Investment Portfolio: Volunteers of America - Case Study Example

Investment Portfolio Report: Volunteers of America Investment Portfolio Report: Volunteers of America Part A The estimate of net costs (expenses) for supporting every volunteer employed is valued at £12,500. This is the annual costs of volunteer support. To find the number of volunteers that will be support by the new project (Volunteer Foundation UK), it is important to estimate the net income from the investment. £50 million has been invested across the asset classes in the NGO’s financial position. Coupled with the grant from Georgiou Charlton, other revenue sources will aid in determining the income. From the excel sheet attached (see below), the total revenue is £57,210,000 and expenses before deducting the amount to compensate all volunteer employees are £3,870,000. £53,340,000, including the amount used in paying the loan, will remain after deducting other expenses save for the cost of volunteer maintenance (Joseph, 2013; Pg. 142). From these, the organization will use £35,340,000 to cater for employee volunteers. Therefore, the total number of people the organization can support is: =£35,340,000/£12,500 = 2,827 VOLUNTEER FOUNDATION UK STATEMENT OF OPERATIONS For the Current Year Ended December 31 Current Year 2014 Revenues £ Government Grants 1,500,000 Foundation Grants 50,000,000 Service fee 800,000 Contributions 2,000,000 Fundraising Events 1,560,000 Investment Income 300,000 Amortization of Deferred Contributions 450,000 Interests and Other 600,000 Total Revenues 57,210,000 Part B The new organization should be focused on spending considerable quantities of resources and enough time in the project. The anomalies and contradictions in new ventures are factors that influence the success of an investment. Therefore, the board and management of the organization need to employ policies and investment strategies to ensure that all stakeholders are satisfied with the outcomes of the venture. Firstly, the board needs to consider the requirements of capital maintenance before computing the profit amounts that the investment is expected to bring. To maintain capital, the management board will ensure that the invested amount (£50 million) is maintained at the best-predetermined level (Joseph, 2013: Pg. 145). Activities such as allocating expenses in respective categories should be in line with the capital value. Second, sustainability of projects depends on the ability of the management board to create and develop income generation activities. For example, setting up craft programs to allow the elderly make use of the skills and hobbies they acquired in their earlier years will help in income generation endeavors. Fundraising and workshops should be initiated for both board members and staff. Plans for fundraisers and evaluation of the planned activities related to the same helps in developing fund-raising strategies, including timing and consideration of organizational costs vital for the needs of funding. Third, premeditated planning documents for organizational structure, income generating activities, and donor funding helps the management and the entire organization to track income generation activities. Planning documents also aid in understanding the specific purpose of the organization. Capacity building procedures, the administration, and projects are outlined in the document. This section is particularly strong because organizations need to state their purposes, convictions, and strong objectives (Kimura and Thi, 2011; Pg. 78). These sections fall under institutional sustainability, organizational sustainability, and project or income sustainability. Fourth, the management board needs to ensure that the portfolio is properly constructed. Portfolio construction process is a three-step process. The first section of this process is to decide on the best way to assign the portfolio keeping in mind different asset categories defined widely as real assets (assets, commodities, and real estates), fixed revenue securities, and equities (Walker and Walker, 1992; Pg. 166). The nature of the organization (Volunteer Foundation UK) demands that asset allocation is framed in relative to investments in local (domestic) assets. The factors steering this decision include the organization’s scale of operations, number of people supported, and government regulations for NPOs. Second, asset selection decisions should ensure that assets are drawn from every asset category to build the portfolio (Darbyshire & Hampton, 2012 pg53). Typically, this is the stage where stocks making up the equity components, the bonds responsible for fixed income elements, and real assets forming real asset elements. The estimated asset allocation for Volunteer Foundation UK VOLUNTEER FOUNDATION UK STATEMENT OF FINANCIAL POSITION As at December 31, 2014 Current Year 2014 Assets £ Current Assets Grants Recievable 7,800,000 Cash and Cash Equivalents 9,970,000 Accounts Recievable 10,040,000 Prepaid Expenses 8,230,000 36,040,000 Investments 3,960,000 Capital Assets (Equiment & Property) 10,000,000 50,000,000 Net Assets and Liabilities Current Liabilities Accounts Payable 1,340,000 Bank Indebtedness 11,600,100 Current Mortgage Payable 2,052,000 14,992,100 Mortgage Payable 1,870,000 Other 1,259,000 3,129,000 Deferred Contributions 12,145,000 Deferred Contributions-Capital Assets 2,422,000 14,567,000 Net Assets Net Assets Invested in Capital Assets 7,584,000 Net Assets Restricted For Endowments 5,601,000 Net Assets Internally Restricted for Special Projects 1,715,000 Unrestricted Net Assets 2,411,900 17,311,900   50,000,000 Finally, execution winds up the whole process of portfolio construction. This component describes how the portfolio is compiled. In this section, investors measure trading costs against the available needs to initiate quick trading. The significance of execution component varies across investment or trading categories selected by the management board. The organization need to note that many investors have failed in portfolio execution, hence careful planning should be put in place (Lajili and Zéghal, 2005: Pg. 132). Fifth, the management board should ensure that portfolio performance is evaluated. Portfolio evaluation is very important for efficient management of the investment (Amenc & Le Sourd, 2003; Pg. 201; Vasavada, 2010; Pg. 152). Given the organization’s specific risk preferences, focus solely remains with making enough money to cater for the expenses while ensuring that profits accrue. Performance evaluation is also important since the investors’ feedback largely determines how they (investors) approach future investing. Sixth, it is important to analyze and address risks facing the constructed portfolio. Often, portfolios may indicate better performances inasmuch as they may be composed of several risks (Investment Weekly News, 201; Pg.583). Standard deviation is important in determining the value of risk facing a portfolio because it is easy to derive and applies simple techniques of normal distribution in returns. Results from standard deviation will aid in connecting symmetric returns and their implications on the profitability or loss of finances (Travers, 2012; Pg. 89). Large values of standard deviations imply that the invested fund has high volatility thus high-risk values. Seventh, the management board needs to take care of risks through proper risk aversion techniques. Different strategies used in investments have their own levels of risks (Indian Commerce Association, 1948; Pg. 2). For example, private equity or venture capital investing in small or medium, private organizations that promise positive results pose more risks than venturing in equities in public, stable, and large equities. The returns on these established organizations tend to be higher. Risk-averse venture capitalists or investors should avoid investing in organizations that show promising results (Haslem, 2003; Pg. 63). Finally, the management board should act in relation to the ethical issues in investment strategies and portfolio construction and management. In a portfolio management task, roles of Fiduciaries need to be taken care (Fubara and Agundu, 2001; Pg. 26). Client guidelines should be followed, in addition to investment rules. These activities are in line with basic financial objective/goal of the client. Under corporate accounting, managing earnings, and financial reporting, ethical procedures involves usual analysis of financial statements, estimation of the intrinsic value of stocks, examining footnotes to financial statements, and examining financial ratios (Smithers, 2013; Pg. 254). Additionally, insider trading, churning, and personal trading indicate probability for abuse hence the need to implement efforts aimed at preventing conflicts of interests. Part C For the construction process of the portfolio, M3 approach has been applied. M3 method is a promising, 3D (three-dimensional) grid that aids management make constructive and better decisions, in addition to acting as a factor for far-reaching and visual discussions relating to the practices and principles underlying organization’s main strategy. M3 approach, at the first glance, may be assumed to use similar techniques as “triple-bottom line (Malkiel and Malkiel, 1999; Pg. 68; Singapore Securities Research Institute, 1975; Pg. 74).” On the other hand, its three axes (TBL)-“people, planet, profit”-was developed particularly to help for profit firms to take note of their profits (bottom line), planet (ethical issues as ecological impacts of their activities), and people (their societal impacts). Since the basic characteristic of non-profit organizations already involves direct positive contributions to environment and society, it is important to advance the available tools and models for NPOs. Previous two-dimensional models for portfolio construction compare the risks and return without looking at the third vital component-performance (Krug and Weinberg, 2007; Pg. 89). This is where M3 model comes in handy. M3 portfolio model helps to illustrate how performance quality, revenue, costs, and growth of objective balance in the entire organization, hence the center of gravity of the organization (Sergeeva and Nikiforova, 2012; Pg.90). The model also gives a vehicle (means) by which organization managers can easily discuss, tackle, and amend tactical or strategic issues. Basic M3 program designs are core mission, resource attraction, supplementary, and administration/common services. M3 portfolio construction begins with indicating the programs (Marathon Asset Management…, 2008: Pg. 98). By stating the discrete activity components (programs), the managers are allowed to examine the performance of the organization clearly. Thus, they can rigorously describe priorities and strategies, including program classifications needing cutting, restructuring, repairing, and enhancing. The next step in portfolio construction is to set up rating systems. A rating system defines the quantitative and qualitative information. Quantitative information includes revenue and costs; these are displayed on money axis. Performance or merit axis displays both quantitative and qualitative information. Portfolios are also associated with risks. Portfolio risks are determined by standard deviation. To determine the measure of risks, asset correlation should be determined. A positive asset-correlation-coefficient shows that the measure of portfolio risk is large. The risks occur as due to the presence of positive correlation. Consequently, portfolios with beta values below 1 indicates fewer risks. Alexander (2010; Pg. 20; Ridley, 2004) affirms that ventures with fewer risks offer low returns. Looking at the organization’s current portfolio, the weighted beta shows a value less than 1, thus an indication of fewer risks, but with limited returns on investment (Ilmanen, 2011; Pg. 67). The Investment Portfolio Asset Allocation Asset assigning plan should comply with the levels of risk the board management want to handle and the organization’s goals. The following table shows the types of asset allocation plans commonly applied by different organizations in various steps of their operations. Asset allocation: risk and return Financial Institution Low Risk: Return of 5% to 6% Organizations with limited disposable income Medium risk: Return of 6.5% to 8.5% Organizations capable of saving a considerable (not much) amount of money High Risk: Return of 8.5% to 10.5% Dual-income organizations Considering the available asset allocation plans available according to the table above, Volunteer Foundation UK falls under medium risk organization with returns ranging from 6.5 % to 8.5%. Assigning assets should be done while keeping in mind that the £50 million is used to fund the expenses and asset classes. Income generated needs to be enough to pay for the bank security of £10 million (according to the payback period indicated in the case study) and to cater for savings (Esposito, 2011; Pg. 20). In addition to the basic bonds, cash and stock choices, the organization considers diversifying its income generating activities into real estate industry. To allocate the percentages of the grant (£50 million) employed in the asset classes, a number of approaches apply. First, it is important to place the money the organization will need (putting it in mind that it is a medium risk investment) within the next five (5) years into secure medium-term investment (Mirabile, 2013; Pg. 61). Therefore, medium-risk medium-return cash reserve investment has been created to cover expenses for 3 to 5 years. This period describes the time taken by stocks or bonds to recover from temporary setbacks and recessions (Richelson and Richelson, 2011). For example, when the economic predicts possibilities of recession within the next 5 years, an organization (particularly Volunteer Foundation UK) may allocate 5 years’ value of operation expenses in secure options such as money market accounts, medium-term bonds, certificates of deposits, and savings account (Gregoriou et al., 2003; Pg.170). Second, from the portfolio’s remaining amounts, 10% needs to be put in stocks, as much as the organization might be interested in low- or medium-risk portfolio. Typically, medium-risk asset allocation plans contain about 30% to 60% in stocks, while low-risks portfolio’s asset allocation ranges from 10% to 30%. Investments in long-term high-risks indicate between 50% and 100% stock values. Finally, the remaining amount after the first and second steps should be used in picking the percentages for REITs and bonds. Since the organization uses over £30 million annually in paying for the maintenance of the projected number of employees (over 4,000), it falls between the medium and high-risk category (Gregoriou, 2006; Pg. 52). The board management should ensure that they open account with an index fund firm or brokerage company. These because of the importance of tracking market indexes when creating and building the investment portfolio. To prevent the funds from the effects of brokerage commissions on the organization’s regular contributions, it is better to buy market index trackers through discounted brokerage approaches (Giamouridis et al., 2012; Pg. 76). The board management may consider choosing Vanguard because of its low-cost index mutual finances (funds) (Gadsden, 1998; Pg. 111). Vanguard’s ratio of index fund is approximately 0.2%. Since the organization has sufficient cash to cover the minimum startup transactions, which ranges from $1000 to $3000 (or more), these approaches are great (Research and Markets…, 2010: Pg. 164). In addition, Vanguard does not charge commissions on transactions (purchases), save for the ratio. It had been indicated earlier that the construction process of the portfolio utilizes the M3 approach. Therefore, using medium-risk, medium-return analysis and VBMFX (Vanguard Total Bond Market Index), the three-fund portfolio may be moderated to suit the organization’s long-term goals. The portfolio will include 40% VBMFX (Vanguard Total Bond Market Index), 20% VGTSX (Vanguard Total International Stock Index), and 40% VTSMX (Vanguard Total Stock Market Index). Part D At Volunteer Foundation UK, the external and internal managers are required to function within the limits of risks set by the board (Connor, et al., 2010; Pg. 183). The Chief Executive Officer delegates the management of the investment branch to a CIO (chief investment officer) that also functions within the guidelines of investment. Down the hierarchy line, smaller investment mandates are assigned to individual manager ranks. Auditing is very important in fund management (Aufmann, 2010, Pg. 81). Internal auditing function will help Volunteer Foundation UK to examine and evaluate the systems, procedures, and policies that are set up to fulfill the integrity and reliability of information; the protection of assets; the efficient and economical use of available resources; and, the compliance with regulations, laws, plans, and policies (Moultrup, 1998; Pg. 84). Roles of internal auditors include analyzing, monitoring, and assessing organizational controls and risks; and confirming and reviewing compliance and information with the laws, policies, and regulations (Bogle, 2010; Pg. 288). The management, together with the auditors (internal or external), should ensure that they work in partnership to provide the audit committee, executive management, and board assurance that all risks are moderated and that Volunteer Foundation UK’s joint or corporate governance is effective and strong (Belmont, 2011; Pg. 47). The combination also ensures that whenever there are chances for improvements, recommendations are made to enhance the procedures, policies, and processes of the organization. Effective communication between the external and internal management organs of the company helps ensuring that all procedures are agreed. Reporting is also an important option in developing efficiency between external and internal audits or management of the organizational activities (Neoh, 1986: Pg. 41). Depending on risk determination in the process of constructing an effective portfolio, external auditors (such as independent public firms dealing with accounting issues and government auditors) and management organs of the organization may decide on the best approach to allocate the assets and diversification plans (Fevurly, 2013; Pg.106). Since the organization will also be partially funded by the state government, external auditors form an integral part of the organization since they are mandated to ensure that the government funds are rightly used. Problems that face in-house management organs include the tendency of internal managers to trade for themselves at the expense of the organization’s financial objectives and goals for income generation in the stock market (Joseph, 2013; Pg. 283).. Managers may also act or introduce policies without consulting with the lower ranking administrators. The overall repercussion is that when investment strategies are carried out or implement without proper consultation, loopholes emerge in the design and plan used in asset allocation and investment decisions. External management is faced with certain limitation regarding efficient execution of the organization’s mandate. External managers may fail to understand the internal issues and challenges facing the organization (Nguyen, 2012; Pg. 65). This group possesses limited knowledge concerning the goals and objectives of Volunteer Foundation UK. Therefore, joint management approach provides the best option for effective and strategic functioning of the entire organization (Neoh, 1986: Pg. 59). List of References "Banking, Financial Services; Morneau Shepell Risk Management Portfolio: An innovative investment strategy for pension plans." (2011). Investment Weekly News, , pp. 583. ALEXANDER, C. (2008). Market risk analysis Volume 2, Volume 2. Chichester, England, Wiley. ALEXANDER, C. 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