Australian Capital Market - Report Example

Name Class Unit 1. Australian market 1.1 Australian capital market Australian Financial Markets Report (2014) asserts that “the major markets in the Australian financial system include the capital markets (shares and bonds), money market and derivatives”. The Australian capital markets works like other global capital markets in facilitating the buying and selling of not only debt and equity instruments. In 2013-2014, the Australian Financial Markets Report (2014) points out that Australian financial market turned over approximately $125 billion. The table below shows the equities and bonds annual turnover in brief based on 2013-14. Table 1 2012-13 (Million) 2013-14 (Million) % change Shares 1,151 1,188 3.2 Bonds 1,049,411 1,108,876 5.7 Source: AFMA, The Australian capital market is crucial for proper and sound functioning of the economy. This is especially due to fact that the economic output generated in an economy is highly dependent on the capital (Colliers International Australia, 2015). 1.2 Australian Securities Exchange (ASX) Australian Securities Exchange-ASX was established in 1987. ASX is recognised as one of the leading financial markets globally offering a wide range of services which includes; trading, clearing, listing and settlement based on a wide range of assets (ASX, 2015). The total market capitalisation for ASX stands at approximately AUD 1.5 trillion (ASX, 2015). The overall turnover is approximated to be at 4.6 billion. ASX headquarters are based at Sydney Australia. The securities offered at the ASX are; REITs, ETFs, warrants, options, and futures among others. Currently, ASX is ranked among the top five globally. ASX is comparable to London Securities Exchange and New York Securities Exchange (Hotcopper, 2015). 2. Investment policy statement 2.1 About the client The vice-chancellor of RMIT University has requested us as fund managers to invest in ASX with $50,000 in order to achieve the vision of the university. RMIT is a global university with its origin in Australia. To achieve its vision, the university has focused on coming up with solutions to benefit people and environment. The university aims at becoming a global university in technology and design. RMIT has been able to achieve international reputation based on excellence in professionalism and research which is outcome oriented. The University is a leader in accounting, finance, science, information systems, education and economics. The university offers more than 800 programs and have an enrolment of over 82,000 students. Based on the QS stars international evaluation system, the university is ranked 5 stars. RMIT is among the top 15 universities in Australia. The university is also among the 200 universities globally which have excelled in accounting and finance, education, statistic and media studies (RMIT University, 2015). 2.2 Time horizon The portfolio main aim is to invest $50,000 for a short duration (8 weeks), from 6 Aug 2015 to 1 Oct 2015. The shortage of time given is considered as a major constrain which influence our ability to take lower risk. Thus, some of the stocks that have been purchased had higher risk. 2.3 The policies and guidelines The investment policy statement, as Arrow & Kruz, 2013, point out, “is a roadmap.” Being a roadmap, the importance of drafting policies cannot be overstated. Policies and guidelines will help us as we, the fund managers, look for ways to prudently and effectively manage, evaluate, as well as monitor the investment portfolio. The policies and guidelines will also be very important in strategy formulation. This is especially in the case when it comes to choosing the strategies to use in reduction of risk and return maximization. Policies and guidelines are supposed to be formulated in such a way that they are able to define the responsibilities for each party associated. Specifically, there are components that could be included as part of the policies and guidelines include transaction guidelines, portfolio management policy, as well as responsibilities and roles that define the duties of all the parties involved. 2.3 The Responsibilities of Investment parties 2.3.1 The client Based on (Pfau, 2011) the key responsibilities of a client in setting investment policy include: Investment policy set is supposed to be clear and consistent with the goals. There must be relevant follow ups that help in ensuring that the fund manager adheres to the investment policy. Hence, RMIT has provided us with a clear investment policy that is able to minimise risk based on the return of investment. 2.3.2 The fund manager As the fund managers, we are tasked with responsibility to achieve the university’s vision. This is through coming up with proper strategies and in a timely manner. This has prompted us to set the guideline and strategies that are to be followed during the investment process which include but not limited to: Making sure that all investments are carried out by qualified dealers and brokers. Provide performance, valuation and transactions reports to our client in a timely and regular basis. Making sure that the balancing stock data, transactions summary as well as the accounting data is reconciled weekly. This will also involve resolving discrepancies in a timely manner. Ensuring an environment of open and frequent communication on all matters between the parties involved. These parties include bank custodian, investment committee, client and investment manager. The relevant matters on this front include, but they are not limited to, the portfolio and strategy outlook as well as overall investment outlook. Carry out the investment strategy and ensure that it is in compliance with the client investment policy. 2.3.3 The bank The bank custodian ensures that the assets and portfolio are safeguarded. The custodian also ensures that there are regular accounting reports and disburse funds based on timely requests. The bank is also expected to ensure that all the transactional stocks are carried out based on the market prices. 2.3.4 Investment committee and consultant The investment committee have a major role on oversight. This is through ensuring that the policy is implemented in a proper way. Also, the committee gauge and approve the investment strategy and carries out the monitoring of the portfolio performance. The responsibilities of investment consultant include: Provide professional and well-researched asset allocation advice Monitor the portfolio’s performance and make regular recommendations Work closely with the investment manager on any investment-related undertaking. 3. Investment Strategy and objectives The investment goal is to generate reasonable short-term growth in the value of the portfolio over the trading period, but with moderate risk. The primary investment strategy agreed between the client and firm is to achieve reasonable short term growth in the value of the portfolio. This is based on the trading period with moderate risk. To achieve this goal, we will use a strategy focusing on diversification of risk level through use of active trading approach. The main aim is to attain the desired return within a short duration which the client has engaged us. In order to comply with the short term growth provided by the client while at the same time maintaining a moderate level of risk, it is vital to divide the portfolio into three tranches. Each of the tranch will have an individual based level of risk and return. The adopted risk and return tranches are based on combination of quantitative trading. This is in the form of offsetting of the high level risk as well as return shares. There is perceived steady return and stable shares. The contribution made by the client of $50,000 is to be invested into ASX equity market. This is through use of adopted strategy which involves dividing into the three tranches. Each of the separate tranche will be able to adopt a risk level based on the overall investment strategy and use a portion of the investment. Each tranche will be looked at as a portfolio and rebalancing will be made based on the client contribution of $50,000. Rebalancing will also be made based on the risk and return based on each tranche. 3.1 Structure of portfolio Due to the short-term approach, the group allocate the funds based on a particular range. They will also consider the risk on the stock when allocating. The following is a guideline on the desired weight band on each risk class. Level of Risk Weight Band Volatility per unit High 33% - 47% 5% - 35% Moderate 10% - 25% 35% - 60% Low 30% - 45% 65% - 95% The group will adopt a traditional equity style approach. This is through focusing on making high investments on growth stocks and paying a relatively low share price on the value stock. Based on the chosen approach, the firm aims at identifying the companies who have a constant growth and earnings in the stock market. These companies can be identified through their high profits, earnings predictability and unit sales growth history. The companies also tend to have high P/E’s and are in most cases leaders in consumer oriented business. Through use of this strategy, it implies that there will be consolidation of stocks which are sold at low prices on current and normal earnings. These are generally found in the industries which are categorised as defence cynical and out of favour. The group expects to use diversification across different sectors so that they can avoid excessive risk and massive losses over the period of investment. 3.2 Return objective An overall growth short term objective of 20% is expected within the duration of investment. This is in line with the RMIT’s requirement for a return of $60,000 to be used for ‘free coffee day” which is offered to staff and students. The lowest acceptable return threshold is 10% which amounts to $55,000. The group final return will be calculated based on actual return after deductions of expert fees, tax considerations and any related service fees. The actual return is obtained at the end of the engagement with client, liquidating remaining shares and any cash reserve remaining. 3.3 Risk objective Risk is a vital tool that fund managers have to minimise. As fund managers, we are seeking to minimise the risk through the returns and the client willingness. Through looking carefully at the risk profile of RMIT, they are willing to adopt moderate risk on the short duration of their investment. The investment strategy notes that the investors have medium ability on risk taking. As the fund managers, we have a clear understanding of the risk we are taking, how to monitor and measure in order to ensure that we avoid any losses. To measure and monitor the risk level associated, we have calculated both beta risk shares and portfolio beta. This is in combination with applying the volatility of estimations. This is in order to obtain return and risk of the portfolio based on the influence of the market conditions. Both measurements of beta are able to tell the investor about stock volatility or the portfolio when compared with the market. When beta is less than one it indicates that the stock or the portfolio is less volatile to market. Portfolio standard deviation measures the risk level of portfolio. A low standard deviation shows less risk level in the portfolio. 4. Investment Constraints The client has detailed the constraints which shows the portfolio consist only investment into Australia ASX 200 share market. The constraints eliminate fixed income, debt securities, FX market and the short term bank bills. This will increase the market risk on thee portfolio. It will also reduce the ability of the fund to be diversified against the systematic risks that can occur in Australian share market. RMIT have expressed that they do not wish for individual shares to be held in the portfolio for an extended duration. This will result in an increase on the trading activities which will be adopted in the portfolio strategy. The trading strategy will have to account for brokerage fees which are attached to trade. This is to be accessed and included at the returns with an aim of meeting the 20% return. ASX applies a brokerage fee at a flat rate of $20 for each trade for orders whose values is up to and includes AUD$10,000.00. For trade over AUD $10,000, a brokerage rate of 0.2% of trade value will be charged. For the duration of investment engagement, tax concerns applied will come in form of capital gains tax, which is applied to any gain made on the sales of shares. RMIT is an institutional investor and any capital gain is accounted as ordinary income. This is subject to the tax applications which are applied by RMIT. References AFMA, 2014, Data, Retrieved 17th Sept 2015 from, http://www.afma.com.au/data/afmr/2014%20afmr.pdf Arrow, K. J., & Kruz, M. 2013. Public investment, the rate of return, and optimal fiscal policy (Vol. 1). Routledge. Colliers International Australia, 2015, Capital Markets: Australian Capital Markets Report | Q1 2014, retrieved 17th Sept 2015 from, http://www.colliers.com.au/find%20research/speciality%20reports%20and%20w hite%2 0papers/australian%20capital%20markets%20report%20- %20q1%202014/ Hotcopper, 2015, Australian stock market and politics forum, Retrieved 17th Sept 2015 from, http://hotcopper.com.au/ Pfau, W. D. 2011. Capital market expectations, asset allocation, and safe withdrawal rates. Asset Allocation, and Safe Withdrawal Rates (August 1, 2011). RMIT University, 2015, About us, Retrieved 17th Sept 2015 from, https://www.rmit.edu.au/about/ Read More