Investment Management-Transfer of Travis Perkins Plc to FTSE 100 - Case Study Example

Investment Management Contents PART A: Roles played in the transfer of Travis Perkins Plc. to FTSE 100 3 Role of al Investors 3 Role of Investment Banks 4 Role of Board of Directors 5 Role of London Stock Exchange 6 PART B: Evaluation of performance of Travis Perkins Plc. from investment point of view 7 Linking the performance of Travis Perkins Plc. to theory 9 Roles and origins of the global financial markets 10 Appreciation of the main investment theories 10 Role of decision making processes of large corporations based on financial needs 10 Roles and functions of fund managers 11 Workings of the Regulatory Bodies 11 Appreciation of the major issues in investment 12 References 14 Appendix 15 PART A: Roles played in the transfer of Travis Perkins Plc. to FTSE 100 Travis Perkins Plc. traces its business roots in UK and has recently become a constituent of the FTSE 100 Index in June, 2013. The transfer of Travis Perkins Plc. from FTSE 250 to the main index of FTSE 100 in June, 2013 has been facilitated by the roles played by the institutional investors, investment banks, Board of Directors and the London Stock Exchange. Role of Institutional Investors The business of Travis Perkins Plc. is in the field of supplying and retailing of building and construction materials for projects and construction activities in UK. The company operates 17 businesses from 1900 sites in the country. These businesses which have generated sustainable revenues to the company include building and construction materials, fittings and accessories for home improvement, plumbing products, heating and pipeline materials, etc. All these are sold to the investment projects that are decided for construction and establishment across the markets in UK. The investment projects are decided by the institutional investors in UK and other parts of the world. The institutional investors are the organizations and enterprises that identify the opportunities in the market and decide to invest in projects for expanding their business and obtain higher returns on investment. The institutional investors have large pools of funds that are invested in the projects undertaken by them as a measure of business expansion and diversification (BUSSE, GOYAL and WAHAL, 2010, p.779). Travis Perkins Plc. has been taking up building and construction projects in a wholesome manner for a long period of time in UK. As a result of their brand name and goodwill in the market, the projects decided by the institutional investors have been taken up in large numbers by Travis Perkins Plc. This has led to the increase in business volumes of the company and the profit margins increased over the years. Due to the increasing number of project contracts received by Travis Perkins Plc. in which the institutional investors invested, the market capitalization of Travis Perkins Plc. increased over the years. Due to the increase in market capitalization, Travis Perkins Plc. has been transferred from the list of FTSE 250 to the main market of FTSE 100 in June, 2013. Thus, the institutional investors played a crucial role in the process of transfer of Travis Perkins Plc. to main market. Role of Investment Banks The investment banks played a crucial role in the transfer of Travis Perkins Plc. from FTSE 250 to the main market of FTSE 100. Travis Perkins Plc. has been engaged in the activity of construction, building and home improvement for decades in the markets of UK. The business of construction and home improvement required large and continuous flow of funds for carrying out the business transactions. The company had to meet the expenditures for buying raw material and other supplies from the suppliers and creditors. Travis Perkins Plc. also had to offer credits to their clients as the construction activities included payment of work in instalments after due completion of different stages of completion. In the course of increasing scale of business the company also required funds for which the requirement of capital started to increase. The investment banks played a crucial role in meeting the requirement of raising capital funds and also to enhance the wealth of the business by advising them to invest in the profit making funds, schemes, etc. The investment banks have provided the underwriting services to Travis Perkins Plc. that has helped the company to raise maximum amount of capital through the issue of shares and securities to the target group of investors. The investment bankers have also provided assistance services to the company for undertaking the construction projects (Pilbeam, 2010, p.19). The feasibility assessment of the construction projects helped the company to earn steady cash flows in their business. Apart from this, the investment banks have also offered profitable investment avenues to Travis Perkins Plc. where they could earn maximum return by investment in the equity funds, private schemes, etc. The services of the investment banks helped the company to enhance the position of liquidity in the business and the company was able to invest in large construction projects which increased their market capitalization. The increase in market capitalization led to the transfer of Travis Perkins Plc. into the main market from June 2013. Role of Board of Directors The Board of Directors is responsible for formulating the strategy to expand the network and intensify the use of space, to prioritize investments throughout the portfolio, to accelerate innovation in terms of customer propositions and to exploit maximum scale advantage. The Board of Directors contains people from diverse background, characters and experiences. The Board of Directors is very much efficient in terms of succession planning, risk management and strategic management. They are major decision makers to adopt different strategies to make Travis Perkins what it is. The corporate governance strategies and the various management practices that the Board adapts, help in developing a better work place and even influence the performance of the company. The strategies formulated by the Board of Directors are so well that it forms the backbone for the better performance of the company (Lumby and Jones, 1999, p.75). The management of Travis Perkins triggers the investors to be associated with the company by following different corporate restructuring process. The share trading of Travis Perkins is increasing because of these restructuring process adapted by the Board of Directors. It is the highly motivated and goal oriented leaders who are a part of the management team of Travis Perkins that improves the performance levels of the organization. The increase in performance level increased the financial component of the firm. This increase in the financial level made the company financially strong which in turn influenced many investors to push in their money in the stocks of Travis Perkins. Thus the efficient execution of the duties of the Board of Directors influenced the growth and profitability of Travis Perkins. Role of London Stock Exchange The London Stock Exchange, in which Travis Perkins Plc. has been listed, has played a vital role in the process of transfer of the company to the main market index. In order to establish a standard operational procedure for all companies listed in the LSE and to protect the interest of the investor, the UK Corporate Governance code has been implemented by London Stock Exchange. The companies are required to comply or explain their business activities in case of deviation from the code. The compliance to the code of conduct prescribed by LSE has benefitted Travis Perkins Plc. in the long run. In line with the UK code of corporate governance, Travis Perkins Plc. has put in place a strong system of corporate governance that guides the way in which the business is governed. As per the LSE demands, Travis Perkins Plc. has been responsible and accountable to the stakeholders in the process of maximization of their wealth. The performance and development of business had to be carried out in line with the mission and vision of the organization. Travis Perkins Plc. has taken active measure for maintain strong investor relations though fair and true disclosure of financial information of the company from time to time. The company has also fulfilled the activities of corporate social responsibility according to the guideline of LSE (Rutterford, 2007, p.24). All these aspects led to the rising business performance, acceptability in the market and increase in market capitalization that led to the transfer of the company to FTSE 100 from June, 2013. PART B: Evaluation of performance of Travis Perkins Plc. from investment point of view Travis Perkins Plc. is a UK based company that is into the business of supplying materials for building and construction and is a retailer of construction material and tools required for improvement of homes in UK. The building, construction and real estate are one of the leading industries in UK. Thus, the investment in the stocks of Travis Perkins Plc. is a very lucrative option for the investors. This is due to the increasing market capitalization of the company and entry of the enterprise into the main market of FTSE 100. The performance of Travis Perkins Plc. could, therefore be evaluated from the point of view of investments. The analysis of the performance of Travis Perkins Plc. from the time it has entered into the main market has been explained as follows. In order to undertake an analysis of the performance of the stocks of Travis Perkins Plc. for the purpose of investment, the closing stock prices of the company from the date of 24th June, 2013 to 31st of December have been taken into consideration (Yahoo finance, 2014 a, p.1). The closing prices of the FTSE 100 index during the same period have been taken into account for the purpose of analysis so that the investments decision could be taken after comparing the performance of Travis Perkins Plc. to that of the market. The detail of the closing prices of the company and the FTSE 100 index has been given in the table shown in Appendix 1 (Yahoo finance, 2014 b, p.1). The table showed in Figure1 given below has been obtained after analysing the stock price movements of Travis Perkins Plc. during the period of June24, 2013 to December31, 2013. It has been found that the average performance of the stocks of Travis Perkins Plc. is higher than that of the main market index, FTSE 100. The average return achieved by the stocks of Travis Perkins Plc. is 0.99% which is higher than the average return of 0.31% obtained by the stocks in the FTSE 100 index of London Stock Exchange. The standard deviation of the stocks of Travis Perkins Plc. is 0.03 which is higher than the standard deviation of the FTSE 100 stocks whose value is o.01. The comparison of the standard deviation revealed that the investment in the stocks of Travis Perkins Plc. is riskier than that of the overall risk of FTSE 100 index. This is supported by the theoretical background and financial theories of risk-return trade off. Due to the high risk of investment in the stocks of Travis Perkins Plc. as compared to that of FTSE 100, the average return obtained from the investment in Travis Perkins Plc. stocks is more than the performance of the market. This is due to the fact that the volatility of the stocks of Travis Perkins Plc. is higher than that of the market as represented in graphical form in Figure 2. As shown in the table given in Figure1, the Beta value of the Travis Perkins Plc. stocks has been found to be 1.70. The Beta value represents the sensitivity of the stocks of the company with respect to the market (Levy and Post, 2005, p.46). Also the value of correlation of the stocks of Travis Perkins Plc. with that of the main market index has been found to be 0.69 which is a positive correlation. This has indicated that the stock price movement of the stocks of Travis Perkins Plc. has followed the movements of the main market index. This could be supported by the graphical representation in the Figure 2 which reflects the fluctuation of the weekly stocks returns of Travis Perkins Plc. in the same direction of FTSE 100 but in a higher magnitude. The higher fluctuation of the stock returns of Travis Perkins Plc. could be theoretically explained by the value of Beta that has been obtained. Since the value of Beta is obtained as 1.7 which is greater than 1, it represents that the fluctuation of the stocks prices though in the same direction of FTSE 100 index would be of a higher magnitude than the main market index thus resembling higher risk of investments. Although the average return of Travis Perkins Plc. is more than that of the FTSE 100 index, it should be noted that the investors has probabilities of attaining higher positive as well as negative returns as compared to the market as a result of the price fluctuations. As shown in Figure 2; the highest positive return obtained from the performance of the stocks of Travis Perkins Plc. is 6.87% and the lowest negative return obtained is -5.4%. Figure 1: performance Analysis of Travis Perkins Plc. and FTSE 100 Figure 2: Fluctuation of stock returns of Travis Perkins Plc. and FTSE 100 Linking the performance of Travis Perkins Plc. to theory The performance of the stocks of Travis Perkins Plc. could be linked to the theories as explained below. Roles and origins of the global financial markets The origin and functions of the global financial markets have played an important role in the performance of the stocks of Travis Perkins Plc. The global financial markets have functioned supportively in order to finance the investment projects undertaken in the economies like that in UK. For this reason, the investment projects and the construction and building activities prospered in the UK economy. This has increased the demand for the products and services of Travis Perkins Plc. that has led to the increase in revenue earnings, profitability and earnings per share. The increase in the demand of the stocks of Travis Perkins Plc. have resulted in the rising performance due to which the average returns have been more as compared to the main market index (Redhead, 2003, pp. 24-27). Appreciation of the main investment theories The main investment theories could be appreciated in explaining the performance of Travis Perkins Plc. from the point of view of investment. The investment theories explain the reaction of the investors in relation to the follow of information to the market about the company. The information on the company and the industry events in the past and the present leads to the flow of information to the market investors. This leads to variation in the demand of the stocks of the company. This is explained by the theory of Efficient Market Hypothesis. The rise in investment in the stocks led to higher prices of the stocks of Travis Perkins Plc. with respect to the main market index along with high volatility of stock prices. Role of decision making processes of large corporations based on financial needs The large corporations like Travis Perkins Plc. undergo stages of varying financial needs depending on the construction and building projects undertaken by them. In order to complete these projects, the company requires funds in the short run and as well as in the long run. In order to cope up with the financial needs, Travis Perkins Plc. have raised capital with the help of investment bankers or borrowed loans from the financial institutions. The decision making process of Travis Perkins Plc. in leveraging its capital structure has led to the increase in valuation of the companies. Thus the stock performance of the company also increased as the demand of stocks increased among the market investors. Roles and functions of fund managers The role and function of the fund managers have played an important role over the years in managing the funds of the organizations which had significant impacts on the stock performance of the companies. Travis Perkins Plc. have selected efficient fund managers and investment bankers that have invested the company funds in profitable investment channels that have offered them desired return on their equities. This has been viewed positively by the shareholders as the decisions of the management in selecting the fund managers have resulted in the maximization of the wealth of the shareholders. Thus the demand of the public investors increased rapidly which reflected in the stock performance of the company and offered higher average returns as compared to FTSE 100. Workings of the Regulatory Bodies The working of the regulatory bodies has influenced the operations of Travis Perkins Plc. As a result of these regulations, the company undertook strict measures for corporate governance. Travis Perkins Plc. management had responded with the measures of accountability in taking up business operations in an ethical manner. The financial information and the business activities undertaken by the company were disclosed in a fair and true manner to the public in periodic time intervals. The compliance to the regulations helped the investors to take informed correct decision on the stock investments. The responsibilities fulfilled by the company resulted in the establishment of faith among the market investors which reflected in the stock performance of the company. Appreciation of the major issues in investment The major issues in the investment in the stocks of Travis Perkins Plc. is the average return obtained by the company shares over the mentioned period of time, the risks involved in the investment in the company shares, the sensitivity of the stocks with respect to the market, correlation with the market and the comparison with the market performance. In evaluating the performance of the company with respect to the market, both the risk and the return are of equal consideration. Apart from this, the recent news and updates on the business of Travis Perkins Plc. are important issues for consideration of investment in the company stocks. The decision for investment in the stocks of Travis Perkins Plc. takes into consideration that the company has recently moved into the main market index of FTSE 100. This is due to the fact that the market capitalization of Travis Perkins Plc. has increased due to the increase in the investments by the institutional investors and the efficient decisions taken by the management in taking up construction projects in UK. The flow of information to the market has resulted in increasing demand of the stocks of Travis Perkins Plc. for which the share price performance has improved and even exceeded the performance of the FTSE 100 index. The investors who are ready to take more than the market risk could decide to invest in Travis Perkins Plc. stocks as the performance of the company has been more volatile than that of the main market (Bodie, Kane and Marcus, 2010, p.82). References Bodie, Z., Kane, A. and Marcus, A. 2010. Investments. New York: McGraw-Hill Education. BUSSE, J. A., GOYAL, A. and WAHAL, S. 2010. Performance and Persistence in Institutional Investment Management. The Journal of Finance. 65(2), pp.765-790. Levy, H. and Post, T. 2005. Investments. New York: Prentice Hall/Financial Times. Lumby, S. and Jones, C. 1999. Investment Appraisal & Financial Decision Making. USA: International Thomson Business Press. Pilbeam, K. 2010. Finance and Financial Markets. New York: Palgrave Macmillan. Redhead, K., 2003. Introducing Investments: A Personal Finance Approach. London: Pearson Education. Rutterford, J. 2007. An Introduction to Stock Exchange Investment. New York: Palgrave Macmillan. Yahoo finance 2014 a. Travis Perkins Plc. Historical Prices. [Online]. Available at: http://finance.yahoo.com/q/hp?s=TPK.L&a=05&b=1&c=2013&d=11&e=31&f=2013&g=w. [Accessed on 7 March, 2014]. Yahoo finance 2014 b. FTSE 100 Historical Prices. [Online]. Available at: http://in.finance.yahoo.com/q/hp?s=%5EFTSE&a=05&b=24&c=2013&d=11&e=31&f=2013&g=w. [Accessed on 7 March, 2014]. Appendix Read More