Portfolio Management: Finance - Assignment Example

PORTFOLIO MANAGEMENT Part 2a Summary of investment transactions made Originally the resources available to the couple were A portfolio of shares originally valued at slightly over £50,000; 2) Inherited cash in the amount of £100,000; 3) Redundancy payment of £10,000 received by Mrs. Fortunate; and 4) £10,000 in the form of ISA held in a building society. The inherited cash and the stock portfolio were combined as one package to be professionally managed by the group. It is borne in mind that Mr. Fortunate currently has an average annual income of £100,000. Current valuation of portfolio After the valuation of the inherited stock portfolio and combining all available funds of the couple, the Group has found out that Mr. Fortunate’s assets, excluding his wifes redundancy payment, is now composed of £110,000 in cash and £125,252 in equities, as shown in the table below, for a total of £235,252. Table 1: Updated valuation of inherited stock portfolio. Cash represents 47 percent and equities account for 53 percent. Based on the Ellis (1997) formula, 75 percent -- i.e., £176,000 should be invested in equities and £59,000 in bonds and money market. The investment in bonds and money market will make sure that the couple will have enough liquid assets to draw upon to meet their daily needs as well as extraordinary and emergency expenses. After deducting £ 125,000 value of the inherited stocks, there still remained £51,000 that could be invested in shares of stock. This fund could have been invested under the ISA, which provides tax shelter on equity investments. Inasmuch as our Group had been asked to invest and manage this fund, we decided to invest £17,000 each in the shares of UK-listed British American Tobacco, Experian, and easyJet. The transactions and results are summarised as follows: Financial assets Price when Recent Total bought valuation Value Inherited portfolio (updated value) £125,252.50 Bonds £ 47,200 Money market £11,800 Stocks BATS 17.000 18,558 Experian 17,000 18,302 easyJet 17,000 18,888 Totals 51,000 55,747 £55,747 Total value of stocks Total value of Mr. Fortunates financial assets £239,999.50 During the brief period of less than two months, the total value of stocks invested in these three companies grew by 9.3 percent, and increase in value of £4,747, causing the total value of Mr. Fortunates financial assets to grow to $240,000. Bonds and money market will continue to provide minimal returns of .029 per cent per week. For a 7-week period, this was.00029(7) x 59,000 or £120. In view of the foregoing positive results, therefore, we are now in a position to state that the Clients portfolio is well on its way to ;meeting his objectives. It is believed, however, that the portfolio should be rebalanced from time to time in order that it will be consistent with the Ellis formula. The portfolio managers are: Part 2 (b) Introduction Investing requires a knowledge and an examination of the economic, industry, and company fundamentals. In addition, despite the scepticism of many investment thinkers, prices and volume patterns may also be used for the purpose of performing technical analysis. Our group has been hampered in its task by the constraint of having to enter the market and transact the fund within a very short period of time. Timing entry and exit with the use of technical analytical methods could not therefore be done with exacttitude and we had to execute the trades with merely trendlines. The macroeconomy has a large influence on the stock market as a whole, on specific industries, and on the companies that comprise each industry. During the past months, particularly during 2008, the world economy was affected by a financial crisis that began with the collapse of the US subprime mortgage market which affected banks and other financial institutions in developed countries as well as developing ones. The major banking and economic crisis that ensued affected all industries. Later, however, the world economy, led by the US, has shown signs of recovery, and stock markets, and shares of many stocks reflected this fact. Particularly affected were the cyclical industries and those that depended on them for the supply of raw materials and for markets. Some companies that were non-cyclical such as foodstuff and tobacco were less vulnerable. Experian was affected too but was less vulnerable than most because the services it provides are essential to business seeking to cope with economic adversity the world over. It is difficult to figure out the impact of industry situations on specific companies, in particular where the companies carry varied product lines or whose services are diversified (See Jones 1997). Experian belongs to this category, and even non-governmental entities engaged in classifying companies disagree on which industry Experian falls under (FT.com vs Reuters, for example.). We therefore feel that the fortunes of Experian are less correlated with industry developments than with the economy as a whole as measured by the stock market indices. The following three stocks were chosen for our additional investments: British American Tobacco (noncyclical consumer goods), easyJet (airline), and Experian (software technology or industrial). We used the Internet resources, specifically, the data and interactive charts provided by Reuters, in addition to Yahoo finance. After pre-qualifying the companies on the basis of past financial performance and the strength and resiliency of their industries, we used chart formations for timing our entry in each case. We drew a trendline at the bottom of price lines. The use of moving averages would have taken us longer before entering the market, or it would have prevented us from taking a buy position. Below are charts that we extracted from Reuters showing the price lines as well as the lines representing the indexes of of the FTSE 100 and each industry. The FTSE 100 substitutes for the economy and the stock market as a whole, whilst the industry is shown to indicate how the company fares in comparison. a. Experian Plc Fig.1: Experian Chart, 3 months data, with trendline, vis-a-vis Industrial and Technology Sectors.. http://www.reuters.com/finance/stocks/chart?symbol=EXPN.L Todays close 660p. The Experian stock was purchased on February 2, 2010 at the price of 613p per share. b. British American Tobacco Plc Fig. 2: British American Tobacco with comparatives (FTSE 100 and Consumer Discretionary) http://uk.reuters.com/business/quotes/chart?symbol=BATS.L Purchased at 2085 on February 10, 2010. Todays close: 2277p c. easyJet Fig 3: easyJet http://uk.reuters.com/business/quotes/chart?symbol=EZJ.L Shares purchased on February 26, 2010 at 414p. Todays close: 460p These stocks were chosen because fundamentally the issuing companies were sound and did better than the market and industry averages. Although the market was rising slightly, the stocks were moving up in a more emphatic way, denoting influences going beyond those coming from the market and the general economy themselves. It is likely that good management contributed to the better performance of these companies despite their low volatility indexes denoted by their low beta. Selected Company: Experian Plc The company is a global credit information company operating from its headquarters in Dublin, Ireland, and doing business in more than 30 countries all over the world. Formerly known as CCN Systems , it also has operational headquarters in England (Nottingham) and the United States (Costa Mesa, California). It is listed in the London Stock Exchange (symbol: EXPN.L) and is one of the companies constituting the FTSE 100 Index. Since the mid 1990s, it has expanded considerably through the acquisition of such companies as TRW Information Services, CheetahMail, PriceGrabber, Hitwise, and others (experian, Answers.com) In 2008, the it acquired SearchAmerica, Inc, a provider of payment prediction data and analytics to the US healthcare industry. The following year it acquired United MailSolutions GmbH. In early 2010, the Group acquired control of A-Care Systems, a Japanese e-mail marketing company. (See Annual Report) The Company’s business The 2009 Experian Annual Report describes the business of the company as that of providing information, analytical tools, and marketing services to organisations of all sizes worldwide, from small start-up businesses to multinationals. These services are useful to companies in managing risk, finding and retaining customers, and automating decision making. They also help individuals manage their credit relationships and minimise identity theft. The geographical scope of the company’s business activities includes North America, where business volume is greatest, Latin America, UK and Ireland, and EMEA/Asia Pacific. It is difficult to compare Experian Plc with other companies because it operates in its four principal business lines – credit information, , decision analytics, and marketing services, and interactive – without any single competitor that competes in all of these lines. Because of its size and reach, the Experian Group is nearly twice as large as its closest competitor and thus enjoys significant competitive advantage and a relative degree of protection from cyclical adversities. North America accounts for more than half of its total annual revenues, followed by the UK and Ireland with just over one-fifth. Latin America and and the EMEA/Asia Pacific regions account for the balance. In terms of revenue by activity, in FY2009, 42 percent came from credit services, 13 percent from decision analytics, 20 percent from marketing services, and 25 percent from Interactive. In terms of customer base, financial services clients account for 41 percent, 18 percent from direct to consumer, and the rest going to retail, telecommunications, public sector, and others.(See Annual Report) The sector under which the Group is classified is technology (Reuters) and the industry is software and programming. (Note, however, that FT.com classifies it as Industrial (sector), and commercial services and supplies (industry)). In business information, its only global competitor is Dun & Bradstreet. In credit-related analytics and software, it is the industry leader globally, with the exception of the United States where Fair Isaac is dominant. In consumer-credit information, Experian is the market leader in UK and Ireland, Brazil and other countries, but has significant competition in Equifax and TransUnion in the United States. In direct marketing services the competitors are Acxiom and Harte-Hanks although there are other that are smaller, specialist and fragmented. In terms of direct-to-consumer credit information business, its main US competitors are Equifax, TransUnion, Fair Isaac, whereas in the UK, Equifax is its major competitor.(Annual Report). Financial performance According to Reuters, the Groups revenues for the six-month period ending September 2009 decreased 7 percent to $1.9 billion and net income dropped 2 percent to $257 million. The decreases in costs of sales and operating expenses enabled the company to minimise the drop in income. A study of the financial statements over the last five years shows a significant drop in revenues from 2007 to 2008 due to the global recession. However, sales are projected to grow slightly from £ 4.0 billion to $4.12 billion for the year ending March 11, 201 Management effectiveness is high asset turnover, receivables turnover, and inventory turnover posting significantly higher figures than the industry. (Reuters) The beta of a low 0.69 denotes low volatility and low vulnerability to the business cycle; hence, it has not been as badly affected as other companies in UK and in its industry during the current global recession. Its liquidity ratios are below 1, compared to the industrys 2 + but is in line with that of the S&P 100. In terms of profitability, its gross margin of 52.28 percent is superior to that of the industry (6.72 percent) and the S&P500 with its 29.66 percent. More importantly, its net profit margin of 13.16 percent is much better than the industrys 1.26 percent. Experian has a relatively high P/E ratio of 21.57 compared to the sectors 10.67. Its return on investment is 9.49 percent compared to 1.86 percent in the industry. Its return on equity is a high 23.22 percent, whilst that of the industry, affected by the ongoing recession, is a very low 0.69 per cent. 0. (Reuters) In general, Experian demonstrates sound fundamentals and is expected to continue to outperform the FTSE 100 as well as the industry averages. Bibliography Ellis, J 1997, Your top investing moves for retirement, Fireside/Simon & Schuster, New York Experian Annual Report 2009. Viewed 28 March 2010 at http://www.experiangroup.com Experian Plc charts. Viewed 29 March 2010 at http://www.reuters.com/finance/stocks/chart?symbol=EXPN.L experian, Answers.com. Viewed 28 March 2010 http://www.answers.com/topic/experian Hearth, D & Zaima, JK 1998, Contemporary investments: Security and portfolio analysis, 2nd edn, The Dryden Press, Orlando, FL Jones, CP 1991, Investments: Analysis and management, 3rd edn., John Wiley & Sons, New York Malkiel, BG 1990, A random walk down Wall Street, WW Norton & Co., New York. Schwab-Pomerantz, C & Schwab, CR 2002, It pays to talk, Crown Publishing Group, New York Read More