Financial Analysis of Mark Lewis - Case Study Example

Investment Analysis Case Study Introduction Based on the financial details of Mark Lewis, the paper aims at preparing optimal financial andinvestment plan for him. Some important personal details of Mark Lewis can be described as per the following. Age 32, with no dependents to support, currently His general health is fine and no serious health issues with his parents Working as an Advertising Executive for last 4 years Current job security is good; however may move to higher jobs in next 18-24 months Currently, pays basic income tax @ 20% Mark Lewis cherishes some long-term and short-term objectives. Long-term Objectives Contribute to pension funds for having decent steady income after retirement. Medium-term Objectives To arrange deposit amount for purchasing a suitable house through mortgage Short-term Objectives a. Critically assess current investment portfolio b. Enhance returns on savings c. See ways to make regular saving Analysing All Assets of Lewis Lewis has the following assets: Items Cash Gilts Stocks Total Value £ 66,250 2,769 5,678 74,696 Percentage % 88.7 3.71 7.6 100 Lewis holds too much cash in his bank account. Yearly return from deposits 750/66,250=1.13% is very low to even meet inflationary effects. Moreover, Lewis pays significantly high on his loan accounts. Lewis is paying interest of £80 per month on personal loans of 6,600. In percentage terms the interest paid by him is huge (960/6,600)/0.8= 18.18%. There is no sense in meager gross earnings of 1.13% from the £66,250 cash deposits in the bank and paying 18.18% of interest on the loan amount. All Current Liabilities of Lewis Item Credit Card Natwest Personal Loan Next Storecard Total Amount £ 5,650 6,600 1,000 13,250 Net worth = Current Assets - Current Liabilities = £74,696 - £13,250 = £61,446 It is suggested that Lewis retires his debt from the cash available with him. This will save him $600 per annum towards interest charge though this will not make any difference in his net worth. Treasury 8% 2021 Gilt Lewis can hold his investment in this gilt for two reasons. One, it has been providing returns that is above average inflation rate since its issue. The investment may become less attractive if inflation rate surpasses 5% consistently. Most parts in last 8 years, inflation has remained less than 4% and secondly, the investment is safest. The following inflation chart about inflation rate for the UK economy clearly shows this. Inflation Rate in the UK between 2006 and 2014 Source: http://www.tradingeconomics.com/united-kingdom/inflation-cpi Investments in Stocks Imperial Tobacco Company The company has a good track record of performance. The company has already appreciated over 25 percent this year. The company has been consistently declaring dividend and holds leadership position in its line of business. Investment of Lewis in this company holds good promise for future and no need to disinvest it now. While its stock price on 1st Jan, 2014 was £2.223 its recent price on 19th December was £2.857 per share and holds scope for further appreciation. Source: https://in.finance.yahoo.com/q/bc?s=IMT.L&t=5y&l=on&z=l&q=l&c= BP Plc. BP plc is an integrated oil and gas company with headquarter in London. The current stock price, as on 19th December, 2014, is £413 while its price on 1st January, 2014 was £478. Though it has excellent track record of performance in the past, there has been a significant change in energy sector recently and the stock has depreciated significantly in last 3 months. The reason for this decrease lies in the decrease of crude oil price worldwide from around 100 USD per barrel a year before to less than 60 USD per barrel. The crude oil price has gone down due to increased supply of shale oil by the US producers causing oil glut in the market. This is certainly going to reduce operating margins of BP substantially in the coming months. It is advisable for Lewis to unload its investment in BP on any short rally and invest proceeds where there are better chances of future appreciation (BP Plc). Source: https://in.finance.yahoo.com/q/bc?s=BP.L Centrica Plc. Centrica supplies electricity and gas to millions of homes in the UK and operates as an integrated company in the energy field. Its energy producing operations are mix of nuclear, oil and gas, wind farms based. Due to oil glut, its operating margins are likely to remain in pressures and there is not much chance of any significant appreciations in its stock price. It is advisable for Lewis to disinvest his holding in Centrica at short upward rally when the stock price appreciates by 5-7 percent from the current levels. Centricas stock price on 1st January, 2014 was 311.20 while the current market price as on 19th December was 272.70 (Centrica Plc, 2014). The following chart shows stock weaknesses in clear terms and it is required to disinvest the stock. Source: https://in.finance.yahoo.com/q/bc?s=CNA.L&t=5y&l=on&z=l&q=l&c= Fidelity China Special Situations Plc Source: http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=IOFM4&univ=T&pagetype=performance After underperforming in 2011 and 2012, Fidelity China Special Situations Plc is on upswing. It has appreciated by over 35% in last six months (Trustnet, 2014). The fund was aimed at harnessing long-term growth prospects of China. The fund proceeds have been invested in the companies of China and Hong Kong. Chinas growth potential is still intact. Recently, the fund has invested 5.3 percent of its assets in Alibaba Group making the second largest asset investment amongst all other investments. The worst for this fund is over. Sector wise, information technology is the top field where the fund has invested around 23.75% of its funds followed by 20.98% in financial sector. Energy constitutes only 4 percent of the investible fund. Lewis is required to hold his investments in this fund at least for some more time and no need to disinvest (Trustnet, 2014). Benefits of Purchasing House instead of Paying Rental As economy moves out of recession, housing prices will appreciate. The immediate advantage of buying house through mortgage is that housing units are still available at lower than its peak price. Since 1993, national house prices have gone up from an average of £60,000 to almost £250,000 – a stupendous increase of over 400%! (Smith, 2013). Source: http://www.primeeconomics.org/?p=2092 Lewis, currently, does not own any dwelling and this is high time that instead of renting, he should own one. A moderate housing that results into repayment of around $725 per month will be perfectly fine as that would not create any extra financial burden on him. The action will save him a good sum of money removing negative outflow every month. It is suggested that Lewis chooses a property worth around £160,000 with a deposit amount of £16,000 (10%) availing 90% loan on the property. Lewis needs to avail a 25 year repayment schedule so that monthly repayment burden remains minimal. Interest and other details are tabulated as per the following. Mortgage type Max. Loan to value % Initial interest rate Followed by a variable rate, currently Overall cost for comparison (APR) Booking Fee Initial Illustrative Monthly Payment 2 Year Fixed Standard 90% 3.59% 3.94% 4.0% APR £999 £728 Source: HSBC, 2014 The mortgage scheme will allow the customer to avail a fixed interest of 3.59% that will change to a variable rate after 2 years. Current variable rate is 3.94% (HSBC, 2014). For further mortgage details and comparison, the client can refer to site: http://www.moneysupermarket.com/mortgages/ and choose the terms that he is more comfortable with. Opening New Individual Savings Accounts (NISA) From 1st July 2014 old ISAs have been replaced by New ISAs now known as NISA. Annual allowance to invest in NISA in either cash or stocks or in any combination is £15,000. No separate limits exist for cash and stocks. NISA provides tax free returns on capital gains and interests. Since Lewis has not taken any advantage of these provisions, it is required that from this year he begins to invest in ISAs for tax-free returns (Individual Savings Account, 2014). NISA Cash Account for Emergency Fund Requirement NISA cash account with Tesco Bank will serve as an emergency fund requirement. Lewis needs to deposit £5172. This will provide 1.45% variable rate of interest (Tesco Bank, 2014). It provides an instant access to funds to meet any eventuality. Share and Stock NISA – Investment in Fundsmith Equity Fund Fundsmith Equity fund is the shares and stocks ISA fund with the focused holdings of some of the top multinational brands of the world such as Unilever, Philip Morris, Microsoft, Dominos Pizza and the likes. It has a mix of the UK, USA and Europe companies in its portfolio. The fund is in the able hands of Terry Smith. Lewis needs to choose this one – shares and stocks ISA with a view to develop a long-term growth and savings. After investing £5172 in cash ISA to meet emergency needs, balance will be invested in Fundsmith Equity fund to complete full NISA allowance. The following chart shows performance of Fundsmith Equity Fund. Source: http://funds.telegraph.co.uk/clients/telegraph/fundFactsheet.aspx?code=LSX2&univ=O Long-term Investment in HSBC Balanced Fund It is worthwhile to tap a top performing balanced fund for a long term investment that is less risky and appreciates with time. The fund invests not only in the UK equities but taps fixed interest instruments, international shares, money market. The fund is one of the top performers in the last 5 years. The following chart clearly spells out HSBC Balanced fund’s performance in terms of its returns to shareholders (HSBC Balanced, 2014). Source: http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MIB&univ=N Pension Scheme Due to contribution in national insurance, Lewis will be eligible for state Pension after age 65. However, pension will be not enough to meet his basic needs after retirement. He can start his pension contribution after 15 months when he would have paid his last car repayment. It is required that he contributes modest amount of 200 (net of tax) every month in a suitable pension scheme provided by some reputed insurer such as Aviva. With the improvement in his financial condition, he can increase his contribution to the suitable pension scheme and attain more security for his retirement days. Analysing Current Income and Expenditures Gross Income Calculations Head Per Month (£) Per Year (£) Salary - 35,700 Interest from Deposits 50 (50×12)/0.8 = 750 Income from Gilts - (96/0.8) = 120 Income from Shares - (115/0.9) = 127 Gross Income - 36,697 Applicable Income Taxes Income Type Salary Interest Dividends Amount £ (34,000+ 5% bonus) 35,700 870 127 Tax Rate % 20 20 10 Tax in £ 5,140 (after deducting applicable allowance) 174 12.70 Total tax payable = £5,327 National Insurance Contributions (NIC) NIC is payable when salary income exceeds £153 per week or 153×52= £7,956 Salary Income of Mark Lewis: £35,700 Income difference that attracts NIC = £35,700 - £7,956 = £27,744 Lewis needs to make 12% contribution on £27,744 that comes to £3,329 Total compulsory outgo = Income tax + NIC = £5,327 + £3,329 = £8,656 Thus, Lewis yearly net income remains = £36,697- £8,656 = £28,041 Or per month net income = 28041/12 = £2,336 Average Monthly Expenditures Monthly expense: £2,132+ (3,550/12) = £2,427.8 This shows that he spends more than his income by £2427.8-£2336= £91.83 Outcome of All Recommendations Items Actions Impact Reducing Liability Paying off all Loans -£13,250 Imperial Tobacco Company Hold it Nil BP Plc. Sell it 200×4.34= +£868 Centrica Plc Sell it 100×3.03= +£303 Gilt Hold it Nil Fidelity China Special Situation Fund Hold it Nil Emergency Fund (Cash NISA) Put £5,172 in NISA cash fund -£5,172 Housing purchase, 10% Deposit + booking fees 25 year mortgage -£16,000-£999 = -£16,999 NISA Share & Stock Account Invest in FundSmith Equity Fund -£9,800 Invest in Long-term Growth Fund Invest in HSBC Balanced fund -£22,000 Net out go -£66,050 While available cash is $66,250. Thus, cash in hand remains £200 for some very urgent needs. Outgo after Reshuffling Items Per Month £ Per Year £ Food 280 Clothes 110 Misc 1250 Car Loan repayment £ 250 Mortgage repayment 728 Motoring expense 240 Socialising 200 Gifts 500 Holidays 2000 Utilities 80 Gym 62 Loan Interest 0 Total 1950 3750 Total yearly expense (1,950×12) + 3,750 = £27,150 Lewis’ gross salaried earnings = £35,700 Less tax deduction = £5,140 (20% tax after allowing allowance of 10,000) Less NIC= £3,329 Net salary in hand per year £27,231. Thus, Lewis is surplus by £80 in a year. Over and above, he would also have gilt interest of £96, the interest generated in emergency fund, dividends that he will receive in Imperial Tobacco Company and the Fidelity China Special Situations fund. He can spend these amounts for the fulfillment of his other needs though they will be small for any major consideration. Conclusion Finally, through reshuffling, Lewis’ objectives are met that can be described as per the following. In this process, Lewis will have £2,000 to spend for his travels and no reduction in his expenses under the heads such as gym, food, clothes, and socializing, and motoring expenses. Short-term He pays off all his liabilities from the cash that he possesses. NISA cash and stock accounts are opened by investing full 15,000 between these two accounts where he can earn tax-free returns. Remaining fund is invested in a long-term balanced fund. His emergency fund needs are met through Cash NISA account. Every month, he is now cash surplus. Medium-term Lewis’ medium-term plan of owning a house is fulfilled. He now owns a house worth £160,000 with repayment spread to 25 years. While owning a house he saves significantly. Long-term Lewis’ long-term objective of investing in a pension fund will get fulfilled after 15 months when he completes his car repayments. He can then invest at least £200 every month towards his pension fund to have decent earnings after retirement. References BP Plc. (2014). Basic Chart. in.finance.yahoo.com. [Online] Available from https://in.finance.yahoo.com/q/bc?s=BP.L [Accessed 19 December 2014] Centrica Plc (2014). Basic Chart. in.finance.yahoo.com. [Online] Available from https://in.finance.yahoo.com/q/bc?s=CNA.L&t=5y&l=on&z=l&q=l&c= [Accessed 19 December 2014] Imperial Tobacco Company (2014). Basic Chart. in.finance.yahoo.com. [Online] Available from https://in.finance.yahoo.com/q/bc?s=IMT.L&t=5y&l=on&z=l&q=l&c= [Accessed 19 December 2014] Digital Look (2014). 8% Treasury Stock 2021. [Online] Available from http://www.digitallook.com/gilt/8_Treasury_Stock_2021/charts [Accessed 19 December 2014] Fundsmith Equity Fund (2014). Fact Sheet. [Online] Available from http://funds.telegraph.co.uk/clients/telegraph/fundFactsheet.aspx?code=LSX2&univ=O [Accessed 19 December 2014] HSBC (2014). Mortgages. [Online] Available from https://mortgages.hsbc.co.uk/products/results [Accessed 19 December 2014] HSBC Balanced (2014). Trustnet. [Online] Available from http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MIB&univ=N [Accessed 20 December 2014] Individual Savings Account (2014). National Statistics. [Online] Available from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/348071/Full_Statistics_Release_August_2014.pdf [Accessed 19 December 2014] Inflation Rate (2014). Trading Economics. [Online] Available from http://www.tradingeconomics.com/united-kingdom/inflation-cpi [Accessed 19 December 2014] Smith, J. (2013). Prime Policy Research in Macroeconomics. [Online] Available from http://www.primeeconomics.org/?p=2092) [Accessed 19 December 2014] Tesco Bank (2014). Instant Access cash ISA. [Online] Available from http://www.tescobank.com/savings/isa-accounts/instant- access/index.html?cmpid=aggregator/moneysupermarket/savings/cashisa/link1[Accessed 19 December 2014] Trustnet (2014). Fidelity China Special Situations Plc. [Online] Available from http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=IOFM4&univ=T&pagetype=overview [Accessed 19 December 2014] Read More