ZRT Systems Investments Management - Case Study Example

ZRT Systems Investments Management 1.0 The objectives of this fund include; A long-term capital growth for this investment portfolio consisting of both stock options and governments bond listed within the Australian Stock Exchange. To effective ensure that the investors enjoy a stable level of income for a longer period. To ensure that the investments bring in high total returns for the existing investors. 2.0 Proposed Return The fund management would strive to ensure that all, if not all, of the investor’s money should all be utilised in purchasing an assets portfolio that would bring in an overall investment return of 5% per annum. A proposed investment return of the whole amount would yield the following amount in profits; 5/100*200,000,000= $10,000,000/12= $833.333 per month 3.0 Asset Allocation 3.1 Background Research of Stock Options According to Australian Financial Review (2016), tech Initial Public Offers (IPOs) performed the best in the financial year ending 2016. Technology stocks that were listed in the Australian Stock Exchange in 2016 performed better than their counterparts from other industries within the country, as they posted enormous shareholders within the very first year of the public listing. The 25 tech firms that were listed in the year all delivered an average return of 69.5% to the existing investors. The AFR continues to indicate that the immediate strongest sector of the period was consumer staples where the 7 newly listed companies enjoyed an average investment return of 37% for their underlying investors. On the contrary, it is indicated that the worst performance sector of the period related to financial services that experienced an enormous level of floats with a total number of 15 companies losing at least 8.1% of their total value. The study found out that there was 12.9% increase in the number of IPOS in 2016 with more than 96 floats as a well as an average investment return improving from 3.7% to 25.4%. It further concludes that there is currently a high risk appetite for potential Australian investors to engage in making tech-related investments within their portfolios. According to Australian Financial Review (2015), the top –most 10 stock options to watch in the market provides very significant information for a potential fund management. Given that the Australian economy is still experiencing a low growth environment, it is important for fund managers to engage in selection of stock options that have the potential of providing a higher return level. The research review points a list of these stocks and their potential for growth. For this fund, the most viable 3 stock options from the list include; i) Thorn Group; which has continued to show signs of growth in terms of extensive business combinations and acquisitions as well. The firm has made enough strategies to focus on consumer leasing business operations with Radio Rentals being able to experience growth from long-term contracts. In addition to mobile voice, data plans are also set to enhance the company’s overall profit margins. ii) RCG Corporation: is also expected to experience growth into the near future. The firm has been able to experience a stronger like-for-like sales growth as well as earnings due to improved additional store roll-outs. It is expected that the firm will sustain its dividend pay-out of 90% of its overall earnings, which is a sum of more 5.7% yield for income investors as a whole. iii) Wesfarmers; has continued to post significant profits over the period especially in relation to its fundamental business of Coles, Bunnings Warehouse and Kmart. The company currently enjoys a 7.4% in dividend yield. iv) Primary Health Care; is also experiencing enormous growth. This growth is specially related to its diversified portfolio of healthcare assets that range from medical centre management; pathology services as well as a subsidiary business that offers software solutions to overall medical general practices. There are expectations of 15% earnings growth for the next couple of years. v) Origin Energy; is also set to experience significant growth as a result of its business expansion strategy where it is set to export LNG from Queensland-an activity that will double its overall earnings in few years to come. Specially, an earnings increase of 25% is set to be posted in the next few years of its operations 3.2 Exchange-Traded Treasury Bonds(TBs) The current coupon interest rates on treasury bonds is predetermined and remains as a fixed figure so that a Treasury Bond that has a 5% coupon interest rate will manage to pay-off investors with a fixed amount of $5 for each $100 Face Value amount held within a given year. On the contrary, however, these bonds also enjoy a yield-to-maturity, which is basically a rate of return on the bonds held whenever purchased at the existing market prices and held until maturity date. It assumes that all coupon interest payments will be reinvested at the same rate. For this fund management, the investment option will be on Coupon Interests Rate instead since it provides an assurance of what amount to expect in the future. Following this line of reasoning, the assets allocation of the investment ZRT Systems Management will assume the figures as follows; Thorn Group stock options will accommodate at least $5,000,000 in shares that being traded at $1.31 per share held; No of shares held with the company = 5,000,000/1.31=3,816,793 RCG Group will have accommodate at least $3,000,0000 in shares that is being traded at $1.09 per share held No of shares held with the company= 3,000,000/1.09= 2,752,293 Wesfarmers Ltd will accommodate at least $50,000,000 in shares that is currently being traded at $45.07 No. of shares held= 50,000,000/45.07= 1,109,385 Primary Health Care will accommodate at least $4,000,0000 of shares being traded at $3.57 per share No of Shares Held= 4,000,000/3.57= 1,120,448 Origin Energy will accommodate $10,000,000 worth of shares being traded at $ 7.05 No of shares held= 10,000,000/7.05= 1,418,439 shares The Exchange-Traded Treasury Bonds will accommodate a further $108,000,000 at a face value of $100 for each bond held. 3.3 Risk and Return Measures Analysis Company 2017 Results Standard Deviation Correlation Coefficient Thorn Group Stocks 0.137885822 0.09796506 Wesfarmers Ltd 1.29400541 0.035709214 RCG Group 0.06363961 0.056070141 Primary Health Care 0.190918831 0.055580446 Origin Energy 0.403050865 0.059578842 Taking a loser at the standard deviations, it can be noted that most the company’s standard deviations are all below value except for Wesfarmers whose value is positioned at 1.29 in the period. This means all of these stock options have a low-risk potential except for Wesfarmers. Despite Wesfarmers high-risk potential, the diversified portfolio that consists of stock options from different sectors will be effectively neutralised. It is also important to note that high risks also translate for high returns in some cases, which we hope would be the case with Wesfarmer’s Ltd. The correlation coefficient value for all the companies remains below the mark of 0.1 within the current trading period. In fact, Thorn Group Stock is the only one with is insignificantly high at a value of 0.0979. These values posit a favourable position for the portfolio given the level of risk per unit of mean return is low within the period, which almost means that the portfolio will enjoy a greater return value. 4.0 Trading Strategy The fund investment will employ a position trading strategy which would involve buying and holding stock options as opposed to active trading. The strategy seeks to accomplish the long-term strategy of the fund of improving investor’s income and stable rate of return in the future. Long-term charts of price movements on a weekly and monthly basis would be employed in gathering enough information needed for achieving higher growth returns in the future period. 5.0 Benchmarking The most viable benchmarking index option will be S&P/ASX 200Index that is popularly referred to as the XJO Index Options. This benchmarking option provides a broader coverage of the overall Australian share market. It is currently positioned highly by professional investors in Australia given that it avails wider movements in the level of stock market. It further provides a reflection of prices of the largest 200 stocks that are currently listed within the ASX and represents at least 80% of the market as a whole. The decision to purchase an XJO put option will be of great assistance in protecting the fund share portfolio from possible stock market downturns and improper uncertainties. It will also help in minimising the overall cost of trading in the long run. References Australian Financial Review (2016). ‘Tech IPOs best Performers on the ASX in 2016’. Retrieved from http://www.afr.com/technology/tech-ipos-best-performers-on-the-asx-in-2016-20170201-gu370d Australian Financial Review. (2015). ‘Top 10 stocks with growth appeal’. Retrieved from http://www.afr.com/personal-finance/shares/top-10-stocks-with-growth-appeal-20150716-gidt71 Australian Government. (2014). Exchange-traded treasury bonds. Retrieved from http://www.asx.com.au/documents/products/AGB_Investor_Information_Statement_Exchange-traded_Treasury_Bonds.pdf ASX Index Options. Retrieved from http://www.asx.com.au/documents/resources/index_options.pdf Read More