Risk-Return Evaluation of the Client - Essay Example

Under this section we will brief you about classes of assets in which investment can be done. The main classes include Cash, bonds, shares, property. Other investment options includes Investment companies, structured products, Exchange Traded products-ETPs, unit linked and with profit funds and Investment bonds. For further clarification of every type of investment we will brief you about every class of asset hereafter.

Cash Investment: This is simple, secure and the most liquidate form of investment which is deposited and interest is earned as per current rate.

Bonds: are debt investments in corporate/government. They are instruments commonly known as fixed income bonds with definite time period and fixed/variable interest rates.

Shares: Corporate/private limited all listed organizations issue there shares and the investor investing gets the label of stakeholder and a right to dividend. Two ways in which returns are expected are Dividends or appreciation in share value in stock exchange. This form of investment is highly preferable in those corporates who are financially strong with a certainty of generating high profits in coming years.

Property: Under this comes the Real estate investment. Investment can be done via buying a property or a piece of land for construction and selling the property on profits. Returns in this scheme come in the form of rental or appreciation of property increasing its market value. This Kind of Investment involves assessment of location of property, economic dynamics and trend.

Investment is done in mix and match of the above mentioned classes to manage a diversified portfolio.

Currently UK class of asset with respect to investment is divided as follow;

This is the extract from the IMA survey of 2014 which shows the division if overall UK Economy division in several class of asset. Equity and fixed income is the highest Investment sector of overall class division and this is mainly because almost all institutional clients such as pension funds, endowment funds etc opt for these for investment as it gives high returns variety of options in every segment as well. This class of assets allocation is applicable to both long term and short term investment period and also to every risk level our clients are willing to take.

Below table is extracted from IMA survey 2014 showing cumulative performance of selected Equity and Bond Indices (2014)

As it can be evaluated from 2014 progress report that bonds and equities fluctuate to minimum to its maximum but overall progress of all the selected equity have shown progress so it will be not highly risky in allocating 10% and 60% of the total investment in bonds and equity sector. By the end of 2014 the most stable in positive %age are S&P 500 and FTSe sterling corporate Bonds. They both have shown constant increase. The more fluctuating segment of this class is FTSe all shares GPE as it variations to change is more sharp and speedy.

The Standard break down classification of having the balanced equity is as follow;

Large Cape core: 20%

Large Cape Value: 10%

Large Cape growth: 5%

Small/mid Cap Growth: 2%

Emerging Markets: 15%

Developed International: 8%

• • Investment Objective

As the Investment plan is of 5years so it will be classified as Mid-term investment with the medium risk level so the target equity should be the one that will progress in coming next 5years. Every class of asset selected will be evaluated for the further 5years and those with high potentials of favorable changes will be selected to invest. In order to have a balanced portfolio our firm will assess all areas of the domestic and international markets to find the best opportunities that fit within your risk budget. The portfolio will be subject to adjustment in order to maintain an appropriate risk level and take opportunities in the market.

• • Investment Strategy

Under this come two options active vs. passive. The investment strategy highly depends on this as the selection of type of asset or class of asset varies with both the options.

Active Investing is more frequent with respect to transactions. Close and timely survey is required to beat the market and fetch higher returns in short durations. As the transactions will be high, changes in asset allocation will be more frequent the cost of overall portfolio management will be greater too. Apart from that the definition has now revised because now there are many short term investment strategies that are low in cost and gets high return after risk adjustments. Such short term investments include Hedge funds, EFTs etc. Therefore, Active Investment is about to compete the market while managing risk adjusted returns.

Passive Investment is more suitable in long term and medium investment plans. That attempt to take the market return on risk adjusted basis. As the friction of transaction is relatively low, so the cost of managing the portfolio and transaction will be relatively low too.

Given the detail by you we classify you as a passive investor as you keen interest in have a less volatile balance portfolio which is best fit of Passive Investment. But as the FTSE are short term but with relatively low cost it will be beneficial to allocate few %age of investment in FTE bonds as well. With this Mix allocation your portfolio will be in between Active and Passive and expected to yield high potential of returns after 5 years.

"Both risk and returns are connected to style. According to current practice portfolio theory, you can optimize a blend of styles for diversification, balancing reward and risk." (Weil, n.d.).

• • Portfolio

Summarizing the results of every stage above a balanced portfolio will be presented that is best fit for you. Now as in Investment Mandate we have suggested some investment decisions in several classes of assets. Moving the suggestions forward, our first asset allocation of 50% will be in S&P 500 index. This Index represents almost all of the UK equities. As the S&P 500 Index have shown an upward trend as per historic data evaluation it will be wise to allocate half of funds in that class. Now as the 50% of the funds are allocated to 500pointsindex your portfolio will have a beta of 0.5. In order to minimize risk in Equity 20% allocation shall be done to FTSe which is although not a long term investment but will earn returns at low cost. This derivative is more in trend and its Market practice is also increasing.

10% allocation to cash class, this is done in order to maintain balance in the portfolio and keep the 10% of total investment max to liquidity. In Cash investments although the survey says that interest rates will stay relatively low but the risk of loss on principal amount will be low.

20% allocation in Bonds, this will confirm the fixed income returns to you. Further dividing the bonds into 15% investment in Fixed Income Bonds and remaining 5% in other types of bonds. This allocation of asset will be highly certain with respect to regular income and will add a balance to portfolio against 50% investment in Equity investment.

Rest 10% of total Investment can be attributable in Real Estate Investment. Such Investment will be done crucially as it can trap the invested money for more than five years. In the survey London is still considered to a smooth run at fair level. The UK’s economic recovery is fragile, though forecasts of 2 percent GDP growth for 2014 are encouraging. “London is fairly fully priced and now needs rental growth to deliver returns. Because of that a lot of the UK institutions are going into the regions again.” Investors are also putting money into strong secondary assets that they can turn into core. As mentioned in survey report of PwC.

This is the balance Portfolio recommended given your profile and assessment. This However is not the fix portfolio and subject to change at any point in future depending on risk variations among them.