Analysis of Fortunes Inc Objectives and Strategies - Case Study Example

An analysis of Fortunes Inc. objectives and strategies

Management portfolio is a complex practice that involves decision-making on investment mix, aligning investments to objectives and managing risks among other (Sultana, 2012). Fortunes Inc is an example of enterprises that operate a portfolio of activities and maintain good performance. Fortunes Inc has a unique management style that gives shareholders equal power when it comes to decision making. The cooperative has shown reputable performance for the last ten years. The good performance has attracted many investors from different sectors of the economy. Moreover, the good performance has aided the cooperative in securing different sources of funds for development and expansion.

The core objectives for Fortunes Inc include maximization of shareholders returns and expansion of investment opportunities. The cooperative has expounded its investment to incorporate the banking sector and the capital market. Furthermore, the company has increased its investment in shares and other opportunities to enhance diversity as far as revenue generation is concerned. The financial performance for the last two years shows that the cooperative’s financial position has improved. The improvement of the financial position is an attestation that the investment strategies of the company are effective (Blommestein et al., 2008).

Fortunes Inc investment objective is to safeguard the shareholders financial position throughout its life. In this regard, it can be observed that the already established investment strategies support the objective and the cooperative has great potential for future growth. However, the fact that almost a half of the employees have less than twenty years to retirement is a big challenge to Fortune Inc. Essentially, the retirement of employees who have worked for several years is likely to lower the quality of the human resource (Iverson, 2013). Additionally, the process of recruiting new employees is costly. In this regard, the cooperative should retain all the workers to avoid the costs and inconveniences caused by recruitment of new workers.

Recommendations and justifications on the appropriate objectives based on age and sustainable remuneration

A well-developed pensions plan is important to any cooperative. A pensions plan serves as a source of motivation to workers since they are assured of financial stability at old age. The pension requirement for Fortunes Inc is quite complex and presents some challenges that might terminate its operation. The majority of trustees are set to retire in less than twenty years to come. In this regard, the cooperative may face financial hardships since the present provisions for pension are too expensive to manage if a large number of workers retire at the same time. Therefore, it is imperative for Fortunes Inc to establish effective measures to avert the danger of a financial crisis in future.

Fortunes inc should concentrate on developing the existing investments to ensure regular revenue inflows. The pension scheme is quite expensive and for it to work efficiently enormous funding is required. It is worth noting that it is unprofessional to fund a pension scheme by loan since the interest on loan and other technicalities associated with borrowing leaves an enterprise with huge debts that may be difficult to pay. Therefore, it is necessary for Fortunes Inc to work on its investment policies to ensure that the pension scheme is funded by returns from the various investments.

The age factor is an important factor to consider when designing the strategies to finance the pension scheme. Over three-quarters of Fortunes Inc workers are to retire within 20 years from now, and this shows that a significant amount of money is required to cover for pensions. Therefore, the cooperative should establish a task force to formulate the mechanisms to be adopted to ensure that the age difference of workers is used to the advantage of the enterprise (Iverson, 2013).

Analysis of the existing portfolio and recommendation for improvement

Each member of the cooperative is set to receive one 60th of their final salary and a certain fixed salary. This shows that the cooperative expects huge cash outflows in the near future. An analysis of the existing portfolio reveals that a big challenge awaits Fortunes Inc is appropriate strategies are not developed to avert the danger. Essentially, the yearly spending on pension is projected to increase from £45,000 in 2018 to £24, 2693. The existing portfolio of the cooperative cannot be able to cover the yearly expenses on pension payment for the next twenty years. If the cooperative continues with its existing portfolio, it is likely to suffer a shortfall almost every year. A shortfall translates that members must seek alternative means of financing the pension scheme since the cooperative resources are insufficient to provide financial security for retiring members. Therefore, it is important for the members to invest in a new portfolio so as to eliminate the shortcomings of the existing portfolio.

Investing in a new portfolio is an important strategy for the Fortunes Inc. The new portfolio is capable of addressing the shortfalls experienced when following the existing portfolio. In essence, the new portfolio is projected to increase the surplus from £75, 390 in 2016 to £109, 767 in 2036 as shown in the appendixes. In this regard, adoption of a new portfolio is of great significant to the company. Apparently, with the new portfolio, the cooperative will be able to fund the pension scheme fully and use the surplus for general development. A surplus promises financial security and high investment potential and this aids in attracting investors and financial providers. Fortunes Inc should concentrate on developing a more efficient portfolio to avoid shortfall that might interrupt normal operations.

Risk management

According to Poitras, G. (2002), risk management is a comprehensive practice that involves risk identification, assessment and devising the strategies to mitigate, avoid or eliminate risk. The Fortunes Inc is faced with several risks that the members should consider when planning the day to day activities. Some of the risks that Fortunes Inc faces include liquidity risk, credit risk, operational risk, strategic risk and market risk among others. The various types of risks facing Fortunes Inc must be addressed appropriately to enhance smooth running of the cooperative activities. Apparently, failure to address risks might result in the collapse of the cooperative and cause huge financial loss to members.

Risk metrics

Investment risk can be defined as the deviation from a projected outcome. Organization that are involved in the management of investment portfolios are exposed to numerous risk that require proficient management. To enhance efficient risk management, both the absolute and relative mechanisms should be applied in the measurement of risks. One of the commonest absolute risk metrics that can be adopted in risk management is the standard deviation. It is imperative to identify that standard deviation is a statistical measure of dispersion that provides an explanation to what happens in the investment world over a given period.

Unsystematic risk refer to the uncertainty that faces an organisation due to the industry or company of investment. Studies show that unsystematic risk can result in adverse consequence of not addressed appropriately. The Unsystematic risks are managed through diversification so that the impact of loss is maintained at the lowest level possible. An example of unsystematic risk can be observed in a situation where news that may negatively influence the return on investment of a firm affect a specific small number of investment options. On the other hand, systematic risk refers to uncertainties derived from the entire market or industry. In essence, systematic risks involve the period changes in stock prices that are caused by changes in the economy such as recession and interest rate. Systematic risk can be managed through hedging since they affect the entire market.

Beta is a measure of systematic risk of a portfolio with respect to the whole market. Beta gives the true picture of how a stock market risk compares to the larger market. Moreover, beta establishes the similarities and differences between a strategic risk/market risk stock and other stocks in the market. Beta is usually calculated using the regression analysis and has found great use in the capital asset pricing model. A beta of 1 shows that the security/stock price will be in line with the market. A negative beta portrays that the price of the security will be less volatile compared to the market. A positive beta shows that the price of the security will be more volatile if compared with the market. it is necessary to note that a beta of more than one indicates a higher return on investment, but exposes the investment to more risks.

Risk management process.

According to Damodaran (2008), risk management is a process that involves five steps. The steps include risk identification, risk analysis, risk evaluation, treatment of risk and finally monitoring. Many studies reveal that adoption of the five steps ensures that all considerations are weighed appropriately before designing the risk management approach to employ.

Risk identification

This step allows individuals to recognize the risks that face the firm. For risk management process to commence, the management and staff members must be aware of the potential problem that faces the firm. Risk identification should be conducted frequently to ensure that emerging risks are noticed before they turn to be catastrophic.

Risk analysis

After identifying the risk, the next step is to assess the nature and potential of the respective risks. This step is important since it gives an insight of how the identified risk might affect the goals and objectives of the organisation. Essentially, risk analysis should be done proficiently since it provides a roadmap to the designing of the risk management policy.

Risk evaluation

This involves assessment of the risks and ranking them according to their magnitude, occurrence potential and anticipated loss to the organisation. This step involves decision making on whether the analysed risk is acceptable or warrants treatment. In essence, ranking risks is an important approach to risk management since it shows whether the available resources can be sufficient to cover uncertainties in case they happen.

Treatment of risk

Once the risks have been evaluated and ranked, risk response planning is done. The process involves assessing the highest ranked risks and establishing the best approach to address them. The main objective of this step is to ensure that the probability of negative risks is maintained at the lowest level possible. In this regard, risk mitigation strategies, contingency management plans, and preventive mechanisms are employed to ensure that the organisation does not suffer adverse financial consequences.

Reviewing and monitoring risk

The final step is to monitor the risk management process. In this cases, the organisation assesses whether the approaches to risk management are effective.

Risk management approaches

Risk management can be done in different approaches. The approaches include risk avoidance, acceptance, transfer, and reduction. Risk avoidance is appropriate when the anticipated loss is too huge to bear. Risk avoidance is the best strategy for risk management since the activity that is projected to cause potential uncertainties is abandoned. However, the approaches have some disadvantages as far as investment is concerned. For instance, risky activities can be very profitable to an organisation. Therefore, avoiding such activities denies the organisation the opportunity to exploit profitable investment opportunities.

Risk reduction

Risk deduction is another appropriate strategy for risk management. The approach ensures that the impact of loss is minimised in case it occurs. In essence, the approach appreciates that risky activities can be very profitable to an organisation, and therefore it is not necessary to abandon them. Risk reduction is the commonest approach adopted in the modern business world since investors are attracted to risky business opportunities.

Risk transfer

Risk transfer involves entering into an insurance contract to cover against losses that might be suffered in case the risk insured against occurs. The insured is expected to remit periodic payments referred to as premiums. On the other hand, the insurer is expected to compensate the insured in case the risk insured against occurs. Risk transfer is important since it ensures that an organisation returns to the financial position it was before the risk insured against occurred.

Risk acceptance

The approach recognizes that other risk management methods involve some costs. In this regard, the approach provides that accepting risks is a non-cost strategy and can be very effective for managing minor cost.

Performance evaluation of the existing portfolio

The current risk portfolio does not warrant financial solution for the next twenty years. For instance, the projected returns from 2016 to 2036 reveals that much has to be done to reduce the annual shortfalls in pension payment. The first group of retirees is anticipated to start receiving the pension benefits from 2018. The annual payout on pensions for 2018 is estimated to be £45,000, which shows that there will be an annual shortfall of £24,765 since the existing portfolio has the potential to generate only £ 6,879 during that year. This shows that the cooperative is set to experience huge financial problems in the near future. A further analysis of the existing portfolio shows that the cooperative will not manage to fund the pension scheme with the proceeds from its investments. In essence, the cooperative is likely to face annual shortfall throughout its life if a new portfolio is not developed soon.

The members should recognize that the economic world has become quite competitive in present days. Moreover, the modern technology has brought massive change and influence on investment decision made by individuals and institutional investors. In this case, the members should embrace change and seek the service of investment experts to ensure that the cooperative’s portfolio can meet all the financial obligation in the present and future situations (Greenstreet, 2002).

Recommendations and justifications on the appropriate asset valuation approaches.

Asset valuation is a mechanism adopted to determine the worth of an organisation based on real property, security or any other valuable items (Damodaran, 2012). Essentially, asset valuation is necessary since it provides the necessary information required when selling an asset or buying an insurance policy. Asset valuation is done on both subjective and objective measurement basis to ensure that both the qualitative and quantitative features of a firm or corporation are featured. For instance, it is difficult to determine the value of a company’s brand name and, therefore, qualitative techniques have to be used. There are different methods for asset valuation, which include cost method, market value method, base stock method and many others.

Fortunes Inc should employ valuation methods such as the cost method, market value method and average cost method. Stowe (2007) state that the cost method is based on the purchase price of the asset being valued. Fortunes Inc has been in existence for the last ten years and therefore it has accumulated a number of assets. In this regard, valuing the cooperative’s assets in accordance with the present prices can aid in determining how much it is worth. However, this method is complex to use since the costs of some assets are interdependent. The market value method provides a platform to determine the net worth of the enterprise on the basis of the current market prices. This provides an effective means of identifying whether the available assets of the enterprise are sufficient to meet the current needs of the market (Vallejo, Rodríguez, & Arregui-Ayastuy, 2011). Lastly, the average cost method facilitates effective valuation of assets that are difficult to differencing. In essence, use of the three methods can be very effective in revealing the true worth of the cooperative.

The members of fortune Inc should establish a comprehensive asset valuation plan that ensures all aspects of the cooperative are covered. Such a plan would ensure that the decisions made are based on the production capacity of the cooperative. In addition, it would ensure that investments done are with the company’s capacity.

• • • • • • • • • • • • • Assessment and recommendations for suitable performance

Gap Analysis

The present performance of Fortunes Inc does not match with the expected financial requirement in future. The cooperative has not exhausted all the productive investment opportunities, and this can be one of the causes for its poor performance. For instance, the cooperative has majored its investment priorities on ordinary shares and the stock market. The investment approach for the cooperative is inappropriate for an organisation whose financial obligations are expected to rise for over two decades. The cooperative has forgone profitable investment opportunities in areas such technology and the capital market. In addition, the ignorant of members about the emerging investment opportunities has resulted in underutilization of the cooperative’s potential. The members should explore new investment opportunities, conduct extensive research and seek expatriate services to bridge the investment gap that the cooperative is experiencing (Franklin, 2006).

Suitability of procedures and methods employed

Fortunes Inc is quite rigid in its policies and approaches to the changes in the business world. The cooperative has not invested in areas that promote creativity and innovation. In addition, the members hold different views concerning how the pension scheme should be managed. The procedure to problem-solving for the cooperative is a bit complex since all members must be present. In this regard, there is need separate the management of the cooperative from that of the pension scheme. Apparently, expatriate services and professional proficiency are required to ensure that the pension funds are sourced sufficiently and managed appropriately.

Benchmark

A benchmark can be described as the practice of testing a set of operations or performance plans to evaluate and identify the best (Platen & Heath, 2006). A benchmark is a crucial aspect of portfolio management as it shows the best performing projects and the investment opportunities that promise reputable plans. The members of Fortunes Inc should conduct a benchmark to evaluate the various available investment opportunities and implement the necessary policies to improve the performance of the poor projects in the existing portfolio.

Risk adjustments

Operating a portfolio of investment is a risky undertaking that requires a high level of competency in decision making. Fortunes Inc should consider working with other institutions such as the investment banks to minimise the probability of risk and diversify the revenue base. In addition, the cooperative should seek insurance services from renowned insurance companies to minimise the probability of suffering huge losses.

Reference list:

Blommestein, H. J., et al. (2008). Use of derivatives for debt management and domestic debt market development: Key conclusions. Oecd Journal: Financial Market Trends, 2008, 1, 223-235.

Damodaran, A. (2012). Investment Valuation: Tools and techniques for determining the value of any asset. Hoboken, N.J: Wiley.

Franklin, M. (2006). Performance gap analysis: Human performance improvement. Alexandria, Va: ASTD Press.

Greenstreet, I. (2002). Effective management of pension scheme mergers. Journal of Pensions Management, 7, 267-285.

Iverson, D. (2013). Strategic risk management: A practical guide to portfolio risk management. Singapore: Wiley.

Platen, E., & Heath, D. (2006). A benchmark approach to quantitative finance. Berlin [etc.: Damodaran, A. (2008). Strategic risk taking: A framework for risk management. Upper Saddle River, N.J: Wharton School Pub.Springer.

Poitras, G. (2002). Risk management, speculation, and derivative securities. Amsterdam: Academic Press.

Stowe, J. D. (2007). Equity asset valuation. Chichester: John Wiley.

Sultana, R. G. (2012). Learning career management skills in Europe: A critical review. Journal of Education and Work, 25, 2, 225-248.

Vallejo, A. B., Rodríguez, C. A., & Arregui-Ayastuy, G. (2011). Identifying, measuring, and valuing knowledge-based intangible assets: New perspectives. Hershey, PA: Business Science Reference

Appendixes

Years

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

Pension (2 Non-Founded Members)

£0

£0

£5,000

£5,100

£5,202

£5,306

£5,412

£5,520

£5,631

£5,743

£5,858

£5,975

£6,095

£6,217

£6,341

£6,468

£6,597

£6,729

£6,864

£7,001

£7,141

Lump sum

£0

£0

£40,000

Lump sum (only founder)

£0

£0

£0

Pension (5 Non-Founded Members)

£20,833

£21,250

£21,675

£22,108

£22,550

£23,001

£23,461

£23,931

£24,409

£24,897

£25,395

£25,903

£26,421

£26,950

Lump sum

£100,000

Lump sum (only founder)

£0

Pension (5 Non-Founded Members)

£29,167

£29,750

£30,345

£30,952

£31,571

£32,203

£32,847

£33,504

£34,174

Lump sum

£100,000

Lump sum (only founder)

£0

Pension (5 Founded Members)

£33,333

£34,000

£34,680

£35,373

£36,081

£36,802

£37,538

£38,289

£39,055

Lump sum

£100,000

Lump sum (only founder)

£50,000

Pension (5 Founded Members)

£33,333

£34,000

£34,680

£35,373

Lump sum

£100,000

Lump sum (only founder)

£50,000

Pension (2 Founded Members)

£13,333

Lump sum

£40,000

Lump sum (only founder)

£20,000

Pension (1 non founded members)

£6,667

Lump sum

£20,000

Lump sum (only founder)

£0

Total Payout On Pension (per year)

£0

£0

£45,000

£5,100

£5,202

£5,306

£5,412

£126,353

£26,880

£27,418

£27,966

£28,526

£341,596

£93,428

£95,297

£97,203

£99,147

£284,463

£137,152

£139,895

£242,693

Total Return From Existing Portfolio

£6,612

£6,744

£6,879

£7,017

£7,157

£7,300

£7,446

£7,595

£7,747

£7,902

£8,060

£8,221

£8,386

£8,553

£8,724

£8,899

£9,077

£9,258

£9,444

£9,632

£9,825

Annual Surplus

£6,612

£13,356

Annual Shortfalls

£24,765

£26,681

£28,636

£30,631

£32,665

£101,284

£120,417

£139,933

£159,840

£180,144

£513,355

£598,230

£684,802

£773,106

£863,176

£1,138,380

£1,266,089

£1,396,351

£1,629,219

Total Return From New Portfolio

£75,390

£76,898

£78,436

£80,004

£81,605

£83,237

£84,901

£86,599

£88,331

£90,098

£91,900

£93,738

£95,613

£97,525

£99,476

£101,465

£103,494

£105,564

£107,675

£109,829

£112,026

Annual Surplus

£75,390

£152,288

£185,724

£260,628

£337,031

£414,961

£494,451

£454,697

£516,148

£578,828

£642,761

£707,973

£461,990

£466,087

£470,265

£474,528

£478,875

£299,977

£270,500

£240,434

£109,767

Annual Shortfalls

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0