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Investment Portfolio for Standard Chartered Plc, Fidelity Capital & Income Fund, HSBC Balanced Fund - Statistics Project Example

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A portfolio is group of securities such as bonds, stocks, commodities, and derivatives where an investor invests his or her money to mitigate the risk of holding a particular asset through diversification.
Diversification of investment spreads the risk over many assets. The…
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Investment Portfolio for Standard Chartered Plc, Fidelity Capital & Income Fund, HSBC Balanced Fund
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INVESTMENT PORTFOLIO PROJECT Table of Contents Introduction 4 Portfolio Selection 4 Objectives and Asset Mix 5 Time Horizon 5 Identifying Holdings and Performance Evaluation 5 Standard Chartered Plc 5 Fidelity Capital & Income Fund 7 BHP Billiton Plc 8 HSBC Balanced Fund 9 Fidelity Blue Chip Growth 10 Barclays Plc 10 Justification for Portfolio Diversification 12 Macro-Economic Factors and Industry Analysis 12 Banking Sector 12 Oil and Gas Sector 13 Petroleum and Mining Sector 13 Diversification 13 Investment Theory 17 Investment Vehicle 17 Risk-Return Analysis 18 Capital Asset Pricing Model 20 Optimal Portfolio Construction 20 Conclusion and Recommendation 22 References 24 Introduction A portfolio is group of securities such as bonds, stocks, commodities, and derivatives where an investor invests his or her money to mitigate the risk of holding a particular asset through diversification. Diversification of investment spreads the risk over many assets. The concept of simple portfolio diversification is that some securities may not perform as anticipated but other assets might exceed in performance making the actual return of the portfolio reasonably close to anticipated return. Investing the entire sum of money in a single stock exposes the investor to the risk of that asset. So, in case when the price of that security falls in the market due to any reason, the investor will suffer huge losses (Hagin, 2004, pp.3-5). This, risk of concentration of money in a single stock is mitigated through diversification. Portfolio Selection The investor has a sum of £ 100,000 to invest into financial products such as debt, equity, derivatives or cash according to his or her choice. The objective of the portfolio is to achieve long term growth of capital. In addition to that, the fund aims minimising risk of capital loss through portfolio diversification. The portfolio will be monitored, analysed and reported upon over the chosen time horizon. The return of the funds is evaluated relative to FTSE shares. The fund management fee is assumed to be charged at 1.75% annually calculated on the total value of fund including cash position. The minimum and maximum number of holding allowed is 4 and 6 respectively. The strategy of the investor is to buy the stock and hold it for long term or at least three years, in expectation of long term capital appreciation. In order to mitigate the domestic gloom in the economy, few funds may be invested overseas in order to geographically diversify and earn benefits from emerging and developing markets. Objectives and Asset Mix The main objective of the portfolio is to get adequate amount of long term growth in income. In order to achieve this objective, substantial amount of the investment corpus should be put into equity class and fewer portions should be invested in debt instruments. This is because, while the equity will ensure long term capital growth for the investor through proper diversification, debt portion of portfolio will ensure fixed and stable income for the investor. Proper diversification will help reduce the overall portfolio risk by spreading stock specific risk into combination of securities. Time Horizon In order to evaluate the performance of the portfolio, sufficient time horizon should be chosen since the objective of portfolio is long term capital growth and not speculative trading. Keeping the objective of portfolio, a time horizon of three years will be chosen to evaluate the performance of the securities. It is also given that the portfolios are deemed to be in existence for the period starting from Friday 18th February to Friday 29th March 2013. Identifying Holdings and Performance Evaluation Standard Chartered Plc Standard Chartered plc is multinational banking and financial service providing company whose headquarter is in London, UK. The company has strong diversified distribution network of over 1700 branches including joint ventures, subsidiaries, and associates. Their operations are spread across over 70 countries and have a total manpower of 87,000. The main clients of the bank include financial institutions, corporate, and retail customers. It offers treasury services and universal banking to its customers. The main source of revenue of the bank comes from Middle East, Africa and Asia. It is also one of the constituents of FTSE 100 index. The company also has strong management team. Five Year Performance Graph (Source: Financial Times, 2013) The rationale for holding the stocks of Standard Chartered Plc in the portfolio is that the company reported consolidated revenue of $18.25 billion for the year ending 2012, creating a net profit of $4.99 billion. The total change in stock returns of the company changed 13.99% compared to 14.75% in FTSE 100 index. This means that the stocks of Standard Chartered plc are less volatile compared to market. The quoted price of the company was 1,668.00 as on April 10, 2013 on London Stock Exchange. Fidelity Capital & Income Fund The fund’s objective is to provide the investor with a combination of income and capital growth by investing in subordinated debt and equity securities. Rise in interest causes price of debt security to decrease and since the foreign market is volatile, it can also increase the risk of investor. Ten Year Performance Graph (Source: Fidelity, 2013) The risk of investment in this fund is that rise in the interest rates of bonds cause price of debt instruments to decrease. Also the stock markets, especially foreign markets, are very sensitive to regulatory, political, economic, and market developments. In such cases, the low rated bonds are more risky, since they face higher chances of defaulting. The quoted price of the company is 9.71 and the net yield of the fund is 5.25%. BHP Billiton Plc BHP Billiton is multinational petroleum and mining company whose headquarter is in Australia while the chief management office is in London, UK. According to a report in 2011, it was the largest mining company in the world in terms of revenues and third largest in terms of market capitalisation. Five Year Performance Graph (Source: Financial Times, 2013) The rationale for holding the stocks of BHP Billiton is that the company is a public company actively traded in London Stock Exchange and New York Stock Exchange. The company’s total revenue from operations for the year ending 2012 was over $72 billion and a net profit over $23 billion. The quoted price of the company was 1951.00 as of April 10, 2013 on the LSE. The change in company’s stock return during last one year was 2.45% compared to 14.75% in FTSE 100 index indicating that investment in the company is safe as the stocks are less volatile. HSBC Balanced Fund The fund is designed to provide the investor steady growth over long term. The fund invests in fixed interest securities, UK securities, international shares and cash deposits. The fund is suitable for investors who are looking for steady growth. The fund’s five year return is yielding at 29.88% while one year return is 10.06%. (Source: Trust Net, 2013) Five Year Performance Graph (Source: Trust Net, 2013) The rationale for holding the stock in the portfolio is that the fund has experienced over 13% annualised growth and is expected to perform better in the coming quarters. Fidelity Blue Chip Growth The objective of the fund is long term capital growth but it invests about 80% of assets in blue chip companies included in S&P 500. Such companies has market capitalisation of at least $1 billion. (Source: Fidelity, 2013) The rationale for holding this fund in the portfolio is to get secured capital growth by investment in blue chip companies. The risk of investment is that the stock markets, especially foreign markets, are very sensitive to regulatory, political, economic, and market developments. Barclays Plc Barclays plc is a leading banking and financial services providing multinational company which is headquartered in London, UK. It is public limited company and is traded as BARC on the London Stock Exchange (LSE). For the year ending 2012, the company reported total revenue over £24 billion with bottom line about £235 million. The company specialises in Investment banking, corporate banking and Wealth banking. Five Year Performance Graph (Source: Financial Times, 2013) Barclays is one of the largest and fastest expanding banks of UK. It has large market share in investment banking, credit card, business and retail banking. This helped the company to generate superior returns during booming period. After the global financial crisis Barclays has continued to focus on risky and high profile business through Barclays’ capital. The company has struggled to bring cost in line with revenues which is reflected from its bottom line. The company’s shares are performing below expectations due to the market wide controversy related to Libor scandal. The management of the company was completely reshuffled after the scandal. The company’s 52 week range is 148.2 to 330.05 and one year return is +31.35%. Justification for Portfolio Diversification The chosen portfolio of six securities is diversified into various sectors or industries including Banking, Financial services, oil and gas, petroleum and mining. Since all the securities in the portfolio are of multinational companies, it is important to understand the influence of macro-economic factors on the overall portfolio and how proper diversification will help to mitigate stock specific risk. Macro-Economic Factors and Industry Analysis Banking Sector Some of the macroeconomic factors influencing the multinational banking industry are exchange rate fluctuation due to operations in different currencies, global slowdown in demand for consumption, financial scandals such as the very recent Libor scandal that affected the stock prices of Barclays plc, regulatory norms such as government intervention, central bank’s policies, and FDI and FPI limits in the banking sector. These factors determine the movement of stock prices in the banking and financial services sector. For instance, if the government of subsidiary country opens up the economy and allows greater investment in the sector, the stock prices shows positive movements as people will buy more banking stock. This will raise the stock prices of the individual companies. In addition, capital outflow also depend on the interest rates of developed economies. Oil and Gas Sector Before selecting a portfolio of assets, an investor should assess the risk associated with the particular sector. For instance, some of the risks associated in the oil and gas sector are political risk (especially for MNC), geological risk (including oil exploration, extraction, and supply chain management factors), demand and supply shocks, huge initial investments often compels the companies to highly leverage their financial statements, and so on. Petroleum and Mining Sector It is a very unpredictable sector in terms of demand, price elasticity, and availability of raw materials, cheap labour, exploration opportunities, and various clearances (like environmental and FDI). Diversification From the above discussion it can be said that a portfolio of securities should always be selected after evaluating the qualitative and macro-economic factors. These factors are uncontrollable and are also known as market risk. It can be measured quantitatively by analysing the stock price volatility and comparing it with aggregate market volatility. This is given by beta which calculates the market risk associated with the company specific stocks. Diversification of investment spreads the risk over many assets. The concept of simple portfolio diversification is that some securities may not perform as anticipated but other assets might exceed in performance making the actual return of the portfolio reasonably close to anticipated return. Investing the entire sum of money in a single stock exposes the investor to the risk of that asset. So, in case when the price of that security falls in the market due to any reason, the investor will suffer huge losses. Fidelity Capital & Income Fund The Sectoral Diversification of the fund as on February 28, 2013 is as follows: (Source: Fidelity, 2013) Country Diversification (Source: Fidelity, 2013) Currency Diversification The fund also diversifies the currency by investing about 99.56% in to US dollar, 0.23% into Euro, and 0.21% into Canadian dollar. HSBC Balanced Fund The fund invests into different asset classes including UK equities, international equities, Gilt funds, and Money market instruments at different percentages of total portfolio as shown below: (Source: Trust Net, 2013) The fund can also be classified according to regional investment. About 67.82% of total portfolio is invested in domicile country which is UK while 27.50% of portfolio corpus is invested into international securities and remaining 4.68% is invested into Money Market Securities. Fidelity Blue Chip The Sectoral Diversification of the fund as on February 28, 2013 is as follows: (Source: Fidelity, 2013) Country Diversification The fund invests almost 92.47% of corpus in United States Blue Chip companies and the remaining is invested in Canada and Netherlands. Currency Diversification (Source: Fidelity, 2013) Investment Theory Investment Vehicle The objective of the portfolio is to get adequate amount of long term growth in income. In order to achieve this objective, substantial amount of the investment corpus should be put into equity class and fewer portions should be invested in debt instruments. This is because, while the equity will ensure long term capital growth for the investor through proper diversification, debt portion of portfolio will ensure fixed and stable income for the investor. In addition to that, the fund aims minimising risk of capital loss through portfolio diversification. The portfolio will be monitored, analysed and reported upon over the chosen time horizon of three years on or before the portfolio inception date. The return of the funds is evaluated relative to FTSE shares. Risk-Return Analysis The investor should be given the option to analyse various degrees of risk and then allocate money accordingly. The combination of assets in which the return is greatest for a given level of risk or conversely, the combination of assets which minimises risk for given return should be chosen as the optimum portfolio. The risk free rate is obtained from the following table that provides details of UK benchmark yields: (Source: Financial Times, 2013) The various tools used by the fund managers that measure risk of volatility includes: Beta- It measures the sensitivity to market movements. The bench mark index has a value of 1; funds with Beta>1 are aggressive funds meaning that these funds fluctuate more when benchmark changes by one percent. Similarly, funds with Beta Read More
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