Funds Management and Potfolio Selection - Assignment Example

Introduction Investing one’s wealth is one of the most important decisions that are being made as it involves the careful evaluation of the various strategies and instruments which not only preserve the original capital of the individual but also provide a consistent return over the period of time. Asset allocation through a careful selection of different assets and formation of an optimal portfolio therefore is an important task which rational investors have to complete according to the individual risk and return preferences. It is also however important to note that not all the investors have the necessary time and knowledge to search the market and identify different assets which can yield consistent results for them. In order to overcome such situations, intermediaries offer their services which include a range of services including offering advice as well as tailoring the portfolio for the individual investors according to the requirements of the investors. Fund management is one type of financial intermediation which can help investors to mange their wealth in a manner that not only provides the consistent returns but also preserve the capital of the investors. Investment fund industry in Australia has grown recently and as such the growth has resulted into the formation of a mutli-billionaire industry at the global level. The essential feature of the fund managers running such investment funds is to offer the services of managing the money on behalf of their clients because they develop expertise as well as knowledge of the market which ordinary investors lack. This paper will discuss at least three products offered by the fund managers, the analysis of their strategy as well as performance and fees charged by them. Fund Management Fund management is often considered as the professional management of the different securities as well as assets in order to meet the specific goals of the investors. Funds are often created for specific purposes with very well define investment goals and objectives. Funds often also outline their strategies as to how the investment process will be carried out to achieve such objectives. For example, if the objectives of the fund are to provide consistent results with minimum risk, the fund may clearly outline that it will invest into government securities or money market so that the overall risk profile of the portfolio remains within acceptable limits. Fund management industry is typically dominated by small as well as large players which cater to the specific needs of the various groups of customers and offer specialized services by creating specific niche markets for themselves. Typically, a fund charges commission on the transactions carried by it besides earning from other sources such as differences between bids and asks spreads. Fund management industry is therefore dominant because the fund managers possess the skills and expertise which is relatively not available any where in the market. Besides fund managers are also enjoy the economies of scales which are achieved due to sheer volume of the transactions that are conducted by the fund managers. (Brailsford, Heaney & Bilson, 2006). Thus fund managers are considered as the effective players in the market who have the requisite expertise and knowledge to find out the securities and assets which meet the investment objectives of the fund as a whole as well as the individual and specific objectives of the individual investors. There are different types of products which are offered by the funds depending upon the overall risk and return preferences of the investors. Three important products are discussed as under: Growth Funds Growth funds are offered to the investors with medium risk profile i.e. the investors who are willing to take the risk but also want to get a consistent minimum return on their investments. Growth funds are therefore offered to the investors with an aim of capital appreciation i.e. the earnings obtained from this fund are re-invested and there are no or very low dividend payouts. Investors often tend to earn from such type of funds through appreciation of the value of these funds and not through interim cash flows. Since the overall aim of such products is to offer the investors an opportunity to earn through capital appreciation therefore such types of portfolios are mostly dominated by the equities i.e. major portion of the portfolio comprises of the stocks of different firms. Advance Australian Equity growth fund is one of the leading growth funds in Australia and is managed by Advance Asset Management Limited.1 The overall aim of this fund is to provide long term returns to investors by investing into Australian stocks. This fund also aims to outperform the S&P/ASP 200 index with the maximum investment horizon of five years. This growth fund invests in equities listed on Australian Stock Exchanges and has a total fund size of $12.31 millions. The overall asset allocation is comprises 95% of the local equities and rest is invested in the liquid cash in order to meet the contingencies. The overall performance of the fund indicate that its performance is mostly in-line with the industry i.e. returns offered by the fund are mostly in the similar band as offered by the leading stock exchanges of Australia. This fund charges a flat entry fee of 4.1% with no exit fee and a minimum amount of $1000 is required to open the account with them. This fund is relatively good because it has been able to offer returns which are almost in-line with its strategy and as such has been successful in maintaining a growing portfolio. The overall strategy is also seems to be good because by investing only into local equities the fund has virtually insulated itself from the risks arising out due to investments made in international markets. Most importantly, international investments carries unique risks such as economic, political as well as other more specific risks which can be attributed to the specific characteristics of the market in which the investment has been made.(Bailey,1995). Income Funds Income funds are mostly targeted to those investors who prefer to have relatively low risk profile and as such do not prefer to take greater risks. This type of product therefore is offered with a primary objective of offering steady stream of cash flows to the investors through periodic distribution of the returns. In order to minimize the risks, these funds often invest into the bonds and stocks yielding high returns. Since this type of fund requires consistent and frequent cash inflows and outflows therefore the overall liquidity requirements for income funds is relatively greater as compared to other types of funds such as growth funds. It is also important to note that capital appreciation is also one of the objectives of the income funds also. Opus Income & Capital Fund no.21 is one of the income funds that are being offered in Australia to various retail as well as institutional investors. This fund is considered as core property fund as it invests into the real estate in order to minimize the risk as well as offer a consistent stream of income to investors. The total portfolio size of this income fund is more than $200 million with gross income earned from the property assets in excess of $20 millions per annum.2 The overall strategy of the fund therefore is based on the rigorous and well structured selection of the different investments to be made besides focusing more on well defined profit and exit strategies. This fund normally charges commission at the rate of 4% plus any taxes that are to be paid by the investors. Its historical yield has been around 9% that it has consistently offered to its investors. Capital Stable Funds Capital Stable funds are offered to the investors with investment preferences of having the long term returns as well as the capital appreciation of the principal amount. Such types of funds are offered to the investors who prefer to run relatively lower level of risk and as such capital is often guaranteed in such types of products. IOOF GSS Ventura Australian Opportunities is one of the capital stable funds that are offered for superannuation purposes. This type of investment therefore requires the fund managers to invest in such a manner that it not only offers the capital growth opportunities but also ensure long term returns. This fund is relatively low in its overall market capitalization 3however; it invests into the Australian equities as well as other investments which can offer consistent returns on long term basis. This fund has also offered the returns which are mostly consistent with the market i.e. they fall in almost the same range but are below market returns. There is no standard entry fees as well as exit fees however, the overall minimum investment requirements are $3000. This fund is relatively small with an aim of offering consistent returns with capital appreciation opportunities to investors who are looking forward to not only maintain their initial capital but also look for achieving their investment goals more consistently. References 1. Bailey, V (1995) International investment: Risks and rewards . Fuel and Energy Abstracts, Volume. 36 (5) 344-344(1) 2. Brailsford, T Heaney, R & Bilson, C (2006) Investments- Concepts and Applications. 3rd ed. Victoria: Cengage Learning. Read More