonds 10 Commodities   Gold 10 Cash and Cash Equivalents 5 Alternative 3: Conservative Asset Percentage Equities   India 15 China 15 UK 10 Debts   UK Corporate Bonds 5 China Government Bonds 15 Singapore Government Bonds 10 Commodities   Gold 20 Cash and Cash Equivalents 10 Recommendations Based on the analysis the above three are some of the alternative strategies for Philip Capital. All the three portfolios have their own unique nature. The first strategy is moderate as it has equal distribution of equity and other instruments. The second strategy is aggressive in which the percentage of equity is higher. The third strategy is mainly aimed at risk reduction. On a growth perspective, alternatives 1 and 2 are the best for Philip Capital. Philip Capital should still make a decision about where they should make and active investment and where they should make a passive investment. Generally speaking a passive strategy is useful when the broader market is expected to perform well compared to performance of individual stocks or sectors. In the UK equity market, which is quite unpredictable at present, it is better to adopt active strategy. For India and China the company can be passive as well as active. Conclusion The report has given a deep insight into the current issues in investment environment. Investment environment will always be prone to some challenges. The winners are those who come out of such challenges successfully. In terms of Philip Capital, the challenge is a volatile and unpredictable market situation. Based on the analysis of the market conditions, Philip Capital can adopt the two strategies that are mentioned in the previous section. The existing portfolio of Philip Capital has more than 50% of exposure towards UK equities and debts. This percentage is reduced in the two recommended portfolios because the UK market is not expected to perform well in 2011. Philip Capital will thus have a better return on investment from the new portfolio. Works Cited Yumi, Teso (2011) Asian Currencies Post Weekly Decline on Libya Political Turmoil. [Online] Available at: http://www.businessweek.com/news/2011-02-26/asian-currencies-post-weekly-decline-on-libya-political-turmoil.html [Accessed 21 March, 2011] Jill, Schlesinger (2011) Japan Earthquake: Economic and Market Impact. [Online] Available at: http://moneywatch.bnet.com/economic-news/blog/financial-decoder/japan-earthquake-economic-and-market-impact/3390/ [Accessed 21 March 2011] Lisa, Reisman (2011) The Japanese Earthquake’s Impact on Global Metal Markets. [Online] Available at: http://oilprice.com/Metals/Commodities/The-Japanese-Earthquakes-Impact-on-Global-Metal-Markets.html [Accessed 21 March 2011] Paul, Ames (2011) Europe’s Debt Crisis Festers out of Spotlight. [Online] Available at: http://www.globalpost.com/dispatch/news/regions/europe/110304/europe-debt-crisis-middle-east-unrest [Accessed 22 March 2011] Tony, Sagami (2010) Why Investing in Asia in 2011 is a No-Brainer. [Online] Available at: http://www.marketoracle.co.uk/Article25207.html [Accessed 22 March 2011] Shani, Raja (2011) Asia Stocks Rise on Libya Oil Impact, Japan Nuclear Progress. [Online] Available at: http://www.businessweek.com/news/2011-03-21/asian-stocks-rise-on-libya-oil-impact-japan-nuclear-progress.html [Accessed 22 March 2011] James, Leitz (2011) Where to Invest Money in 2011. [Online] Available at: http://ezinearticles.com/?Where-to-Invest-Money-in-2011&id=5598410 [Accessed 22 March 2011] Nick, Barisheff (2011) Gold Outlook 2011. [Online] Available at: http://www.financialsense.com/contributors/nick-barisheff/gold-outlook-2011-irreversible-upward-pressures-and-the-china-effect [Accessed 22 March 2011] Articlebase, (2011) Top Sectors to Invest in 2011 From Indian Stock Market. [Online] Available at: http://www.articlesbase.com/investing-articles/top-sectors-to-invest-in-2011-from-indian-stock-market-4131309.html [Accessed 22 March 2011] Read More