Fundamentals of Finance - Essay Example

Fundamentals of Finance Name Course name and Code Instructor’s name Date: History of Colonial First State Colonial First State began in 1988 as the funds management arm of the State Bank of NSW. The firm had an initial investment capital of A$5 million and has grown to more than A$127 billion in funds being managed. The firm has diversified assets under management and its operations have been expanded into global markets. The firm has also acquired several global asset managers which has enabled them to extend their reach into new investment options and establish an international base for managing their global assets. The firm has become one of the leading wealth management brands in Australia with over 700,000 investors from around the world. The firm offers a range of products such as investments, superannuation, retirement and margin lending to individuals, corporate and superannuation fund investors. The firms wide range and investment management expertise spans Australian and global shares, fixed interests, property, credit, hedge funds, private equity and infrastructure. Managed funds Managed funds are broad based mutual fund which has investments in several types of securities to reduce risk of loss during a downturn. Managed funds rely on the expertise of the mutual fund manager to carry out research and select the stocks or bonds that make up the fund’s portfolio. It comprises listed and unlisted property funds which are managed on the behalf of institutional and retail investors. A managed fund pools the money of several investors and the money is managed professionally in accordance to the investment objective of each fund. It allows individuals to take advantage of investment opportunities which they may not be able to access as an individual investor. Individuals investing in managed fund are allocated a number of units on the basis of entry unit price at the time of investing. The units are a representation of the value of the individual’s investment which often changes over time dependent on the market value of the assets in the fund. Minimums The minimum initial investment at Colonial First State is $1,000. The firm does not have a minimum additional contribution. The firm does not also have a minimum withdrawal amount. Switching Switching is the process of changing from one fund to another. The switching process is treated as a withdrawal from one fund and an investment into another. Funds are withdrawn at the exit unit price and the new units invested at the entry unit price. If an investor is switching from a fund with a lower entry fee than the fund he/she is switching to, he/she may pay the difference between the two fees. Switching at Colonial First State may be transacted online or by completing switch form which is available on the firm’s website or by calling the firm. The investor can also provide the firm with a written request to switch. Once the request is received on a NSW business day the switch will be processed at that day’s unit prices in case the request is received prior to 3pm. In cases where the fund is suspended or restricted, switches may not be processed. In case the switch request involves an investment into a suspended or restricted fund, the Colonial First State will invest that allocation into the Colonial First State cash fund and notify the investor with his confirmation. In some cases switches may attract capital gains tax. Asset class Asset class is a group of securities which have similar characteristics, have similar behavior in the market place and are subject to the same laws and regulations. It is a group of similar investments whose prices tend to move together. The four main asset classes are cash, fixed interest securities, property and shares. Cash refers to investment in bank bills and other securities which have a short investment time frame. Returns from cash investments are usually stable and have low potential for capital loss. On the other hand, fixed interest securities include bonds which operate like loans. It involves payment of cash for the bond and in return the investor receives a regular interest payment from the issuer of the bond for an agreed period of time. The value of the bond may fluctuate dependent on the interest rate movements. Upon maturity of the bond, the loan is repaid in cash. Returns from bonds are more consistent but lower than that from shares. In the case of property, the investor either buys a property directly or invests in property securities. Each property security holds real property investment in sectors such as retail, industrial or office. The property securities are listed on stock exchange and are purchased and sold just like shares. The volatility of property investments are lesser than shares although the returns from such investments may be lower than that accrued from investment in shares. Shares represent a partial ownership of a company and are usually traded at the stock exchange. Shares represent asset class with greater risk as opposed to other investment asset classes. This is because their values fluctuate more than any other asset class. However, returns from shares have historically outperformed other asset classes. Types of multi sector funds offered by Colonial First State The four types of multi sector funds offered by the Colonial First State are conservative, balanced, diversified and high growth fund. Conservative fund is aimed at providing investors with a regular income while maintaining and potentially increasing the value of investor’s capital over medium term. Asset class investment allocation involves 30% in shares and property while 70 percent is invested in fixed interest and cash. Conservative funds have a minimum timeframe of three years. Balanced fund aims at providing investors with a balance of income and capital growth from investment in cash, fixed interest, property and shares over the medium term. The allocation of investment is 50% investment in shares and property while the other 50% is invested in fixed interest and cash. The minimum timeframe for balanced fund investment is four years. Diversified fund aims at providing investors with a medium to long term capital growth in addition to some income via investment in cash, fixed interest, property and shares. The allocation of investment is 70% investment in shares and property while the remaining 30% is invested in fixed interest and cash. The minimum timeframe for diversified fund is five years. High growth fund is intended to provide investors with long term capital growth through investment in a diversified portfolio of Australian and global shares. Differences between a growth asset and a defensive asset Growth assets are investments made with the main aim of attaining an investment return which includes capital growth and income that outperforms inflation. In the case of the Colonial First State growth assets include Australian shares, international shares, property and alternative assets. On the other hand, defensive assets are investments made with the main aim of attaining more stable returns than growth assets investment with little or no capital growth. Defensive assets in the Colonial First State include cash and fixed interest. Growth assets are characterized with higher volatility in short term than defensive assets and have a higher risk of a negative return. However, in the long term, returns from growth assets are higher than those from defensive investment. Payable fees charged by Colonial First State Even though fund managers charge various fees for the services provided, the Colonial First State only charges contribution fees depending on the fund. For cash fund the firm does not charge any contribution fee. Other funds have varying contributions fees with conservative fund charging 2.5%, balanced fund charging 3.0% and all other funds charging 4.0%. Management costs p.a. at Colonial First State The minimum lowest management costs p.a. at Colonial First State is cash fund which is charged at 0.95%. Managed fund with the highest maximum management fee p.a. at Colonial First State is the global share fund which charges 3.0%. Risks of investing in managed funds There are several risks associated with investment in managed fund. First is the market risk. Managed funds returns are affected by market performance. Thus, factors such as interest rates, investor sentiment and global events may affect returns depending on the markets or asset class. The second risk is security and investment specific risk. This includes risks which are specific to different managed funds. For instance, changes in the management of a company, its business environment or profitability may impact on the value of the shares of the company. These risks may also affect the ability of a firm t settle its debts. Another risk is management risk which may result from the inability of a certain investment manager to manage investor’s fund effectively. There is also a liquidity risk which is the difficulty in disposing an asset for cash quickly without impacting negatively on the received price. Assets such as shares of big companies are considered to be more liquid than real assets. However, some liquid assets such as shares may become illiquid under certain abnormal or challenging market conditions. All the risks discussed are general risks which affect all managed funds. However, there are fund specific risks such as currency risk and derivative risk. Investments in global markets or securities face currency risk in that any fluctuations in exchange rates affect them directly. To avoid this Colonial First State, adopt different currency management strategies such as currency hedging which reduces the effect of currency value fluctuation on the investment. On the other hand, derivative risks are risks which are increased when contracts between two parties that usually derive their value from price of a physical asset or market index. Such risks include the possibility that the derivative is costly or difficult to reverse, that there is an adverse movement in asset or index underlying the derivative or that parties are not performing their duties under the contract. Gearing risk Gearing involves borrowing money to increase the amount available for investment. Gearing increases both gains and losses from the fund’s investment. Investors in geared funds face larger fluctuations in the value of their portfolio as compared to ungeared portfolio. A geared fund underperforms in comparison to ungeared portfolio when the cost of borrowing exceeds the return on the ungeared investment. Investors at Colonial First State in geared share fund may risk losing all their capital if the market falls rapidly over 40% while those investors in geared global share fund may lose all their capital if the market falls rapidly over 60%. The importance of risk-return relationship in the investment decision The analysis of security is based on the concept of return and risk. The return and risk forms the framework of making an investment decision. Returns from equity include dividend and capital appreciation. Risks are deviation of actual return from the estimated return. The risk may arise due to either internal or external forces. Investors are often interested in minimization of risk and the same time maximizes returns. Internal risk can be eliminated via holding more diversified securities. External risk is also referred to as market risk and cannot be eliminated through diversification of securities. Thus diversification reduces risk to the minimum level of market risk. An increase in investor’s required return increases their perceived uncertainty. Since different asset classes are associated with different risks and returns, investment decision ought to consider the relationships. This is because the higher the risk, the higher the likely returns from long term investment. Choice of managed fund offered by Colonial First State Given $50,000 to invest in a managed fund a I would choose invest in diversified funds under the multi sector funds at the Colonial First State. This will be able to provide with a medium to long term capital growth in addition to earning me some income via investment in cash, fixed interest, property and shares. This will ensure that my investment is allocated in growth assets (70% of investment in shares and property) while the remaining 30% is invested in fixed interest and cash. The diversified investment in multi sector asset classes will ensure that the risks are reduced and the returns from my investment are increased at the same time. Work cited Colonial First State, Managed Investment Fund: Colonial First State Managed Investment Funds, 2009 pp. 1-52. Read More