The Investment in Shares, Bonds, and Debentures - Term Paper Example

UNIVERSITY

Abstract.

The investment in shares, bonds, and debentures is profitable but can also be risky. To be able to invest you need the scientific know-how and relevant analytical skills to be able to mitigate the risks. In Order to make these investments, you need to make decisions based on an emotional and rational perspective. Investing in securities is a risky affair but to an investor, it’s one of the many ways to invest his or her savings.

Investors’ prefer investing in a group of securities instead of investing all their savings in a single security. Investing in a group of securities is called a portfolio. By creating a portfolio you are able to reduce the risks without any chance sacrificing your returns. By understanding the principal aspects of management you stand a high chance of success.

Introduction

Portfolio management is both a science and an art of making decisions in investment and balancing the risks. According to Staff (2015), an investor is always faced with a problem of choosing the securities to invest in and the amount of money to invest in each security and evaluate on how to mitigate the risks. An investor is always faced with the challenges of risks and returns in any portfolio. An investor should always review his investment portfolio. As time changes so do the characteristics of individual securities. An investor should always keep an eye on these changes as they may increase the returns and also increase the risk. The aim for investment in securities is the chances for a good return and the corresponding risks. The performances for each portfolio should be evaluated and the returns gained from the portfolio should be measured.

An investor should always evaluate the weaknesses, strengths, opportunities, and threats of each investment they make. He/she should understand the form of a portfolio to use either passive management which is tracking the market index or active management which involves a single or a team of managers in an attempt to beat the market return through investment research and decision on individuals. According to Prassana (2012), the key element in portfolio management is understanding that various assets do not move from the concept.

Table 1: Selection and evaluation of investments using portfolio theory and related analytics.

Fund name

Fund type

Amount

Portfolio Weights

Weight %

Calvert U.S. Large Cap Value Responsible Index Fund C

Index fund

$120.44M

120.44

1097.14

10.97

Brown Advisory Sustainable Growth Fund

Domestic Growth Fund

$454.22M

454.22

1097.14

41.4

Calvert Emerging Markets Equity Fund C

Emerging Markets Fund

$271.45M

271.45

1097.14

24.74

Praxis Value - Institutional

Value Fund

$177.74M

177.74

1097.14

16.20

UBS International Sustainable Equity Fund

Global Fund

$31.55M

31.55

1097.14

2.88

Walden Midcap Fund

Call Fund

$41.74M

41.74

1097.14

3.81

Source of data:https://charts.ussif.org/mfpc/fund_profile_display.php?FundID=258

The portfolio theory states that’s not just enough to look at the risk or return just one stock. According to Bennett, J. A., & Sias, R. W. (2010), when you invest in more than one stock, you can get great benefits due to the diversification factor. This is mainly due to a reduction in the percentage of riskiness. The benefits of diversification are huge. Not putting all your eggs in one basket can result in a huge gain.

For the above investment, the risk being taken when buying the above stock is that the return to be reaped will be much less than expected. This is what is mostly known as the deviation from the expected return.

Brown Advisory Sustainable Growth Fund has the highest weight in the above data. It is thus expected that this will have a huge influence on the expected return of the portfolio. The investor considers this a less risky investment hence investing a high percentage of the money on it.

UBS International Sustainable Equity Fund (our call fund) in this case has the least weight of 3.81%. This might be considered as the riskiest fund hence the investor has invested the least amount of money.

Calvert Emerging Markets Equity Fund C and Praxis Value - Institutional is an average investment in terms of the weights in this portfolio.

Walden Midcap Fund seems like a very risky portfolio prompting the investor to place just 3.81% of the total weight as the investment.

Our portfolio is composed of very stocks comprising of Domestic Growth Fund, Emerging Markets Fund, Value Fund and index fund this is less risky than the risk when there is just one mutual fund. According to Jaconetti, Colleen, Francis, & Yan (2010), a portfolio containing assets will always pay off, regardless of a bad and good day. Mixing risks of a non-risky fund can be the best way to go by.

The portfolio theory states that the risk has only two components: Systematic and unsystematic risk.

Systematic risks are risks that cannot be diversified regardless of how hard you try. These risks include political risks, interest rates, and natural forces.

Unsystematic risks (specific risk), are risks that can be diversified away by increasing the number of stocks. This ensures that one does not have funds that have very high risks. Having funds with different levels of risk ensures that the portfolio is well balanced.

Emerging financial trends in selecting and analyzing environmental influences on an investment portfolio, and explains the effects of these trends

Digitization

Every day the world is becoming more digitized. The boundaries between investment portfolios and the customers are continuously becoming fluid. For example, you can automatically make a purchase a portfolio directly from the internet and dispose of those that are making losses immediately due to the updates you are receiving from the internet. Having a portfolio that keeps decreasing in value prompts the investors to easily dispose it and buy portfolios that are doing better. Digitization is transforming how investors in every industry go to the market and carry out their operations. Digitization might, however, be complex and time-consuming.

Cyber security

Cyber security is paramount not only in the financial industry but all industries Privacy is very important in the financial industry. A while ago people had to have most of their investment portfolios public. The trend of cyber security has increased investor confidence. Investors can easily secure their information by just having a secure password.

Macroeconomic trends

Asset prices react sensitively to economic and other environmental influences. Recently there has been high inflation rates and high-interest rates on the market. Incidences such as Recession and unexpected increased inflation rates reduce investor confidence. This has led to many of them pulling out their investments out causing a decline in the value of portfolios.

Mobility

Mobile dominates all investment industry as a common investor touch point. Having a common platform where different investors from all parts of the world can share information on how the portfolios are doing. This is a very informative platform since investors can make important and concrete decisions that might result in very profitable leads.

Emerging resources and demographics:

The current market currently has a huge young population, they actually account for four-fifths of the world total. Investing in funds that touch the young people will result in a very profitable venture.

Regulatory Changes

Regulatory compliance is a very important key in the financial services industry. Some investment companies operate in different countries all over the world, these countries are managed by different regulatory mandates. In 2015, 155 regulatory updates were issued daily by different countries worldwide. This summed up to around 40,605 updates per annum, these updates come in different forms, like announcements of regulations, speeches, and notifications. Kong, & Lu. (2006) stated that each regulatory update always has effect investments. Investment managers and their compliance teams are required to be aware of each update and the impact it will cause on the existing investments. It's not an easy job, Information can easily pass someone due to the quantity being supplied each day. In addition, many new regulations emerge in the investment industry. Each new regulation requires implementation of causing a complex system of operating investment portfolios.

Increasing Pressure on Margins

Investment schemes incur high costs in relation to compliance. Although this expenditure can be budgeted for investment managers can be always caught unawares. Because of the size and complexity of investment companies, the institutions have to follow additional compliance regulations, which impact profit margin. The ability of an investment portfolio to absorb cost increases becomes weaker when it is also pressure. Regulation reduces profitable businesses due to the added compliance costs.

Salient metrics to mirror professionally managed portfolios

For many years, investor’s mutual funds have been believed to be a vehicle to help people achieve their financial goals. However, in mutual funds, investors have been given very little freedom when trying to manage their funds Mirrored investment services is the new platform giving the investors the freedom they need.

Nance (2016) says that mirroring involves checking out a portfolio manager’s holdings his exact moves and the performance of the portfolios on a mirroring web site. If you are interested in what is happening, you give the mirror company permission to execute the trades in your account in the same way that the portfolio manager makes. For example, if the portfolio manager invests 10 percent of a portfolio in Apple, the service will automatically buy a 10 percent investment in your account for this service, you will pay a fee of 5% to 23% a year of the amount you decide to invest with them. The amount that is divided between the manager and the mirroring company usually depends on how complicated the investing style is and the reputation of your manager.

Mirroring firms state that their services provide normal investors increased transparency and control than what they would have with the normal mutual fund. This is because you can observe every trade your portfolio manager invests in your brokerage account immediately, which is better than waiting for a mutual fund to send you a list of your holding which happens sometimes biannually. You will also be able to create a list of stocks that you do not want to be bought for you. Mirror trading has a user-friendly interface and is very simple to use. They also choose the leading traders for you.

In our portfolio, if the Mirroring services manager decides to buy 10% more in the Walden Midcap Fund. They will automatically buy an extra 10% more in the same fund.

Although mirroring services are beneficial for the investors, this service still has a long way to go. The first -service was started in 2009 and others have come up with time. They have however not impressed so many people hence they will have to wait for a while to shine. Managers still have to post historical information to prove how good they are. In our case here are the historical performance of our portfolio.

Table 2: Historical performance

1 yr. average

3 yr. average

5year average

10-years average

Previous year average

Calvert U.S. Large Cap Value Responsible Index Fund C

12.63

--

--

--

15.93

Brown Advisory Sustainable Growth Fund

16.61

13.31

15.89

--

5.75

Calvert Emerging Markets Equity Fund C

29.13

5.72

--

--

5.72

Praxis Value - Institutional

12.85

6

12.76

4.58

16.75

UBS International Sustainable Equity Fund

18.52

4.75

9.35

2.05

-1.07

Walden Midcap Fund

8.82

7.4

11.66

--

12.13

Table 3: Analysis and report of selected portfolios

Name

Open /Closed

Fund turnover

Correlation

Covariance

Alpha

Price to book

Treynor ratio

Sharpe Ratio

NAV

Expense ratio

Std deviation

Calvert U.S. Large Cap Value Responsible Index Fund C

Open

$120.44M

-0.95

3.56

--

--

--

0.75

0.27

1.32

7.58

Brown Advisory Sustainable Growth Fund

Open

$454.22M

-1

5.33

13.31

15.89

--

2.49

0.6

0.74

5.96

Calvert Emerging Markets Equity Fund C

Closed

$271.45M

0.86

4.7

5.72

--

--

5.72

1

2.02

10.13

Praxis Value - Institutional

Closed

$177.74M

0.54

0.99

6

12.76

4.58

0.75

0.3

0.44

7.82

UBS International Sustainable Equity Fund

Open

$31.55M

0.89

3.27

4.75

9.35

2.05

-1.07

0.8

1.25

7.55

Walden Midcap Fund

Closed

8/2011

$41.74M

-0.66

6.23

7.4

11.66

--

1.13

0.75

1

7.52

Brown Advisory Sustainable Growth Fund has the highest turnover with UBS International Sustainable Equity Fund has the lowest turnover with $31.55.

Standard deviation measures how much a return deviates from the Expected return. The higher the deviation the further it is from the mean. From our table above Calvert Emerging Markets Equity Fund C has the highest deviation from the mean.

The Sharpe Ratio is used to calculate the risk-adjusted return. The portfolio theory states that putting more assets to an already diversified portfolio with correlations of less than one with each other decreases portfolio risk without reducing return. From our data 3 companies have a Sharpe ratio of less the higher the ratio the more it costs.

Correlation of funds (-1.0) correlation like in Brown implies is a perfect correlation it implies that one asset’s gain is correctly matched by an asset's loss

The expense ratio measures what it costs an investment company to operate in a mutual fund.

Evaluate the regulatory compliance and adherence to prospecting and portfolio mandates.

The current regulatory environment has investment managers overwhelmed with a huge number of requirements from investors and regulators. The consequences of not complying with the requirements as expected by the key stakeholders in the market leads to a lot of questioning on the efficiency of the compliance programs

A good system of compliance is important in protecting a firm from business, reputation and other regulatory risks. A strong compliance enables an investment firm set itself apart from all the competitors in the market. The cost to pay for not breaching regulations are tremendous fines, there is the nearness of prominent results. Administrative consistency is a vital key in the money related administrations industry.

Some investment companies work in various nations everywhere throughout the world, these nations are managed by different regulatory mandates. Regulatory change comes in different forms, like announcements of regulations, speeches, and notifications. Each regulatory update always has effect investments. Investment managers and their compliance teams are required to be aware of each update and the impact it will cause on the existing investments. It's not an easy job, Information can easily pass someone due to the quantity being supplied each day. In addition, many new regulations emerge in the investment industry. Each new regulation requires implementation of causing a complex system of operating investment portfolios.

Failure to comply with regulations has the following consequences-:

According to Pepe (2016), Entanglements are presented when Investment managers have to follow too many compliance regulations so as to meet the needs of the investors. In the recent past, there was a financial crisis that needed investment managers to adhere strictly and apply controls in their investment portfolios. This developing rundown of necessities can wind up being a test for most investment managers. They are required to manage this consistency day by day since the majority of the customers obviously express the sorts of securities that can be purchased or not purchased in their portfolios, position focus restrains inside portfolios, and also the particular weighting of securities in the portfolio. The consequences of not following regulations can cause a lot of inconveniences. Investment managers are in this case require having a lot of data in hand to avoid being caught off guard by newly imposed regulations. Knowing the right means to obtain information is very the key to a successful investment opportunity. Investors’ managers need to be very adaptable in this kind of situations. They need to be fully prepared for any developing changes in order to make profits for their clients.

Conclusion

There is always a long list of investing purposes. Investors do it to make a living while others do it for fun. Some people decide to invest for a short term while others look forward to a long-term benefit. All investments huge or small engage in a type of portfolio. Portfolio management helps an investor control a huge collection of mutual funds. The success of an investment portfolio is driven by the expertise of the portfolio manager. When making an investment portfolio it is always very important to put more investment weights in the funds that are doing well in the market and lesser weights on the shaky investments. This ensures that the portfolio is diversified and there are higher chances of making returns.

Having a manager with huge experience in investment will make for a very successful investment in the case where you are using the mirror trading services. Most mirror trading services do not hire amateur managers completely. This is because they would like to create a high degree of confidence in the investor's looking forward to using their services. It also ensures that the current clients are completely satisfied and comfortable

There are different sets of strategies that an investor utilize in managing a portfolio, it all starts with goals. Although there are many investment managers around, the investor must have control over how investments are managed like deciding which funds you want your manager is supposed to purchase.