Actuality of TRUST2 Home - a New Financial Product in the UK - Case Study Example

Academia Research d 15th November 2009 TRUST2Home- a New Financial Product in UK Abstract With a view to restore the confidence and trust of UK investors who faced great losses during last credit crisis on account of the sub prime lending and failure of Northern Rock Bank, TRUST2 HOME fund has been launched in UK. The main feature of the fund is to invest fund money in govt backed securities and real estate funds in foreign real estate trusts in emerging markets to get security, trust, and good returns. The fund will be marketed in UK with the support of full throttled promotion, advertisements, and network channel support. The fund will be of medium duration and enable UK investors to finance their dream homes for their young children when they grow matured. Contents: 1. Introduction 2. Situation Analysis 3. Product 4. TRUST2 Home 5. International Investors in Indian Real Estate 6. Money Market- Global Scenario 7 Credit risk 8 Interest rate risk, 9 Target Market of TRUST2 10 Well defined Target Focus 11 Marketing Expense Budget of TRUST2 12 Pricing Strategy 13 Brand Advertisement, Promotion and Communication 14. Product Life Cycle of UK Real Estate Market 15. Product Life Cycle 16. PEST analysis 17. Conclusion TRUST2 Homet- a New Financial Product in UK Introduction In 2003 and 2004, accounting irregularities in mortgage finance companies Fannie Mae and Freddie Mac grabbed the attention of every one in the world. The failure of Northern Rock in UK has shaken the public confidence in financial markets.Sub prime lending killed many homes dreams in US and UK. Global recession has turned many financial institutions and programmes in doldrums. Stability in the financial market is lost. Investors have become shaky about hazy dealing from financial institutions. Situation Analysis If the private sectors are to rebuild that confidence and trust, they must have transparency, respect and integrity. They must be central to the development of a successful and trustworthy brand in financial services. These values need to be introduced at the macro level. Sufficient confidence has to be built among customers that the banks have quality capital and that they can absorb the losses incurred in course of operation. Insurers must have the capacity to support liabilities. There is urgent need for sound back up by reliable institutions preferably government to all risk plans and transactions. Protection must come from the government through stable financial system. Products launched in the financial segment need scrutiny and approval by the authorities. Only then confidence of public and investors can be restored and stability can be promoted in the financial market. This can be more effectively done by the single institution of Government. FSA is on the work to strengthen and rebalance regulations that were lost in between so that lost confidence is restored in the financial system. Sam Fleming, November 1,2007, Daily Mail, Credit crisis 'could cripple UK economy' Product Keeping the above scenario in the mind there is need for opening such business fronts wherein investors have confidence, trust and reliability. Money market mutual funds have such face to restore the investors' confidence if backed by government. The industry represents a multibillion-dollar investment segment. Money market accounts are popular alternatives to CD's, short-term bonds, and savings accounts. This is possible by competitive yields, daily access to the money, and a sense of safety and stability that a money market provides. Money market funds offered by the top banks and brokerage houses are also not immune to a loss in value or liquidity but they can present a better picture. Banks in the money market plan use the depositors' money in buying a large pool of very short term bond including, government bonds, corporate bonds, or municipal bonds, which are more secured. True money market funds are not a common saving account but a mutual fund. Money market funds try to maintain a stable share price or the net Asset value of $1 per share to help investors form appositive view of stability in the fund. Money market fund provides a positive sense to bear risk. FDIC insured money market accounts are far more secure. Investors should have confidence that their investments are covered. Such insurance backed money market funds try to maintain a stable share price as net asset value. The main source of loss that a money market fund incurs is buying bonds of a loss making company. Government must back up such investments through some insurance or guarantees to compensate the loss through this avenue. This is only way to restore the confidence of investors in risk ravaged market of UK. Generally a money market fund gives higher interest rates to investors and remain competitive to bank's offer of their premium product 'High Yielding saves Account' Money market Funds can offer high return because they can spread their investments in a variety of money market instruments and maintain a diversified portfolio. Money market funds in order to be appealing and attractive have to incorporate certain features of capital security, flexibility in investment,, liquidity, stability and competitive money market return , tax exempt money market funds, and higher interest rates offering. Economy Watch, www.smartmoney.com In today's market of UK wherein the investors' confidence has shaken up badly by Northern Rock's downfall money market fund has to concentrate more on capital security and liquidity to make it more popular. Government Business understanding money market funds, www.governmentbusiness.co.uk /content/view/2069/1) visited 0n 13th Nov.09 The Association of British Insurers (ABI) supports this type of proposals for a new category of money market fund with protection of capital as its main objective. Instruments such as bank deposits, certificates of deposit and commercial paper can be permitted to be included in this fund. Asset-backed securities would be excluded that tend to create problems. TRUST2 Home TRUST2 Home is the brand entity we have designed to restore the confidence of UK public that was shattered during the last real estate bust. The fund will provide security and return both. The fund will take care of the public urge to have more than one house. This sentiment was shown prominently during last real estate boom when everyone tried to borrow funds from banks to finance for a new home. The fund came easily from bank like Northern Rocks at very low terms resulting in proliferation of homes in the UK market. Later there came a bust in the market disabling many borrowers to default their payments sinking the bank and leading to foreclosure of homes. This fund of TRUST2 Home will revive back the old sentiment. UK public will be motivated to invest in the fund which is medium term fund aimed at UK public to build a separate new home for their children when they grow. The fund will have a corpus of British pound one billion. A part of funds will be invested in short term municipal funds that are generally tax free. This will edge over the bank accounts that can't provide this facility. Parking money in Government Treasury Bills, bonds and other securities though taxable but more secure. Short term corporate debts can be risky on account of defaulting. Trust2 will provide greater flexibility on withdrawing the money by investors in emergency. The best money market funds offer the best interest rates. With this view Trust2 will provide higher interest rate thanks to its investment in high yielding portfolio. A part of the fund will be invested in Indian real estate will fetch better returns to enable them to offer this opportunity. The fund will invest partially in debt instruments of firms that develop real estate, commercial properties and malls. The fund will prefer to invest real estate companies of repute that primarily aim to invest in residential properties not only Britain but also in other promising parts of the global economy where real estate assumed importance in recent days such as Indian market. Since the real estate industry in UK is in bad shape it would be wise to invest in emerging markets like India where the industry is flourishing and need a huge capital to built up the real estate and fulfil the demand. The investment of the fund will seek maximum real return consistent with prudent investment management. The fund will partially invests in real estate-linked derivative instruments backed by a portfolio of inflation-indexed securities and other Fixed-Income Instruments. It may invest up to 20% of total assets in securities denominated in foreign currencies and may invest beyond this limit in U.S. dollar denominated securities of foreign issuers. The fund may also invest up to 10% of total assets in preferred stocks. Trust2 Funds Plan: Net Asset Value of the fund will be $632 million, expected year to-date Return to be 35%, minimum yearly investment $10,000, duration of investment for 10 years. International Investors in Indian Real Estate The real estate market in India is getting matured day by day as large and international people are taking part. The market is open to international investors. Morgan Stanly - one of the world's best banks has recently invested Indian real estate. According to the latest report real estate segment is the biggest investment avenue in India... India real estate is improving in real estate development, township construction planning and luxurious apartment. Real estate development market boom is spread across the country' The economy has managed to grow faster each year because of increasing real estate market trend. There is constant demand for residential properties, commercial properties, and shopping Malls. The return on real estate in Indian investment is one of the highest and suits foreigners who want to buy properties here or simply put money for investments. The boom in real estate market in India is supported by the growing purchasing power of Indian people, presence of a large number of fortune 500 companies in the country that creates confidence among investors from abroad. Real estate investment in India yield huge dividends, Indians abroad have proved their credentials to deliver the best recent approval by the government of India to 100 percent FDI in real estate attracted big investments in India from abroad in this segment. Money Market Global Scenario Mutual fund industry in both US and Europe has been a great performer. Till 2001 we have got a record availability of $11.7 trillion worth assets that were held by the prominent mutual funds in 60 countries. This was about 17% of the estimated primary securities in their respective national markets. The performance history of many successful funds indicates that the countries where funds would prosper were those where laws and regulations make this sort of investment attractive to investors, where protecting investor rights was possible. The countries with the maximum of the global fund industry were the U.S with 60%, Luxembourg with 6.5%, France with 6.1%, Italy with 3.1%, and Japan with 2.9%. The mutual fund showed sign of continued growth except in recent years when the industry has gone bust. From 1996 to 2001, the ratio of fund industry size to GDP increased by 7.9 percentage points on average. The total size of the equity mutual fund industry in those countries is similar to that of the bond industry including money market funds. Worldwide equity and bond fund assets were at $5,925 billion and $5,415 billion, respectively by the end of 2001, with median country assets of $8.9 billion and$13.7 billion in these the two sectors. The industry size in Mutual fund under equity sector in United Kingdom was worth $316,702 million and bond sector was worth $288,210 million. Khorana, Ajay. Servaes, Henri. Peter, Tufanod Journal of Financial Economics, (2005), Fund industry around the world,Explaining the size of the mutual Market positioning The best money market is considered to be the best if it is very old and have the expertise of handling huge public funds and provide back attractive returns. The best money market funds always pay higher interest rates compared to what banks pay conventionally on the normal savings account. Banks have also introduced the high yielding savings account with the provision of interest rates that are at par with the interest rates offered by the money market funds. But still the investors have attractions toward the money market funds because they could earn better by diversifying their funds by investing in diversified portfolio. TRUST2 Investment will position itself in the market to exhibit its strength to park their funds in good and strong portfolio to make it derive good returns with security. The required security will be possible by investments in Municipal bond, other bonds, government securities, gilds. Tax exempt instruments will be preferred. With this view Trust2 will provide higher interest rate thanks to its investment in high yielding portfolio. Investment in Indian real estate industry will provide the image of higher return yielding funds. In Money market funds, returns on investment are very important factor to judge the credibility of the fund. A good and successful money market fund can deliver returns of around 7% per month and around 30% on annual basis. An Australian dollar fund managed by UBS Global Asset Management firm returned 6.9% on month basis and 29.7% on annual basis. On the opposite the Santander's money market fund returned a low 0.27% monthly return in Sept 09. Lipper Global indices and .. Credit risk A part of Trust2 fund will be invested in government securities such as gilts that are rated as AAA in the UK Short term guilt can give marginally higher return but with lesser safety because corporations issuing these gilts may default some time.. Investors looking for a slightly higher return can invest in traditional money market funds, which invest in short-term gilts and money market securities issued by corporations. The credit risk is determined by the weighted final maturity of the fund. The fund with higher credit quality should be more secured and not susceptible to losses. Government Business, Understanding money market funds Since Trust2 investment fund will hold fixed income securities; these will have bearing with the changes in interest rates. The value of these securities generally increases whenever interest rates decline. With the lowering interest rates in England, Trust2 fund will be benefited since the value of the securities which they owned will increase. When interest rates will rise, funds with less sensitivity to interest rates will benefit. The data on Bank rate show that the interest rate has been falling in England since July 2007 from 5.75% the peak to 0.5% in Marc 09. Mar 2009 0.5% Feb 2009 1.00% Jan 2009 1.50% Dec 2008 2.00% Nov 2008 3.00% Oct 2008 4.50% Apr 2008 5.00% Feb 2008 5.25% Dec 2007 5.50% July 2007 5.75% http://www.thisismoney.co.uk/market Target Market of TRUST2 The target market where TRUST2 will be launched in population concentrates of about 25,000 home offices and 10,000 small businesses in UK. This market is expected to grow at a rate of 5% per annum. Necessary adjustment can be done when required in measuring the target market. The purchasing power of the average population will be taken to decide about the market size. To generalize in the beginning the industry size in 2001 of the UK market is taken as the base. As per research done it is $316,702 millions in UK out of which Equity sector size is $288,210 million and Bond sector size is $44,,347 million. Estimation is done to cover 2% of the industry by 2012 end to achieve an investment fund of $634 million Country 1 .Industry size 2.Equity sector size 3.Bond sector size 4.industry /primary securities 5. Industry / GDP UK 316,702 288,210 44,347 0.061 0.222 In million$ Khorana, Ajay. Servaes, Henri. Peter, Tufanod . Journal of Financial Economics 00 (2005),Explaining the size of the mutual Fund industry around the world Segmentation and positioning: .Well defined Target Focus The market analysis should lead to developing strategic market focus. That means selecting the key target markets. This is the critical foundation of strategy. We will concentrate on the population of investors who have burned their fingers during last credit crises and yet ready to finance homes for their children in future through investing in reliable govt. backed fund Trust2 where money is secure and yet liquid. This segment will readily join the corpus after due verification of the plan. They don't have to put all the money in one day. They are thinking of financing a home for their deal children when they grow up and be matured. This may be second home they would possess but they will be in need of that home. The fund projection estimated within next three years up to 2012 is $634 millions. In order to achieve this sales objective the company will have to support the marketing efforts by allocating funds that may be a reasonable amount roughly to the extent of 11% of the sales projection. Marketing Expense Budget of TRUST2 % $million 2010-12 Advertising 5% 31.7 $250,000 Catalogues 0.5% 3.17 $28,000 Websites .0.1% 0.634 $125,000 Promotions 2 % 12.68 $18,000 Shows $0.1% 0.634 $22,000 Literature $0.1% 0.634 $8,000 PR 0.5% 3.17 $1,000 Seminars 1% 6.34 $34,000 Service 0.5% 3.17 $11,000 Training 1% 6.34 $66,000 Other 0.2% 1.268 $15,000 Total Sales and Marketing Expenses 69.74 Percent of Sales 11% The total expenses will be divided into three years of operation. As the sales revenue increase expense percentage should also be increased proportionately. The goal of this budget is to control the expenses year-wise so that it remains under the target and expenses conform to the revenue generation. All marketing activities should be coordinated to achieve the aim. Necessary modification should be done when required each year to be within the target. Pricing strategy The marketers may require the product's price to remain below to keep their sales volume at an acceptable level. Penetration strategy of pricing is recommended to have greater sales with high volume. Investors will be required to invest $10,000 per annum for ten years. This will build a sizeable fund for financing one own home and at the same time be able to take out money in emergency if required. In this system investors will become borrower and they will have their own strong base built up. Banks will get enough opportunity to foreclose homes easily if the loan amount given on that base is defaulted for some time. Level of demand for homes in UK is high because people want second homes as means of investment. This demand could not be thoroughly filled up because of the past sub- prime debacle. This made the UK real estate market depressed for the time being. People's aspiration does not die so easily. TRUST2 will cash on this aspiration of people that is still smouldering. This aspiration will be presented in the form a home for their children tomorrow. This plan will motivate investors to let the fire burning in their hearts, with a sentimental urge for a second home in children's name. Therefore this plan will have hardly any competitor and investors will take out money for the plan of TRUST2. Brand image The brand image of TRUST2 will stir the investor's sentiment that this fund is trying to restore the trust through a new an innovative plan Since there will be government backing to the plan he trust content will be added. Trust that is lost takes time to be restored. This plan will provide time and opportunity to understand the facts and gradually enable investors to turn toward investing for their future home. The brand 'TRUST2' will become subject matter of discussion among the investors. The very word will create an image about the product and position it in their brains and finally in the market. Advertisement, Promotion and Communication The back up of advertisement and promotional efforts will strengthen the brand for long. Proper advertisement through various media should enhance credibility as an organization and present it as the best solution to meet customers' needs. The present need of consumers or investors is to restore the trust and provide them opportunity to come back with their money to have their sough-after home not for them but for their children now in the changed environment. The brand TRUST2 will be able to communicate with the target group in a natural process and sent the entire desirable message in soft terms. SWOT analysis Strength Money market funds offer advantages compared to bank deposits. Money market funds are targeted to provide capital security, liquidity and competitive money market returns. Some funds concentrate more on capital security or liquidity, whereas others put more emphasis on achieving competitive money market returns. Trust2 product will provide security, liquidity and return Money market Mutual funds are attractive to investors because they offer more stability than individual stocks. In general, the wide range and scope of the fund allows a slower, steadier growth compared to the rapid rise and fall of individual stocks. Also, mutual funds may be cheaper to invest in than individual stocks because the fund allows a large group of investors to pool their resources and purchase large amounts of stocks at a lower cost. Also, many investors like having a group of experts manage the buying and selling of stocks in a fund rather than having to manage it themselves. Weaknesses Investors should know about expenses attached to investing in money market mutual fund market. Individual investors are charged management fees by investment firms and corporations that manage, trade and buy shares in mutual funds.. Some mutual funds charge secondary expenses such as registration fees, the cost of purchasing and selling mutual fund shares, and the cost of mailing material to investors. Before investing in a mutual fund, investors should request a detailed list of all expenses involved in dealing in the specific fund. Opportunity Level of demand for homes in UK is high because people want second homes as means of investment. This demand could not be thoroughly filled up because of the past sub- prime debacle. This made the UK real estate market depressed for the time being. People's aspiration does not die so easily. TRUST2 will cash on this aspiration of people that is still smouldering. This aspiration will be presented in the form a home for their children tomorrow. This plan will motivate investors to let the fire burning in their hearts, with a sentimental urge for a second home in children's name. Therefore this plan will have hardly any competitor and investors will take out money for the plan of TRUST2. The brand image of TRUST2 will stir the investor's sentiment that this fund is trying to restore the trust through a new an innovative plan Since there will be government backing to the plan he trust content will be added. Threat Government regulations may prove a threat to this plan because it might impose certain restriction in implementing it. The plan for investment in real estate funds in a foreign country will be a matter of concern. The rules and laws may not be favourable there to invest. Return prospect may be good but tighter regulations may create problems in realizing the dreams easily. Many competitors might enter the market with more short term plans and by investing in highly liquid instruments might present a picture for investors. Product Life Cycle of UK Real Estate Market UK product life cycle for real estate is in maturity stage. Almost everyone has a home to live. Yet many require rented homes when they go out to settle some else temporarily. Children or adolescents will soon require their own home to live. British people generally prefer to invest in second homes with a view to earn solid risk free returns. With this view only they invested lots of funds borrowed by the banks to have a second home. This dream could not be fulfilled for everyone. Thus though the real estate market is in the maturity stage there is vacuum for investment homes. Therefore, the correct strategy for investment funds will be explore this market by arousing confidence and trust in the lost investors and revive them with an innovative schemes and funds as the TRUST2 is. It requires of a renewed promotional efforts on the part of the fund. The real estate market life cycle is still in the growth phase in many countries such as emerging countries like India, china, and Brazil. The aim of new funds should be to diversify their investments in these markets in real estate trusts so they can reap the higher return from the growth oriented markets by spending lesser on promotions and other marketing expenses. Boston Matrix The real estate market has become a 'question mark' in Boston Matrix but has the potential to gain market share and become a star, or a cash cow when the market growth changes. Question marks market of UK must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Our market survey affirms that UK market has all the potentials to be remunerative soon. The objective of TRUS2 is to earn out of investments of funds in real estate market of any other emerging markets. There fore the potential of the fund to become star or Cash cow is bright at present. PEST analysis PEST analysis stands for "political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors used in the environmental scanning and strategic management. Political environment in UK and other countries where sub prime lending affected the economy is charge with the frustration since a large number of investors are affected. Governments in the affected countries became conscious about this big and devastating public grievance and wanted to give a backing to the deteriorating financial environment. Government always comes forward with government owned financial institutions when private sector entities fail to deliver the correct service to the financial world or subject this sector with regulatory treatments. Government enables the issuance of debt at below market cost; maintain investors' trust by exempting them from many provisions of regulations like tax exempt status, exempt from depositing insurance premiums or bringing investors into safety nets. Rebuilding trust among public and investors is a wholesome process and need to bring the entire network of the industry comprising banks, pension funds, intermediaries and brokers and finally the consumer, savers, pensioners on one single platform. The effort must create the essential values which drive the business and the wider society. The economic loss that occurred in UK after the Northern Rock episode is grave having wider ramification. The following recession has griped everyone in the fold. Investors have already burned their fingers. The loss they incurred is not easily recoverable. Government therefore stepped in and trying to redress the grievances by restoring the confidence through various protected schemes, Conclusion The political dynamics of reforms in financial institutions through government backed plans and programmes are a must to be present in the background of economic deterioration in UK through mishandling of financial institutions. Nationalization and government ownership is not the answer. Necessary and fundamental reforms in laws and regulation will enable private sectors banks and financial institutions to dress up their products and services to the present demand of investors and thereby create a new environment of trust. TRUST2 is a small step toward that. Reference: Reuters, Lipper Snaps UK- UBS leads money market funds in Septwww.reuters.com/article/.../idUSLC39203620091012 - Economy Watch, www.smartmoney.com visited on 13th Nov.09 Sam Fleming, November 1,2007, Daily Mail, Credit crisis 'could cripple UK economy' www.governmentbusiness.co.uk /content/view/2069/1) visited 0n 13th Nov.09 Journal of Financial Economics, (2005), Fund industry around the world Explaining the size of the mutual Khorana, Ajay. Servaes, Henri. Peter, Tufanod . Journal of Financial Economics 00 (2005),Explaining the size of the mutual Fund industry around the world http://www.thisismoney.co.uk/market updated:5 November 2009, 12:05pm Kotler, Philips. Marketing Management, 2001, Prentice Hall Read More