Investment Strategy and Portfolio Management - Essay Example

Investment management is a science of making expert decisions on financial resources, assets or securities of public and private investors with regards to their investment projective for their gain considering all risks involved. Portfolio management is the offering of services, advisory or optional services and managing of these assets for the well-being of the investor (Allison L. Evans, 2013). Public investors include insurance companies, charitable organizations, and pension funds among others. Private investors are done through investment contracts. Every investor has to have a guiding investment philosophy. The types of investment are real investment, fixed assets, or financial investments, basically agreement made on contracts such as securities, bonds among others. The purchase of financial investments leads to the purchase of real investments. Financial investments also give the buyer a realm into a look in real investments. Having a great financial investment requires the buyer and portfolio manager to have great investment philosophies.An investment philosophy is thinking about how markets work, varieties that affect stocks in the market and the varieties of assumptions that investors do make. Investment strategies are basically designed to make use of this mistakes that are made by investors to make a gain out of them. There are several factors that affect the investments assumptions made by investors. They include: Human behavioral traits, human beings do behave and coordinate different as nature has put it. But while this is so, most human beings have a tendency to believe in majority or crowds being right especially on decisions. Thus for every momentum investor, who tends to invest in places where he sees crowds investing owing to the believe that they could be right in the terms of gain being brought about by the investment, there tends to be another person who doesn’t believe in the same, contradictory. The contradict ends up investing in other securities rather than the common one. while this in the short run tends to be a total failure for the contradict in the long term the prices end to push and pull each other due to market factors and do variant in the long term bringing benefits to both. Markets efficiency is another factor to consider for a great investment policy. Markets are an organized system that collects buyers and sellers in one place for the exchange of goods and services. Securities are traded in various types of markets. Some do have a physical location while others do not. Markets could also be classified as secondary or primary markets. Primary markets are where securities are bought as new shares in the market which greatly raises the capital of the firm while secondary markets are where securities are only resold. Secondary markets however in the long term hardly make so much gain for the investors. Secondary markets with their function of reselling the securities help raise the value of shares and increase the index price on shares helping investors make the right decisions on what securities to invest in. while markets help in determining price index of securities some investment philosophies tend to believe that market indexes are always good hence when the investment goes up, good news for them, when it goes down then it’s really down for them. Others tend to do the contradictory of that believing that while their pricing could probably be right information on financial reports and financial analysis isn’t made available to the public hence there could be a mistake in the pricing of their stocks (Malkiel, 2003). A great example is the internet bubble that occurred in the years between 1999 – early 2000, with the new technology the market suggested great success and investors invested highly on internet based businesses as a result of this market prediction only to their predicament (Goodnight & Green, 2010). Markets could also be grouped into call in and continuous markets. Call in markets are characterized in the sense that they only trade during specific market hours avoiding frantic changes in market prices of stocks and with the continuous market they trade at all time, 24 hour market. Markets could also be characterized in terms of what they sell. Money markets dispose assets that have a short life span mainly under one year they include , while capital markets dispose things with over one year life span. Once the investor has laid an investment philosophy he need to put it into action by having a strategic plan for his assets. Asset allocation is the balancing of risks involved in investment while trying to diversify the output or income attained. The basic steps in choosing asset allocation include choosing what type of asset to invest in such as securities, bonds among others, the right amount and percentage acceptable by investor to invest on selected asset and the ability to be able to expand assets within the selected asset as this lowers the risk of losses. For example be able to buy more securities of a certain kind in the stock exchange market. There are several factors that influence asset allocation or investment strategy depending on the time frame that the client needs the capital return. These include; the amount of risk the investor is willing to take, the time within which he wants to invest, is it short or long term, market momentum of the specified asset the investor wants to take among others. The most optimal investment philosophy is the one where the investor is willing to take a high risk and getting maximum returns for his investment. Portfolio management of clients’ assets involves both strategic and tactical asset allocation. Strategic asset allocation is about setting asset allocation with the investor with all his goals in mind and upon return on those investments you keep rebalancing with the investor as his needs and priorities too do change with time (Marie Brière, 2010). It’s a buy and keep concept involved usually done over long term investments and securities or assets invested in are usually in a mixed range. Changes can hardly be done once a decision has been made regardless of the rebalancing done owing to market fluctuations. Tactical allocation is about having percentages within asset allocation such as giving the portfolio manager allowances to invest within market ranges and make maximum use of market chances and arising price opportunities within the given time (John Lewis, March 2012). It is about taking advantage of market mispricing on assets to increase chances of returns. Changes can be made giving the investor a chance to play along with market fluctuations and efficiency changes. There are two types of tactical assets allocation discretionary or systematic. Systematic tactical assets allocation strategy is about the quantity to be invested. It is based on the markets inefficiencies or imbalances on securities equilibriums among different assets classes. That is investments are made according to efficient returns. They can be bought or sold depending on market terms and the amount of risks is high thou returns are high. Discretionary tactical assets allocation changes his assets allocation according to their validity in which they invested. This means that he can change effectively from securities to bonds if he discovers that bonds are bound to give him higher returns. Active and passive management of portfolios differ in the sense that while both managers are looking out to make a high return on investment, active managers tend to really more on information that they find out to make gains. They look out for macroeconomic analysis, fundamental analysis, history of the assets in question and technical analysis all in the name of trying to make out what attractive stocks are available that will give maximum return. On the other hand the passive managers tend not to really rely on market information but look at the historical data analysis of the large bonds and securities in the market and their performance, trying to diversify them and throughout the long term investment they rebalance the investments too for profitable gain. It has however been proved that active managers rather do more poorly than the passive managers as they increase the cost of investment and their outcome or gain is very unpredicted and could end up being lower. This is so because market prices are usually very unpredictable as there are several factors affecting markets that are unpredictable such as politics, technological, social and emotional factors among others. Prices of securities in future are absolutely undetectable as things such as inflation and economic growth could end up affecting prices in real estate’s or land prices, gold and other precious metals, oil etc. Risks involved by active managers and their returns are incompatible (Kenneth R. Solow, et al., n.d.). The higher the risk they take the higher the risk of losing the capital that comes with it. Once again their forecasts could come not in handy and the company or investor could come at a disadvantage. To the investor active managers are more expensive than the passive ones as their brokerage fee is usually higher than that of a passive manager since their charges come as a commission on the total amount of returns. Once the investor and portfolio manager have effectively analyzed the investment philosophy and have come up with the appropriate one that fits in the client, it is important to also consider the tax status of the client. The tax status of the client is very important in considering the investment strategy for the investor as there are investment plans that bite highly on the investors’ income while others do not. So once they have established the appropriate plan and it fits into the clients’ tax status they may go ahead with the investment plan. Philanthropy is the art of giving to those in need. It is important as human beings to consider the less fortunate in society and offer help to them (Spiegelman, 2014). The Nelly Capital is a UK fund that acts as a charitable organization giving help to the needy children in terms of contributing to their school fees for higher. They act as the corpus here and the children act as the recipients. Nelly indeed does have its own people who invest in the UK fund with the expectation of getting gains from them, this are the donors to the fund. By investing using charitable funds, the investors are able to avoid the risk of paying high dollars in terms of income taxes. This is a genuine benefit to them. By donors giving their assets to this charitable organization they are able to trade effectively without making any gain on their capital invested (Ball, 2006). Charitable reminder trusts like Nelly capital, enable the donors to contribute their income tax of their assets while gaining income from them at the same time. The beneficiaries of these assets allocated to the trust include the grantor, i.e. the person donating together with his named beneficiaries for example children, wife or so any other mentioned beneficiary either after the death of all beneficiaries or after a certain period of time, usually fixed in terms of years. For the Nelly Capital they are bound to receive the money after every four years of investing in the fund they receive a certain percentage of the money back. There are two types of charitable organizations. The charitable remainder annuity trust, like Nelly capital, where donors are granted to receive a certain amount of money after a specific period of four years. After these four years the money either is passed onto the charity or goes into the fund again. The donor can only make one contribution to the corpus which cannot be increased in later years. The percentage that he gets income should at least be not less than 5% of what he initially contributed to the fund. On the other hand we do have the charitable remainder unit trust in which the donor unlike in the charitable remainder annuity trust can make more than one contribution to the corpus trust. The corpus continues to pay a specific amount of money to the beneficiary each year until the death of that beneficiary. There are several advantaged of investing in charitable trust such include that they allow the investors to keep the real value of their assets in that they give out with an exemption to taxes as they sell within the trusts hence reducing large capital taxes. This is usually a strategic investment plan as it goes on for a long period of time. Based on the amount you contribute to the corpus, there is a large amount of tax deduction benefit to the donor as the gift taxes do increase (Sarah Lindop, 2013). Charitable remainder trust are a way of getting and creating income for those with no resources to create income. Once you have funded the charitable organization they do sell the property at a no tax basis and provide benefits of the same to the donor or you could actually leave the assets with the charitable remainder organization till you are in a lower class of paying taxes hence decreasing the taxes you pay as you get income at the same time. Investors of the Nelly capital Fund have advantages of these things. Nelly capital has also practiced market diversification experiencing a lot of growth with their micro-caps stocks. With about 20% in government bonds (Sinquefield, 2000), bonds are actually considered risk free and with the rise in the current UK economy after the great recession, the road to recovery into a better economy is already showing, meaning that once the price in interests rates goes up, the price of the bond will automatically increase leading to a higher bond price and more gain on the bonds that have been invested. This means that the corpus stands to gain on this 20% that has been invested on bonds. On the relative basis it maybe an increase in trying to explain to our donors on the importance of preplanning our structural financial plan after the first withdrawal of benefits in June this year. The Corporate bonds have a share of 25% and due to an increase in interests rates they have a decrease in price hence their return has not been good at all. Companies have in recent years after the recession experienced a lot of technology and new advancements in growth hence an increase in their share in the market efficiency. This has naturally led to an increase in share prices of the companies despite the high interest rates in borrowing that the banks have imposed on loans given to the banks. Tactical managers have in this event ended up buying more shares of the same company stocks in the market hence an increase in the growth in the money that the company has gained from the 30% of equities that was invested. Corpus has also invested 10% of its micro-cap stocks in international equities. A recent study shows that global stocks are bound to increase in price (Kleintop, 2014) in 2015 as a result of the flattening of the US stocks in the international market. Another result of the rise of this is that some countries that had earlier on focused on increasing their tax budget have decided to delay the same such as Japan, china has also been seen to say that it has increased and improved infrastructure, this being a key country in production of many goods, sees an increase in production and its fiscal budget hence improving the economy as a whole. Oil prices seem to have fallen so far this year and a decrease in oil prices seems to naturally affect the demand and supply together with pricing of goods and services affecting the GDP of many countries, this equally means a great fiscal budget in many countries and an increase GDP too meaning that the financial equities prices shoot up seeing a raise in the return of international equities (Kleintop, 2014). The 11% invested in the European government bonds is specifically seeing a rise in its returns as the central bank in Europe has been forecast to seeing an increase in the rise of international equities (Zeng, 2015). Despite the recent recession experienced in the Euro zone a rise in the increase to normal trading means has come in handy for the investors in the bonds as a rise in the interest rates is increasing in the zone is leading to a rise in the price of bonds hence more maturity in price and the returns seem great. The 4% invested in cash and short term instruments seems to have yield highly though the risk was great the results to be coming so much in handy. Over this investment period the corpus seems to be experiencing a high risk of investors coming in as to the fact that thou people seem to be escaping the taxing and enjoying other monetary gifts in terms of earning out of a non-profit organization, they seem to have no control of their money and liquefying it in cases of emergencies. The donors also experience difficulties in terms of investing most of the times, in the event that a donor ends up finding more assets to give up to the corpus this is not possible as this is a strategic fixed investment that is only made once and then benefits are ripped from it in only four years time. The corpus should really focus on investing and having a form of annuity for its donors every once a year and should try make some regulation that in the event of having tactical investors they should be allowed to come into the fund too. The bases of investment taken by the fund should practically be renewed after this year’s payment to the donors increasing the amount in overseas stock to around 20%, UK bonds to about 40% as the economy is gradually picking up and the increase in interests’ rates in the economy sees an increase in the amount of returns on government bonds (Cairns, 1998). This shall or has been analyzed based on the current economic growth after the great recession, the adjustments that the central bank has made on the economy and the amount that people are buying equities such as houses that is really seeing the economy grow, companies also seem to be going more technologically being improved meaning there is an improvement in the amount of production being made and thus increasing the GDP of the country all helping in the decrease of prices to increase prices of the government bonds. Corporate bonds on the other hand should be decreased to about 10% as their return is relatively low since market efficiency is dictating an increase in the rise of interests rates (Deacon, 1994) meaning that this is virtually bound to be less volatile compared to the bonds. The global economy has recently been affected by the central bank of Europe after the rise of the Euro back to normality after the increase in trade and reduction in the decrease in amount of index in the Euro (Kandel, 1996) that it was going through. This means that the corpus could acquire more of the European government bonds to about 20% of the same. An increase in the amount of share and tradeoffs of daily activity could help increase the tactical cash flowing in the trust funds. It is also advisable to maybe help the investors to think of investing in long terms till their tax rate group lowers maybe to retirement age as this will enable the corpus to trade more without having to pay the investors on a term of every four years. Financial campaigns could also be started to help tell the investors and bring in more investors by letting them know on the importance of fueling an educational vehicle as well as the benefits they could reap from the trust as donors. It is of vital importance that we as a fund understand the importance of the terms under which we and our donors deal with and especially the terms under which our donors would like to have their money invested. Nelly capital focuses on further reinvesting for our donors and also for maximum gain of children without means to pay education and this should continue in the benefit of both. Implementing the above stated tactics will not only see benefits for donors but the fund as well. 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R. & Locatelli, a. S., n.d. Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies. Journal of Financial Planning. Kleintop, J., 2014. Will International Stocks Outperform in 2015?. Charles Schwarb, November. Malkiel, B. G., 2003. The Efficient Market Hypothesis and Its. Journal of Economic Perspectives, winter, 17(1), pp. 59-82. Marie Brière, A. B. S., 2010. Volatility Exposure for Strategic Asset Allocation. THE JOURNAL OF PORTFOLIO MANAGEMENT , Spring, 36(3), pp. 105-116. Sarah Lindop, K. H., 2013. Dividend taxation and the pricing of UK equities. Journal of Applied Accounting Research, 14(3), pp. 203-223. Sinquefield, G. Q. a. R. A., 2000. Performance of UK equity unit trusts. Journal of Asset Management, February, Volume 1, pp. 72-92. Spiegelman, R., 2014. Charitable Donations: The Basics of Giving. Charles Schwab, October. Zeng, M., 2015. U.S., European Government Bond Yields Fall Ahead of ECB Buying Program. Wall Street Journal, March. 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