Ethical Investment Portfolios Issues - Case Study Example

Student’s Name Professor’s Name Course Name Date of Submission Ethical Investment Portfolios {(2.5+0.2)/100*1/12}* 20,000,000 = £45,000 Money to be returned equals Principal + interest = £20,000,000 + £45,000 = £20,045,000 Portfolio No. 1 Equity Portfolio; annualized return of 18 %, £ 20,000,000/2 =£10,000,000 Monthly return = 18/12 = 1.5 % * £10,000,000, £150,000 Notably, I would divide my equity assets into four different sub-categories in order to develop the element of diversification. Diversification of the stocks means that the investment portfolio will be based upon different industries, market capitalization and foreign investments. These sub-categories are; I) Technology-based companies stocks, (10 % of £10,000,000), equals £ 1,000,000 for each stock a). TRW Automotive Holdings; operates under the automotive industry, the company’s has provided a lot of its shares to the shareholders. The total shareholder’s return stands at 563.3 %. Furthermore, the market capitalization stands at £7,054.98. There is a 0.18 % increase the share price of the company on a daily basis. The current market share price stands at £ 59.25. This means that the total amount of shares to be purchased stands at (£ 1,000,000/£ 59.25), 16878. The company’s stock performance is compared to NASDAQ benchmark. b). Unisys Inc. operates under the information technology industry. The current total shareholder’s return stands at 353.6 %. The company’s stocks are benchmarked against the S&P 500 for the company stands at 38 against the benchmark of 102. The current share price stands at £ 24.15 and there is a probable percentage increase of the price by about 5.18 %. Thus, the total number of shares to be purchased equals £1,000,000/£ 24.15, 41,408. II) Emerging Markets stocks; 10 %, £ 1,000,000 for each stock a) Aberdeen Global Income fund Inc. operates as an investment agency. In January 2013, the asset value per share of common stock stood at £13.77. There is a prospective increase in the price of shares by about 10 % in the coming three months. Thus, the investment of the stock stands at 1,000,000/13.77 = 72621 shares b) Micron Technology: operates under information technology industry. it is considered to be one of the upcoming companies given that it has embarked on producing on-demand semi-conductors and memory-devices for both consumers and corporate across the globe. Notably, the yearly total shareholder’s return stands at about 300 %. The monthly returns for the company surpass its benchmark value; Micron Tech stands at 17.70 % against an S&P 500 monthly total return of 17.70 %. The current share market price is placed at £ 9.51 with a projected increase of about 2.04 %. The company operates under £ 9.51billion market capitalization. The efficient Asset utilization stands steady at 0.57 while the Total Returns on Assets (ROA) stands at 54.89 %. III) growth-based stocks; 10 %, £ 1,000,000 for each stock a) Tenneco: this is an auto-parts manufacturing Company. There is a probable increase in the future-sales of the company’s products. Total returns of the company stands at 48.47 % while the Earnings per Share stands at 4.50. The Quartile profit margin stands at 1. 88 % while the price of the company’s share equals £ 37.40. The YTD returns for this company stands at 6.55 % against a benchmark of S&P 500 Total Return 9.34 %. Thus, the portfolio stocks consists of £ 1,000,000/ £ 37.40 = 26737 common shares b) Tenet Health Care Company; operates under the health care industry. The company’s stock performance falls under growth-based stocks because it has recently managed to surpass challenges associated with closing-down of operations. In 2012, the company’s shareholder’s return attained a 368.7 %. The company’s return on assets (ROA) stands at 12.6 % against an industry average of 22.4 %. Throughout the month there has been a steady 1.17 % increase in the company’s share price which stands at £44.16 Thus, the total number of shares; £ 1000,000 /£44.16, = 22645 share IV). High-dividend growth companies stocks; 10 %, £ 1,000,000 for each stock a) Ford Motors; it is considered to be one of the competitive companies at the close of the 2012 financial period. The company’ has been over a substantial period of time managed to pay its shareholders high-rate of dividends. The total shareholder return stands at an annual figure of about 336.7 %. By comparing the company’s YTD returns against the S&P 500 total return projects a 4.34 % against 9.34 % on a monthly basis. The earnings yield equals 10.6 % while the dividends yield earnings stands at 1.87 %. The stocks operate under the £52.88B market capitalization and there is a projective increase of 0.07 % in respect to shares. Currently, the share market price stands at £13.40. b) HSBC Group; this company depicts a high-dividend growth rate of about 3.78 % and an EPS of about 3.55. The current share market price stands at £54.22 with a 0.22 % projected monthly increase. By comparing the company’s stock performance against the S&P 500 total return benchmark it figure stands at 2.17 % against the 9.34 % YTD monthly returns. v) Retail-based stocks; 10 %, £ 2,000,000 capital allocation: whole amount a) Dillard Company; operates as a departmental store chains across the globe. The company trades as a public company at the both the London and New York stock Exchange. The 2013 shareholder’s return stood at 368.7 %. Portfolio No.2 This portfolio is composed of both government and corporate bonds: Amount to be Distributed amongst these Bonds; 50 % * £ 20,000,000 = 10,000,000 I) Government Bonds There are four types of United Kingdom Gilt Yields which are provided below; a) UK Gilt 2 Year Yield Government Bond; which possesses 0.25 % yield and a -6 monthly coupon rate; for this type of bond, the amount to be apportioned equals £1,000,000 b) UK Gilt 5 Year Yield Government Bonds; which possesses 0.85 % yield rate and -12 monthly coupon rate. For this type of bond, the amount to be apportioned stands at £1,000,000 c) Bank of England Government Bonds: that attracts yield rate of 0.5 % and +2 monthly coupon rates. For this type of bond, the amount to be apportioned stands at £1,000,000. d) UK Gilt 10 Year Yield Government Bonds; which possesses 1.98 % yield rate and a further -22 % monthly coupon rate. For this type of bond, the amount to be apportioned stands at £1,000,000. II) Corporate Bonds a) Bank of Baroda Corporate Bond whose interest rate stands at 2.10 %. The minimum purchase amount stands at £ 500 and a maximum amount of £ 200,000, 1 year bond. For this type of bond, the amount to be apportioned stands at £ 200,000. b) Bank of London and the Middle East Corporate Bonds which attracts 2.00 % interest rate a minimum purchase amount of £25,000 and maximum purchase amount that stands steady at £ 49,999 on a 1 year fixed term. For this type of bond, the amount to be apportioned stands at £50,000 c) Halifax Corporate Bonds; which attracts 1.75 % interest rate with a minimum amount of £ 500 and maximum purchase amount that stands at £ 5,000,000, 1 year fixed term bond. For this type of bond, the amount to be apportioned stands at £ 4,500,000 d) Vanquis Bank Corporate Bond which attracts 2.91 % interest rates, minimum purchase amount of about £1,000 and maximum amount of £250,000, 5-year fixed term bond. For this type of bond, the amount to be apportioned stands at £250,000 e) AgriBank Corporate Bonds; that attracts 3.50 % interest rates with an initial investment of £1,000,000 and 4 year fixed term rate. Part 2: Over the period upon which the share performances of the companies were analyzed and their respective growth rates recorded it is ascertained that there is no way a company can keep up with its share price at an upward or downward trending. The share prices keep fluctuating depending with the market demand of the company’s shares as well as other internal activities of the firms. For instance, whenever the share prices fell hence trading at discounts price and below the original net values of the stock, the following effects were noted. First, in cases where the company depicted irrational deployment of expensive capital hence weighing down on their immediate returns on capital caused investors to back-off from purchasing the company’s stock. This, in turn, caused great levels of tension that was later reflected in the downward movement of the company’s stock price thus selling at a discount in respect to the net value. Second, in cases when companies depicted challenges in the manner for which costs were controlled led to the investors being less enthusiastic. This, in turn, decreased the amount of shares traded at the stock exchanges hence lowering their prices due to low demands. Third, in cases when these companies depicted less capacities in the manner for which they influenced their customers and suppliers led to poor sales forecasts. This formed a basis upon which potential investors shunned purchasing the stocks. For this case then, the share prices were affected immensely. In respect to profits being recognized by the fore-stated portfolios, it is indeed clear that their prices went up when it was perceived that potential investors were deemed to have moved away from panic purchases to complacency stock buying. This means that the shares were put on a high demand hence a resultant increase on their prices at the stock markets. Second, both the equities and bonds market had their profits realized whenever it was ascertained that there were going to be currency fluctuations so that the sterling was expected to fall in respect to the dollar. This future projection of probable profits made their prices rise irrespective of their demand structure. Furthermore, personal analysis on the rising trends of share prices was largely associated with smaller developing companies given the fact their positive performance was apparent hence an assuredly that there were profits going to be made in the future. In this case, the potential investors flocked the company’s share market and purchased more hence increasing its immediate demand. Notably, increased demand meant a subsequent increase in the stock prices. Part 3 In the course of analysis, the equities portfolio uses the Sharpe ratio as a basis of evaluating the performance outcome of the companies in comparison to the benchmark index. For the equities portfolio, the S&P 500 index is used as a benchmark. The differential return is calculated as below; D= RF-RB D=6495.30-1563, 4932.3 For the Debt Securities Portfolio, the investment used NASDAQ as the formidable benchmark for analyzing the stock performance. Thus, the computations for these values are calculated as follows; D= RF-RB D= 5490-2345, 3145 Part 4 There are different portfolio management theories put forth that are associated with the form of behaviors potential investors depict before they can engage in making decision pertaining to either investing with certain companies or not. These theories have also played a great role in the course of selecting the different items of equities as well as bonds for the purpose of future investment benefits. First, there is the risk aversion theory which states that investors possess different desires that either prevent or encourage them from avoiding risky investments (Investopedia 1). This theory is used in the course of maximizing investments at fewer risks exposures. In this case, the portfolios have been identified through risk aversion strategies so that the investments are only made whenever it is ascertained that the environmental risks are less and returns are highly projected. Although insurance is considered to be the most effective risk aversion strategy, the aforementioned portfolios have not deployed it since it is expensive to acquire and hence can add up-to the costs of conducting investment business (Investopedia 1). Second, there is the Markowitz portfolio theory which assumes different portfolio scenarios (Investopedia 1). First, the model assumes that in case of similar level of returns investors certainly choose portfolios with least risk expectations. Second, there is the assumption that potential investors engage in the subject in order to maximize their immediate levels of return. Third, there is the assumption that potential investor’s project expected returns for investments made as well as the expected time period upon which to enjoy the profits. Thus, in this case, it true and fair to postulate that while developing the portfolios these elements came into mind especially because the initial capital amount was derived as a loan instrument which needs frequent interests-service and repayment as a whole. It should be noted that the stocks (equities) portfolio is held for a shorter period of time upon which it will be possible to resale in the stock market for cash. On the other hand, the bonds portfolio does not assume the long-term diversification plan. The maturity period for all the purchased bonds are fewer than 5 years so that they can be easily translated to cash instrument useful for repaying the loan borrowed. Third, there is the portfolio management theory associated with efficient frontier (Investopedia 1). This concept ensures that a formidable balance is attained between relative possible investment risks in respect to the immediate expected rate of return. Thus, efficient portfolios are able to allow potential investors higher expected rate of returns under similar or lower cases of investment risks. The entire portfolio has taken this phenomenon into consideration given that they have been diversified to include foreign investments so that the issue of currency fluctuation is curbed once and for all. To sum up, it is fair to indicate that the process of developing portfolios is a risky business activity given that the stock performance as well as bond purchased fluctuate in their respective prices depending with both internal and external factors that affect their growth and hence profitability index. Therefore, investments are made by accessing the financial performance of the entities so that probable future gains are deemed positive by the great returns. Works Cited Investopedia. Portfolio management-portfolio management theories. (2010).Accessed from http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/portfolio- Management-theories.asp#axzz2NXNyBGEq Read More