The Reasons for the Global Economic Meltdown - Case Study Example

Introduction The global economy is going through a severe economic recession. There are a number of reasons for this global economic meltdown, but one of the primary reasons is bad investment decisions made by investment bankers. Industry giants such as Lehman Brothers were forced into bankruptcy because of these bad investment decisions. As an after effect of this global economic meltdown investors have become risk averse. Although there is some improvement in international economic conditions but still it’s a long way from a global economic recovery. This risk averseness has somewhat driven out the speculations and made a portfolio investors job even more important. A research analyst or portfolio manager has to think about more fundamental aspects of a security in this situation. Moreover after a valuation has been carried out an investor must use his own intuition and knowledge to assess what impact the market can have on his valuation i.e. what is the true value of security. There are a number of factors which must be taken into account when making an investment decision: Underlying Assets When ever making an investment decision an investor must first of all asses value of the underlying asset. This gives an idea of salvage value for your security. If even market goes bad and there is a market recession, net value of assets is usually still recovered. This is also a very important factor in determining long term investment opportunities. If an investor plans on holding a security for more than a year, underlying assets become even more important. This is because underlying assets are responsible for future cash flow streams and thus reflect growth potential. Market Sentiments Every investor planning to make investments in securities must have an understanding that no matter how good a security, market sentiments are still the key to its value in the secondary markets. This is because an open market functions on basis of supply and demand and if there is lack of demand than there is will not be any value for a security. Demand is consequently driven by market sentiments and perception of a securities value. In the long run however market sentiments are not as important. Variables There are a number of security specific variables that must also be included into investment decisions. Past performance and price stability are of the key variable that must be taken into account. Past performance is important because it can show any seasonal trends and factors which contribute to demand fluctuations. Investment Decisions Alliance Trust Alliance trust is one of the biggest investment firm based in Dundee. It is the biggest investment trust in England. In 2008 due to its high market capitalization and stable performance it was made part of FTSE 100 index. Alliance trust has four major business divisions i.e. quoted equity, property, private equity and financial services, the latter of which comprises its asset management and savings units. The company currently holds almost £2,067.6m in assets. Investment trust is currently holding its majority portfolio in UK based companies. According to its last annual reports the company holds more than 50% in UK institutions namely BP, Royal Dutch Shell, GlaxoSmithKline, Vodafone and BHP Billiton. The share showed an increase of 15% in its recent financial year and is therefore a good choice for investment. Barclays This is a global British financial services firm which operates in many continents around the world. This holding company is listed on NYSE and LST. The mortgage divisions of Barclays were in serious trouble in the recent recession. This drove its share price far below its fair value in secondary markets. The British government has come to Barclay’s aid which has helped its share price stabilize. Huge gains can be made as the price is currently underpriced and it is expected to move back to its true value. Barclays is also part of FTSE 100 index. It has also been named the 26th largest company in the world by Forbes. BP British Petroleum is the fourth largest company in the world. It deals in energy products and has a diversified portfolio of energy investments. Their investments in independent soviet states are expected to bring even more prosperity to BP. BP is also a member of elite FTSE 100 index, and is listed on London stock exchange. Energy is a very good investment in the current financial conditions. With unreliability of other investments options, energy sector is still attractive due to its ever increasing demand and diminishing reserves of fossil fuels. British airways British Airways is the largest commercial airways of UK. The company has been facing severe financial problems due to increasing fuel prices and tough competition. The company still has a very strong asset base. The share price of BA showed very bad performance for a last couple of years. There is a major contribution of negative market sentiments in this bad performance. This means that current share price is greatly undervalued; therefore gains are available for investors investing in British airways while it recovers. Prudential Prudential is one of the world’s leading service providers. It provides investment management, insurance and various other financial products to both institutional and individual consumers in over thirty countries around the world. Principal products and services provided by Prudential include mutual funds, insurance, annuities, pension and retirement-related investments, administration and asset management, securities brokerage services, and commercial and residential real estate. In light of recent economic meltdown Prudential is one of very few corporations which have survived without many losses. Other competitors such as AIG have failed to sustain themselves against bad conditions but Prudential has shown its depth. Currently total assets of Prudential stand at $485.8 billion; moreover it has reported revenue of $34.4 billion and net income of $3.4 Billion. Investments in Prudential complete the portfolio when it comes to shares this is because it’s based in America unlike other companies that are part of the portfolio and it’s mainly involved in insurance. These two factors give Prudential a hedging quality for rest of the portfolio. Baillie Gifford American The fund was started in 1997 and has shown incredible performance over the last twelve years. Most of its investments are based in North America. The current Fund manager is Mick Brewis who is well known for his understanding of American markets. The fund also makes investments in Canada. The Fund charges a 5% commission initially and an annual commission of 1.65%. The fund has a conservative approach to their investments as is therefore a good choice for investment in current conditions. INVESCO Perpetual entity A house hold name INVESCO is the largest investment management company of Britain. INVESCO manages funds for a wide customer base. Customers of INVESCO range from individuals to institutional clients. INVESCO offers a wide range of products such as includes ICVCs, investment trusts, ISAs, pension products, offshore funds and other specialist mandates. This security is one of INVESCO’s most successful ones. It provides a fixed return each period and charges a yearly commission of 1.5%. An initial commission of 2.5% is also applicable which is very low as compared to other companies operating in the industry. Franklin Templeton GBP strategic bonds The recently meltdown has changed the global economic scenario. A few years ago United State dollar was the strongest currency in the entire world. There were a number of reasons for this strength. First of all many smaller countries preferred to keep their foreign reserves denominated in United States dollar. This situation is now changing. The recent bad performance by the American dollar has forced many countries to change their economic strategies. This has opened up a window of opportunity for currencies such as Euro and Great British Pound. China has trillions of dollars in reserves, even if it converts a small portion of its reserves into Great British Pound it will be a huge boost to all securities denominated in GBP. This is why a strategic bond is a good choice as an investment. Moreover is highly reputed firm. Based in America and headquarters in California, Franklin Templeton offers financial services in an astounding one hundred and fifty countries. Franklin Templeton is being currently traded on the New York Stock Exchange and has shown stable performance during recent turmoil. SWIP Royal Emerging market fund The last decade has seen amazing growth in some countries recently considered as developing countries. This amazing growth has led to a new terminology Emerging Markets. These countries are usually characterized by a large labor force, raw material and excess land, all the ingredients necessary for rapid growth. Most of growth in emerging markets has come from out sourcing by major companies. As living standards increase in United States and Europe people are demanding more and more pays. This increases the input cost of labor and thus reduce profit margins for manufacturers. This has prompted many multinationals to search for alternative labor and raw material markets. China has become famous for outsourcing electrical and computer based manufacturing. Brazil is famous from providing auto assemblers and manufacturers with feasible conditions. India has developed itself as a hub for call center outsourcing. The SWIP Royal Emerging market fund invests in these emerging markets. There are a number of advantages of these investments in emerging markets. First of all most of these markets such as china have not taken full hit of the economic recessions and can still provide stable financial rewards on investments. Secondly they bring diversity to a portfolio because they behave differently to global economic variables as compared to European based investments. SWIP is a strong financial entity of Europe and is one of Europe’s largest asset management companies, with €100.73 billion invested across all major asset classes. This financial strength and expertise guarantees an investor that there will not be any bankruptcies or bad investment decisions. Royal London Cash Fund Royal London is based out of UK and is involved in a number of life and pension products. The aim of including Royal London Cash fund is to provide a balancing factor to the investment. It will maintain investment liquidity because it is a cash fund. Purpose of Portfolio The portfolio will be perfectly suited for a pension fund seeking long term growth as well as small annual payments. The companies that constitute the portfolio are industry giants and are therefore secure investments. Pension funds are risk averse because of the nature of their investors which are retired professional. They prefer stability over ambitious growth. Portfolio Performance The portfolio gave an overall return of -4.25%. We must keep in mind that investments in mutual funds charge a high initial cost and led to a negative return. Most of the investment decision gave negative returns. This is however a very small period to asses a portfolio’s performance. In the long run the performance is expected to improve. The investment decision to investment more in British Airways and Franklin Templeton GPB strategic Bonds turned to be a wise one. They showed very impressive performance and are thus a major contributor to the profit seen by the portfolio. Read More