Investment Strategy and Portfolio of Morris Capital - Coursework Example

Investment strategy and Portfolio Introduction Morris Capital has one of the best portfolios in the past. Ever since the inception the fund was aimedat significant growth. The present portfolio was constituted in the year 2005. The asset holdings of the fund are worth £13.5 million as on January 1 2010. The assets in the portfolio are 35% in UK Equities, 20% in overseas equities, 15% in UK corporate bonds, 20% in UK Government Bonds, 5% in commercial property and 5% in cash and short term instruments. But as evident, the market is on a completely different direction in 2010, from what it was in 2009. There are huge opportunities as well as risk in the coming period. The current portfolio of the fund will not be profitable enough in the year 2010. Therefore, it needs to be revised based on the current market and future potential of the market. This report aims at analyzing the current investment environment in terms of challenges and opportunities. After analyzing the issues in the environment, certain potential investment options are analyzed and finally an efficient portfolio is created for the fund based on the challenges, risks and opportunities. Investment environment analysis 2010 is a year of opportunities and challenges for the investors. Market experts predict that investors should go global in the year 2010. Identifying the high growth market and grabbing that opportunity will pay off in the year 2010. “Its one of the few things that passive and active investors can agree on, even though they have opposite reasons.” (Coy, 2009) Though the passive investors are conservative and they focus on indices, they can do the same by diversifying into the international markets. This part of the report will examine the major issues in the current and future investment environment. Some of the major issues and challenges in the present context are outlined below. Sovereign debt crisis: Present investment environment is characterized by an array of sovereign debt crisis. Euro zone is the most debt prone area as of now. “Greece is on the verge of national bankruptcy and international investors are sceptical about the government’s ability to implement the savage cuts to wages and social spending required to lower its deficit from 12.7 percent of gross domestic product to just 3 percent by 2012. Portugal and Spain face a similar situation.” (Connor, 2010) The situation in Ireland and Italy is also similar. Dubai debt crisis is news that shocked the market some months back. The policies of Dubai government regarding its debt are very crucial for both the capital as well as the bond market. Dubai has a total debt of over 80 billion dollars. Moody’s have downgraded many government backed companies in UAE. United States is also on the league where they have been warned by Moody’s that the credit rating on the nation will be tightened on the grounds of increased deficit. United States is currently having a budget deficit of around 10.6 percent of the GDP. The market is very keen on knowing each policy that the government will frame for reducing its debt burden. The present deficit in US is estimated to be twice as that of the euro zone average. Therefore, investors are to be very cautious about the actions of the government in these debt prone regions in order to predict the impact on the market. US unemployment rate: Rising US unemployment rate is an important issue in the current investment environment. “The U.S. economy is slowly bouncing back from its worst downturn since the 1930s, but the job market has remained a top worry, with unemployment near 10 percent.” (Reuters, 2010) When US reported a marginal decrease in the unemployment rate, the market responded positively. Markets all over the world are looking towards the unemployment figures of US. Though statistics state that the job market is rebounding, the widening budget deficit may adversely affect the data. Therefore, the uncertainty about the US job market is an important cause of concern for the investors. Premature withdrawal of stimulus: Stimulus withdrawal by governments all over the world is a factor that the market is frightened about. Most countries have already announced their plans of stimulus withdrawal. Markets across the world are sentimental about the stimulus withdrawal decision governments. IMF has warned the world that an early withdrawal of stimulus would prove to be costly for economies all over the world. “It says, with the exception of some countries, current conditions do not justify a significant rolling back of macroeconomic stimulus or financial policies in 2010.” (News limited, 2010) IMF informed that though the economy will perform well in 2010, the fiscal as well as monetary stimulus needed to be continued in the year 2010 until the growth becomes sustainable. But IMF has opined that fast growing economies of the world can start withdrawing stimulus. Thus the market movement will depend on a gradual and timely withdrawal of the stimulus. China’s currency policy: China’s currency policy poses one of the greatest threats to the global economy at present. China has artificially kept its currency devalued and it is making its export sector boom. This scenario has invited the flow of hot money into the country is leading to a situation of inflation. If this situation continues, the possibilities of an asset bubble in very high. “Economists say China runs the risk of a sharp recessionary correction, which could hit recovery around the world, particularly the United States, its main trade partner.” (The age, 2010) “China is among the emerging markets facing risks of property and commodity market bubbles, central bank adviser Fan Gang said, joining officials from the region in expressing concern about surging asset prices.” (Wong and Leung, 2010) But, there are also economists who rule out any possibility of an asset bubble in China. They say that asset prices will stabilize once the government exits from the stimulus. Based on the above investment environment, fund managers will have to strategically allocate the fund into various asset classes. The company can consider the following factors for selecting the best portfolio. Markets to invest: Investors should look mainly towards the developing countries for better returns. The best countries to invest in 2010 are China, India, Japan, Korea, Taiwan, Canada, Australia, Brazil, Germany and Poland. Among these the hottest markets are China and India which are the fastest growing markets in the world. Among these countries itself, some of them are expected to perform only till the first half. As per the market experts, China will perform well only during the first half of the year. “Korea and Taiwan both look to be in pretty good shape: Neither had too much fiscal or monetary stimulus and both have good foreign-reserve positions.” (Hutchinson, 2009) Australia is expected to perform well all throughout the year if commodity prices do not fall. India will perform well in the year, but deficit problem may be a setback. Germany is another healthy market in the world. Germany is expected to show a sustainable growth in the year 2010. But pressures from other debt prone European Union countries can create short term impact on the market. Canada and Brazil are predicted to do better in the first half of the year. It is not necessary that the fund manager should diversify into all the above market. But will have to carefully select a good group of countries for making investments. Instruments to invest: Equity will remain as the hottest investment option in 2010. Most of the emerging markets are about to show higher returns in the equities. The other investment options for 2010 are Corporate Bonds and Gold/Gold ETF’s. As far as bond market is concerned, corporate bonds will be an attractive option in 2010. Government bonds across the world will be under pressure due to debt driven problems. But there are selected countries, where the government bonds will be better and safer, especially the growing economies. “Federal Reserve market intervention and its zero percent interest rate policy has provided "cover" for the bond market, and that support appears likely to continue into early 2010, but investors needs to be mindful that bond market pricing does not reflect true market conditions.” (Steinhilber, 2009) Corporate Bond market is will do pretty well in 2010. Most of the nations were injected with stimulus packages to boost the industries. Due to this majority of the companies have recorded profits by the end of second quarter of 2009 itself. Market is still growing and this momentum will continue. Corporate bonds will thus be a safe bet in 2010. Gold is considered to be another safest investment option for 2010 as its price will increase in the year. “One of the reasons for the continuing increase in gold prices is supply outstripping demand. This situation has been fanned by people who have taken their money out of property or real estate and invested it into gold and other precious metals.” (Bizcovering, 2009) Sectors to invest: The sectors to invest in 2010 vary from one country to the other. Automobile ancillary, Banking, Oil and gas, mines and minerals, metals and travel and tourism are the sectors that will perform well in India. (Indian Stock Market Guide, 2010) The sectors that will perform well all over the world are healthcare, precious metals, oil and gas and alternative energy. Therefore these sectors should be considered by investors while diversifying into global equities. (Market oracle, 2010) Present strategies for plausible strategic asset allocations Alternative 1 Sl No Asset Category % Allocation 1 Equities (UK) Germany: 30% Equities (Overseas) India: 25% China: 25% Brazil: 20% 60%  2 Government Bonds: UK: 50% US: 50%  10% 3 Corporate Bonds: UK: 100%  15% 4 Gold  10% 5 Cash and short term instruments  5%   Total  100% Alternative 2 Sl No Asset Category % Allocation 1 Equities (UK) Germany: 20% Poland: 10% Equities (Overseas) India: 20% China: 15% Brazil: 10% Taiwan: 5% Korea: 10% Albania: 10% 60%  2 Government Bonds: UK: 100%  5% 3 Corporate Bonds: UK: 100%  10% 4 Gold  20% 5 Cash and short term instruments  5%   Total  100% Given above are two alternative options that Morris Capital can consider in the year 2010. Both of the portfolios have 60% exposure to equities. The first alternative is less diversified than the second. In alternative 1 only India, China and Brazil are considered for overseas equities as they are the best among other emerging markets. Only Germany is considered for UK equities. Very less exposure is taken to the UK government bonds in both the alternatives. The first alternative was given less exposure to gold while the second alternative gives higher exposure to gold. The second alternative is highly diversified as it covers almost all the best markets in the world. Also, the second alternative will serve as a hedge against any possible fluctuations in the equity market because there is 20% exposure to Gold. Recommendations Based on the alternatives outlined in the previous chapter, Morris Capital can select alternative 2. Alternative two is highly diversified. The 20% approach to gold and smaller exposure to debt instruments will act as a good hedge against fluctuations in the equity market. Morris should use active as well as passive strategies in this fund. In countries like India, Brazil and China, Morris capital can use Active strategy by investing in individual stocks. In rest of the markets, Morris capital can use passive strategy by investing in indices. Conclusion This report has given a clear insight into the present issues in the investment environment. Considering the issues and opportunities of the market, two alternative portfolios were formulated, among which alternative 2 is selected. The new portfolio is entirely different from that of its existing portfolio. Gold is omitted in the present portfolio, but in the new portfolio 20% will be allocated to Gold. Maximum exposure is given to overseas equities by diversifying into major emerging markets. Property, which formed a considerable portion of the existing fund, is excluded from the new portfolio. An overvalued situation and possibility of asset bubble is the reason to exclude property from the portfolio. Thus, Morris Capital can optimize the returns of the fund by investing in the selected alternative. Works Cited Peter Coy, 2010. 2010 Investment Outlook. [Online] Available at: http://www.businessweek.com/magazine/content/09_52/b4161045147139.htm [Accessed 6 March 2010] Patrick O’ Connor, 2010. Sovereign debt fears trigger plunge in global markets. [Online] Available at: http://www.wsws.org/articles/2010/feb2010/econ-f05.shtml [Accessed 6 March 2010] Reuters, 2010. Data points to US job market nearing rebound. [Online] Available at: http://www.reuters.com/article/idUSTRE61F2RH20100303 [Accessed 6 March 2010] News limited, 2010. Premature stimulus withdrawal ‘costly’. [Online] Available at: http://www.news.com.au/business/breaking-news/premature-stimulus-withdrawal-costly/story-e6frfkur-1225833668620 [Accessed 7 March 2010] The Age, 2010. Markets wary of China’s ‘asset bubble’. [Online] Available at: http://news.theage.com.au/breaking-news-business/markets-wary-of-chinas-asset-bubble-20100125-mtu6.html [Accessed 7 March 2010] Sophie, Leung & Chia-Peck, Wong, 2009. China faces asset-bubble risk. [Online] (Updated 18 November 2009) Available at: http://www.bloomberg.com/apps/news?pid=20601068&sid=awonLXtlhUzE [Accessed 8 March 2010] Martin Hutchinson, 2009. The Hottest Places to Invest in 2010. [Online] Available at: http://www.marketoracle.co.uk/Article15707.html [Accessed 9 March 2010] J., D., Steinhilber, 2009. Bond Market Outlook: Stick to Shorter Term High Quality Investments. [Online] Available at: http://seekingalpha.com/article/171599-bond-market-outlook-stick-to-shorter-term-high-quality-investments [Accessed 10 March 2010] Bizcovering, 2009. Invest in Gold in 2010. [Online] Available at: http://bizcovering.com/investing/invest-in-gold-in-2010/ [Accessed 10 March 2010] Kurtis, Hemmerling, 2009. Gold Price Forecast 2010 Update. [Online] Available at: http://precious-metals-investing.suite101.com/article.cfm/gold_price_forecast_2010_update [Accessed 10 March 2010] Indian Stock Market Guide, 2010. Top sectors in 2010 for stock market investing. [Online] Available at: http://www.indianstockmarketguide.net/top-sectors-in-2010-for-stock-market-investing/ [Accessed 11 March 2010] The Market Oracle, 2009. The Three Best and Worse Investment Sectors for the Next Five Years. [Online] Available at: http://www.marketoracle.co.uk/Article11841.html [Accessed 10 March 2010] Read More