Family Heritage Fund - Term Paper Example

Family Heritage Fund Introduction The Family Heritage Fund has been successful fund entity in the US financial history. The fund has developed a strong investment strategy in which they separate investment into two categories in which 80 per cent of assets are invested into common stocks whereas 10 per cent in outstanding shares retained by founding family (Villolonga, 2007). The fund has largely been successful in implementing a vibrant and effective investment strategy. This strategy is based on the foundations of strong investment philosophy in which capital appreciation; conducive workplace environment and investment return are three founding pillars. In the following parts of this paper, first investment philosophy has been elaborated. It is followed by the overall strategic direction. Before the conclusion part, a comparison with three funds has been provided so as to evaluate the performance of Family Heritage fund. Investment philosophy Investment philosophy is about approach towards risk tolerance (Garman and Forgue, 2012). Investment philosophy is about temperament (Mauboussin, 2013) and is set of principles for investment activities (Singer and Fedorinchik, 2010). . And the best investment philosophy is generated through understanding personal mistakes (Miles, 2004). The family Heritage’s investment philosophy can be categorised in three broad categories: workforce, shareholders or investors and financial planning (Villolonga, 2007). For the workforce, the fund prefers to implement and provide strong and stable workplace with an aim of reducing or controlling labour turnover besides enabling them to become more and more productive (Villolonga, 2007). At the same time, the fund has also put in place stable and strong policy towards shareholders and investors; in this strategy, the fund attempts to satisfy their expectations by having lower debt levels besides emphasizing on lucrative and persistent return on the shareholders’ investment along with higher reinvestment focus for generating stable and vibrant growth in coming years (Villolonga, 2007). Also, for the financial planning, the fund has focused on the use of capital appreciation model through serving the long term objectives of investors and shareholders by aligning the interests of family-controlled entities (Villolonga, 2007). Overall strategic direction The fund has put in place strong investment philosophy and financial strategy for obtaining the objectives of the fund. For example, the fund has not precisely focused on the single industry for investment instead they have diversified their investment strategy in which they have systemically invested across all industries. For example, they have invested in technology firms, financial firms, consumer services, consumer cyclical, energy firms, consumer non-cyclicals, utilities, industrial firms, and heath care as well (Villolonga, 2007). This diversification strategy looks successful reaping more returns than the expected. For example, the biggest advantage of this diversified strategy is that it allows the fund to control and minimise the risk of generating less attractive returns. Subsequently, through controlling the risk and risk exposure, the fund’s investment philosophy has brought attractive returns for investors and shareholders as well. In this regard, it is important to mention that the fund has specifically identified only those firms which are family controlled; this comprehension is important as it has backing from the personal experience of Pitcairn in which they understand the family strength and its subsequent constructive effects for the financial performance of the firm. Figure 01: PIMCO Total Return Fund and Barclay U.S. Aggregate Index Source: (PIMCO Return, 2015). This graph shows that PIMCO Total Return Fund has outperformed Barclays Aggregate index. A total of ten year performance appraisal highlight that PIMCO has been consistently increasing its annual return when it is compared with the performance of Barclay’s aggregate index. For example, in 2005, PIMCO reported slightly higher return of around 3.5 per cent whereas the Barclay’s only reported around 3 per cent return in the same year. In the subsequent years, both have been regularly increasing over these years by reporting higher returns in the subsequent years. In this regard, it is important to highlight that the PIMCO’ three years were important. For example, in 2007, which was the start of the global financial crisis in the United States, the fund reported higher performance around 10 per cent whereas, in the same year, Barclays reported around 6 percent; this reflects that the PIMCO’s investment strategy was more productive as they had invested in strong stocks providing attractive returns. More importantly, even the year of 200 when the global financial crises were at their peak as many firms were forced to show negative or unimpressive financial results, the PIMCO reported the highest level of return in the entire history of the fund. Figure 02: American Fund Performance Source (American Fund, 2014). This figure reflects that the fund has considerably performed better over these years. For example, the American Fund reported around 12 per cent return in 2004; and if this is compared with the PIMCO fund and the Barclays performance, it can be easily understood that the American Fund has been the most productive fund. For example, in 2009, American Fund reported the total return rate of 34.48 per cent whereas the PIMCO reported around 14 per cent return in the same year. In other words, the American Fund reported more than 20 per cent growth in the same year, clearly highlighting that American Fund’s investment strategy and choice of investable funds are more stable and strong as well. However, it is still relevant to highlight that there are some areas where the performance of the PIMCO was better than the performance of American Fund. For example, in 2008, the American fund reported negative growth rate of 39.07 per cent whereas the performance of PIMCO was not negative instead it was positive by reporting around 4 per cent return in the same year. Based on this situation, it can be deduced that the American Fund only invested in those firms where were heavily affected by the effects of the 2008 financial crises. On the other hand, the PIMCO’s strategy was different to this one as the fund only invested in those firms which were recession-proof. Within this context, it is important to mention that Family Heritage Family Fund’s performance has been mixed over these years especially this difference becomes visible when it is compared with the performance of American Fund and PIMCO fund. For example, Family Heritage Fund’s annual return rate was 9.77 per cent, 6.72 per cent and 3.08 per cent in 2005, 2005 and 2006 respectively (Villolonga, 2007). In other words, the returns provided by the American fund in the same year were higher than the return rate provided by the Family Heritage Fund. Under this situation, it is highly essential that the Family Heritage should reconsider its investment strategy. For this purpose, it is recommended that the fund should focus and invest only in those firms which are comparatively more stable than the others. For example, the American Fund’s return rate has been consistent over these years and this is mainly caused by the fact that the American fund only invests in those firms which have strong financial indicators. Keeping this view in mind, it is necessary for Family Heritage to change its investment philosophy by investing in those firms which are not family-controlled. This feature is important as it provides the basic change in the investment philosophy of the fund. Conclusion Family Heritage is based on three broad foundations: Conducive workplace environment, capital appreciation policy and the investor return. In order to increase the return, the fund believes that it should provide congenial workplace to workforce so as to retain their expertise. However, its current investment philosophy is not generating enough return rates when it is compared with the American fund and PIMCO fund. A comparative analysis signifies that the fund has underperformed over these years and it is this to change the investment philosophy and investment strategy through only investing in those which are more stable. References American Fund, (2014). The Growth Fund of America. Available: https://www.americanfunds.com/individual/pdf/shareholder/mfgeprx-005_gfap.pdf Accessed: 7 February, 2015 Garman, E.T., & Forgue, R.E. (2012). Personal Finance. 11th ed. Ohio: South-Western. Mauboussin, M.J. (2013). More Than You Know: Finding Financial Wisdom in Unconventional Places. Columbia: Columbia University Press. Miles, R.P. (2004). Warren Buffet Wealth: Principles and Practical Methods Used by the World’s Greatest Investor. New Jersey: Wiley. PIMCO Return, (2015). PIMCO Total Return Fund INSTL. Available: https://investments.pimco.com/Products/pages/346.aspx Accessed: 7 February, 2015 Singer, B., Fedorinchik, G. (2010). Investment Leadership and Portfolio Management: The Path to Successful Stewardship for Investment Firms. New Jersey, Wiley. Villalonga, B. (2007). The Pitcairn Family Heritage Fund. Boston: Harvard Business School. Read More