Investment Strategy and Portfolio Management of Morris Fund - Case Study Example

Investment strategy and portfolio management Table of Content Table of Content 2 Introduction 3 Morris fund 4 Present market condition 5 Future portfolio revival strategy of Morris 6 Conclusion 9 Reference 10 Bibliography 12 Introduction Investment is a common strategy followed by civilized human being from years, and with passage of time it turned as a highly diversified business sector. There are many factors which an individual has in their mind while making investment; hence there are several definitions of investment given by different market experts. The most common definition of investment describes “Investment is the employment of funds with the aim of achieving income or growth in value” (Kaptan, 2001, p.1). As per the economists and financial experts definition of investment is not as imply as it has been provided. They believe that investment is allocation of resources in form of assets which will yield monitory return in future. Different investors have different appetite for risk as retune, for example a young investor prefers to have capital gains and thus have high appetite for risk. On the other side a retired person will prefer regular income from the investor and have low appetite for risk (Cowan & Russell-Jones, 2005, p.75). There are certain other factors which affect investment patter of an individual such as the time when one wishes to withdraw his or her investment, the rate of desired return, liquidity and marketability of the investment and many more (Chirinko & Schaller, 1995). Hence the companies which are engaged in investment business need to be very careful while developing their portfolios. During developing the investment portfolio the fund management first analyse requirement of the investors, they also analyse the present market condition, prevailing rate and return associated with each investment instrument and financial as well as economic risk in different global market. Therefore the four vital steps to be followed by the fund managers are: Defining the portfolio criteria, creating the portfolio, evaluating the portfolio and finally conducting post investment review (United States, et al, n.d. p.34). While developing a portfolio all these steps needs to be followed to attain a balance between cash inflow and cash outflow. This same technique needs to be followed by the fund manager of Morris fund while developing their future investment strategy. Morris fund Morris Capital is a UK fund that offers an investment tool to the people who want to invest and raise funds after five year. These investors want to secure the future educational liabilities of the children’s such as school fee or university fee. The fund was started in June 2005, with a lock-in period of five years, hence few of the investors might start withdrawing their investment from June 2010 onwards. This will affects the balance of Morris capital in near future. As per the data revealed by the company its total assets are £13.5 million and this amount is invested in different financial instrument to attain a well diversified portfolio. Major portion of the corpus is invested in equity instrument; 35 percent in UK equities and 20 percent in overseas equities. There are investments in long-term instrument, 15 percent in UK corporate fund and 20 percent in UK government fund. 5 percent of the corpus is invested in commercial property which has less volatile investment which has low marketability but high long-term appreciation. Around 5 percent of the total fund in retained as cash or short term securities. The management analysed that soon the rate of withdrawal will over cross the rate at which new capital inflows in the fund, so the net cash outflow will be 3 percent. Till date the cash outflow was almost nil but the scenario will change and management decided to revive their investment portfolio. Present market condition The economical crisis of 2008-09 was a major shock for the booming economies in western nation and resulted as a financial tsunami. Morris fund was started in June 2005, when market condition was quite stable; equity market was performing well both in UK as well as in other international market. However the recession of 2008-09 affected all the global share markets and market price of the stock fall drastically (Elliott, 2008). With passage of time stock market condition improved in immerging nations like China, Brazil and India. Investors’ confidence is getting high and thus stocks of many sectors are performing quite well both in UK and other overseas stock markets (NASDAQ, 2010). Government of different nations introduced different stimulus packs in their countries to enhance liquidity and thus they reduced the benchmark rate. This made bank deposits and other financial instrument offered by the bank less attractive. Due to high assurance offered by the bonds, it made them a good investment instrument in past (Rooney, B. 2009). As the economy started recovering, government of many nations introduced hike in interest rate to reduce money supply. Soon this will affect the bond price and the yield offered by them. Hence in near future bonds will lose their attractiveness among investors. Affect of recession was quite harsh on big companies; many corporate giant were bound to fill bankruptcy. Till date the balance sheet of many multinational companies are showing high debt components which presents a poor solvency state in near future. Until the companies attain a better position to pay their overdue liabilities, corporate bonds will not be considered as a good investment instrument. The real estate conditions are yet to improve because property prices are quite low in UK and US. As per the market experts investment in real estate market is not a good option until demand for property boost (Wong, 2009). Other investment sectors like gold, crude oil, foreign exchange currency, etc have high risk associated with themselves. So the investors are unwilling to take high risk by investing in such instruments. Hence it can be concluded that although the economy is at the recovery path, but conditions are not much stable in all the major economies like UK and US. Due to stimulus packages introduced by the government market attained liquidity, but the economic fundaments are yet at poor state. Investing in long-term instruments might be risky because no one is aware how market will respond when government will take away the stimulus package, thus investors are more interested to invest for short term in the emerging nations how got less affected by recession. Future portfolio revival strategy of Morris There are many instruments which can be used by Morris Capital to develop their future portfolio. Considering the present market condition it seems that stock markets are performing quite well. The data revealed by the stock exchange provides a clear indication that market regained its liquidity. The volume of stocks traded in the secondary market increased in past few months, the investors are more willing to invest in certain blue chip companies because stock price of these companies are almost at the bottom level. Due to strong fundamentals, developing countries managed to perform much better even at the phase of recession, hence these nations are attractive markets for the foreign investors. Even the UK stock markets are regaining volume and liquidity which makes share as a good investment instrument for short or medium term. At present Morris Capital has good portion of capital invested in shares, there is a possibility that due to recession a good portion of the capital got eroded. Hence the management need to revalue their investment to determine the exact valuation and then certain vital reshuffling should be done. Management can sell certain poor performing stocks in UK stock exchange and reinvest this in emerging economies for attaining short term gains. This strategy will add adequate amount of liquidity in the portfolio maintained by Morris. While investing in stock market, the management need to follow active investment strategy where it should search for small gains and should enchase it as soon as possible. It has to be accepted that active investment strategy enhances the portfolio risk, so to diversify the risk, management of Morris need to retain certain portion of investment in more secured instruments. The investors of Morris Capital invested in the fund to have a predetermined rate of return at the time of maturity; hence they have moderate risk appetite. From June 2010 onward Morris Capital will require a stable supply of fund to balance the cash withdrawal; hence the management should enhance their investment in more secured instruments. Although the yield offered by government bonds is declining, but management can rely on them as a good source of stable income in near future. As compared to active investment, passive investment is a better option for the fund managers. The management can buy stocks which they feel will perform better in nearby future. The management can also go for indexing so that their portfolio performs as per the movement of index. The management need to understand it future requirement, and on basis of that the balance between active and passive investment need to be developed (Faerber, 2007, p.207-208). As compared to the present market condition, passive investment strategy is more suitable for Morris Capital. First of all its will reduce the risk associated with investment and secondly it also minimises the cost of investment. Hence the management will try to trade-off between active and passive investments. Corporate bonds are no more an attractive instrument due to high insolvency risk associated with them; hence the fund managers should avoid parking more capital in these instruments. Being a non-secured debt instrument, they offer high return but on the same time these are quite risk in present market. Morris Capital need to maintain adequate liquidity to pay the investors ones their investment attain maturity, but one the same time holding too high will result in opportunity loss. It is quite possible for predicting the future cash outflow, so excess of cash can be invested in money market instruments. Their investment are highly liquid and secured, therefore instead of holding ideal cash, it is better to investment in highly liquid and secured instruments. As the condition of real estate is yet to recover, hence making any change in the investment made in corporate property is risky. When the investment was made prices where high and the property market was at great heights, but after the sub-prime case, conditions are just the opposite. Property prices are too low, and there is no sign of improvement in nearby future. So the best policy is to keep this investment undisturbed and wait until conditions revive in this sector. As per the market experts different hedge funds are available in the market which can be good option for those investors which have spare funds are having high appetite for risk. However neither the fund held by Morris Capital is so high that considerable amount can be invested in these funds nor the risk appetite of the investors is high enough to cope with risk associated with these funds. Hence Morris should not invest in these funds until it have a huge capital base. Conclusion After considering the present market condition of UK as well as international market, it seems that Morris Capital need to trade-off between the risk associated with different investment options and the rate of return offered by them. Management should pay more attention toward passive investment instruments because the market conditions are improving, and hence these investments will offer a fair and steady return. On the other side growing opportunities in emerging nation can be enchased through active investment in those stocks which are highly volatile. So the portfolio needs to be balanced with appropriate ratio of investment in active as well as passive instrument. With revival in economy, competition will grow between different financial institutions, so at that time customers will prefer to have high returns with moderate associated risk. There is a possibility that investors will prefer to withdraw their investment from Morris fund for inverting in some other institution. If such situation arises, it will disturb the future forecast made by management, and net cash withdrawal may exceed 3 percent (forecasted). Therefore while developing the portfolio management need to pay attention toward flexibility. The instruments selected for the portfolio need to have good marketability to that as and when required further alteration can be made. Reference Chirinko, S. R. & Schaller, H. May 1995. Introduction. Why Liquidity Matters In Investment Equation. [Pdf]. Available at: http://bbs.cenet.org.cn/uploadImages/2003591944433316.pdf [Accessed on March 11, 2010]. Cowan, N. & Russell-Jones, N. 2005. Risk Analysis and Evaluation. 2nd ed. Lessons Professional Publishing. Elliott, L. January 26, 2008. Black Monday: recession fears spark global share crash. [Online]. Available at: http://www.guardian.co.uk/business/2008/jan/22/marketturmoil.equities [Accessed on March 11, 2010]. Faerber, E. 2007. All About Stocks, 3E. 3rd ed. McGraw-Hill Professional. Kaptan, S. S. 2001. Investment Management. Sarup & Sons. NASDAQ. March 10, 2010. 3/10/2010 4:30:00 PM ET DJ30 PointChange: +2.95 Level: 10567.33 NASDAQ PointChange: +18.27 Level: 2358.95 NQ100 PercentChange: +0.8 R2K PercentChange: +0.8 SP400 PercentChange: +0.8 SP500 PointChange: +5.16 Level: 1145.61 NASDAQ-Adv:1724 Dec: 957 NYSE-Adv:2040 Dec: 985. [Online]. Available at: http://www.nasdaq.com/aspx/market-summary.aspx[Accessed on March 11, 2010]. Rooney, B. October 30, 2009. Bond market still going strong. [Online]. Available at: http://money.cnn.com/2009/10/30/markets/bondcenter/bonds/index.htm[Accessed on March 11, 2010]. United States, Committee on Finance, Senate, Government Accountability Office, Congress. No date. Information technology Centers for Medicare & Medicaid Services needs to establish critical investment management capabilities : report to the Chairman, Committee on Finance, U.S. Senate. DIANE Publishing. Wong, M. November 12, 2009. Real estate financing: investment and analysis. Spring 2010. JMHH F45/F50. REAL/FNCE 209/721. [Pdf]. Available at: http://finance.wharton.upenn.edu/courses/Syllabi/2010_Spring/MWong_RE-Investment209-2010.pdf [Accessed on March 11, 2010]. Bibliography Blake, D. 2000. Financial market analysis. 2nd edition. Wiley. Cuthbertson, K. and Nitzsche, D. 2008. Investments. 2nd edition. Wiley. Rutterford, J. and Davidson, M. 2007. An Introduction to Stock Exchange Investment. 3rd edition. PalgraveMacMillan. Read More