Investment Strategy and Portfolio Management - Assignment Example

Investment Strategy and Portfolio Management By 1812 words Introduction The financial services industry is challenged on many fronts, all of them to some degree entangled, and all of them decisive to refurbishing the health and sustainable growth of the industry (Bernstein 2001). Financial foundations are in a phase of strategic change due to the increased competition and economic crises, this calls for necessary attention to a wide range of issues altogether some, some of the decisions implemented must be more visible and fast moving, others more significant and long-term in their recovery from the crisis. Emergent programs convey opportunities for these smaller financial institutions to introduce agendas that will facilitate them to compete against large brands and to stay up to current consumer needs. In this paper, we look at the market dynamics that are driving the shift toward merchant funded and relationship loyalty programs; the unique aspects of these programs as compared to traditional loyalty rewards programs; emerging consumer trends that will further impact loyalty programs; and the broader proliferation of Universal Commerce that will reinforce the necessity for customer loyalty programs. Morris Capital being an investment vehicle for educational purposes based in UK has members who make regular financial contributions to the initiative, with their aim being to achieve significant growth in value in order to finance educational objectives, after a given period. Morris Capital has a policy that, after a minimum period of five years, the contributors are eligible to begin withdrawing their funds. The fund was established in June 2009; it is thus expected that the first contributors will soon be eligible to begin withdrawing funds if they wish. Morris Capital faces competition from depositary institutions, mutual funds and others, in attracting inflows of funds from contributors. Morris Capital is a professional investment that presents financial guidance and the distribution of financial and risk products to local personnel and corporations who realize the need to build their wealth and establish equitable plans for the future expectations. Morris Capital aspires to be the preferred partner amongst its clients by this will be achieved by providing the clients with premium quality services, support and education to improve their professionalism. Since the inauguration, Morris Capital has developed speedily in a highly competitive market. The distinctive and consultative business model that attaches and builds jointly advantageous associations among financial advisers and its members has stirred this growth. The firm has anticipated that fund withdrawals by members who have invested for at least five years will exceed fund inflows (from new and existing contributors) by 7% per annum on average for the subsequent five years. A suggested interpretation of this 7% figure is: (Cash outflows during year – cash inflows during year) / Total assets at 1/1/2014 = 7% The trend, therefore, calls for strategic measure to be taken to ensure the continued survival of the initiative. The investment committee will have to establish strong measures to ensure that the competitors do not out do the Morris Capital. Over the last few years, the world’s financial system has gone through its greatest crisis since the Great Depression. Rigorous financial predicaments have come into sight concurrently in a number of regions, and the economic crises are being felt all through the universe as a consequence of the increased interconnectedness of the worldwide economy. To successfully achieve competitive advantage Morris capital must initiate investment strategies to meet the deficiency that will be incurred after the initial investor members’ start withdrawing their money from the initiative. The investment committee will appreciate using either the active or passive investment approaches. The investment committee is obliged with; How to come to a new level of growth and sustainable profitability in an environment of low interest rates (Bernstein 2001) Rebuilding asset quality and strengthening their capital adequacy Where to develop new and reliable sources of revenue Enriching and increasing the business value of customer relationships, at a time when customer behaviours and expectations are more demanding Restoring public confidence in the industry How to deal with aggressive and innovative non-bank competitors Embedding risk management culture into the fabric and habit of daily operations. The above changes will automatically force the investment committee to address their core markets and customer segments to ensure market survival and market command. They will need to make more efficient a smaller and further specify market niche as it becomes impractical for the Morris Capital to look forward to retaining all things to all members of the initiative (Murray 2010). Both active and passive approaches have specific constraints and consequences. The investment committee will be obliged to decide and establish what is most favourable for the company to buy; their decision will also be expected to respond to the ever changing markets. The preference between both choosing active and passive investment approaches act as a hinge on the type of investments the investment committee chooses. Passive management generally works best for easily traded, well-known holdings like stocks in large U.S. corporations, says Smetters, because so much is known about those firms that active managers are unlikely to gain any special insight However, in certain niche markets, he adds, like emerging-market and small-company stocks, where assets are less liquid and fewer people are watching, it is possible for an active manager to spot diamonds in the rough (Swedroe 1998). It is recommended by most of the financial advisers that actively managed investments for important portions of their members of the firm portfolio. Active management comprises joint funds and exchange-traded money, bonds and other assets control by financial committee. Among the benefits of applying active management approaches are: Flexibility: because active managers, unlike passive ones, are not required to hold specific stocks or bonds (Taleb 2007) Hedging: the ability to use short sales, put options, and other strategies to insure against losses Risk management: the ability to get out of specific holdings or market sectors when risks get too large (Siegel 2008) Tax management: including strategies tailored to the individual investor, like selling money-losing investments to offset taxes on winners. Characteristics of effective active management Active investment approach is usually advantageous to investors in comparison with the passive approach (Swedroe 1998). The demands for investment management services differ from time to time depending on a range of different issues such as; cultural change in thoughts towards saving, population demographics, socioeconomic changes, and shifts in responsibility for the funding of long-term saving, for example, between employers and employees. However, effective active management requires in all circumstances a number of key elements Assuming that the active manager can take an active position of any size in the market portfolio, active management is an approach to the stock market which maintains that the greatest returns can be generated by moving in and out of stocks at the appropriate time. Appropriate time according to some investors depends on the ability of a company reaching a specific set price. Other investors, it does not have any implications or connection to the performance of the stock at all and is generated by “buy” or “sell” levels based on the overall market strategies. The active management technique believes that the market unpredictability that has recently increased in the past years is, as a result, the computer trading facilities that move large blocks of stocks that create opportunities can be capitalized on (Taleb 2007). Active investors will often use trading techniques that include short-selling, betting that the stock will go down as well as more sophisticated strategies that include “betting against the box,” collars, and many others. Active investors vary from those concerned with day to day trading activities to those that are involved in making frequent shifts in their portfolios (Taleb 2007). As market complexity and volatility continue to increase, many who believe that the theory behind active investment is the right one, particularly as conditions are changing faster than ever before, find it difficult to implement that strategy in their own portfolios. They either don’t have the time or expertise to make active trades, or haven’t found a money manager they fully trust. Given the fundamental changes in the economy in the U.S. and globally, it is likely that the active management approach will likely grow in influence. Even Warren Buffet, the most famous “buy and hold” investor, has been taking a more active view of his Berkshire Hathaway portfolio in recent years. Assumptions on the active manager’s objective We have assumed that the active manager should maximize the information ratio in a multi period environment. Much has been written about the correct objective for the multi period problem and the Sharpe ratio has been identified as sub optimal in a multi-period context. However, the crucial point is that these theories are not relevant here, for the portfolio management objective is not something that the active manager can choose, but instead remains the responsibility of the investment committee. According to Bodie, (1996) he points out active management technique is strictly theoretically correct. The active investment approach should repeatedly apportion contradictory amounts to the active management committee as a function of the size of active manager forecasts. Then both the member and the investment committee have multi period problems, but it is operational impractical, and prohibitively expensive, for the trustee to do this and the single period problem remains the pertinent one REFERENCES: Bernstein, William. The Intelligent Asset Allocator, McGraw-Hill, 2001, A detailed look at asset allocation in passive and index portfolios It may be advanced for readers uncomfortable with statistics. Bogle, John Common Sense on Mutual Funds, Wiley, 1999,  A thorough examination of research on passive and index investing and the disadvantages of active management from the founder of Vanguard mutual funds and the first retail S & P 500 index fund. Clyatt, Bob Work Less, Live More, Nolo, 2005, A clear written and practical look at "early semi-retirement"   This book emphasizes lifestyle planning and is an excellent brief introduction to passive and index investing. Dalbar 2012 "Quantitative Analysis of Investor Behaviour" Murray, G and Goldie, D, Learn How to Manage Your Money and Protect Your Financial Future, 2010 Excellent one hour read on active vs. passive and DFA. Siegel, J. Stocks for the Long Run, Fourth Edition, 2008, Sherden, William A The Fortune Sellers, Wiley, 1998, An amusing and revealing expose of the failure of experts in many fields, including investing, to add value over chance guessing. Swedroe, Larry E Winning Investment Strategy Dutton, 1998, and What Wall Street Doesnt Want You To Know, 2000, St. Martins.  Both these books are easy to read and informative introductions to passive and index investing and DFA style asset allocation models. Taleb, Nassim The Black Swan, Random House, 2007, A critical examination of the statistical models underpinning modern finance and their limits. Read More