Question 1 (12 marks | Word limit: 600 words) LO1: Analyse the processes involved in managing an investment portfolio. (a) Analyse the objectives of the defined benefit fund in terms of the return...

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Question 1 (12 marks | Word limit: 600 words)


LO1: Analyse the processes involved in managing an investment portfolio.


(a) Analyse the objectives of the defined benefit fund in terms of the return requirements.

How do you think they could be improved?
(2 marks)


(b) Analyse the objectives of the defined benefit fund in terms of risk management.

How do you think they could be improved?
(2 marks)


(c) Propose two (2) new objectives for the defined benefit fund based on both return and riskrequirements.
(2 marks)


(d) Analyse the objectives of the balanced fund in terms of the return requirements.

How do you think they could be improved?
(3 marks)


(e) Analyse the objectives of the balanced fund in terms of risk management.

How do you think they could be improved?
(3 marks)




Investment Management (FIN206) Assignment Total marks: 100 Personal ID: [Enter your Personal ID] I have read the Assignment Guide in the ‘General assessment information’ and have applied the word count principles to my work. My word count for this assignment is: [Enter your word count] words Your assignment should be loaded into KapLearn by 11.30 pm AEST on the due date Checklist I have completed my assignment using Word. I have completed my assignment using Calibri, Arial, Times New Roman or Verdana fonts. I have added my Personal ID on this page. I have added my word count on this page. I have added my Personal ID in front of the filename in the footer on the second page. I have saved the file to be uploaded as PersonalID_FIN206_AS_v3. Each question of my assignment is within the word limit guidelines for that question as per the ‘General assessment information’ (Assessment Assignment General assessment information). My assignment file size is no larger than 2 MB. If tables were required, they are visible as text, not as links or images. I have not removed the marking grid from the footer. I have submitted my assignment as per the instructions in KapLearn. Marker feedback Comment on overall performance: For marker use only. Instructions to students •This assignment covers Topics 1 to 5 and accounts for 40% of your final grade. •There are four (4) questions in this assignment. You should answer all questions. •The overall word limit for the assignment is 5200 words. Marks will only be awarded for answers up to the word limit (plus 10%) for each question. Any material written after this will not be counted towards your mark for that question. Headings, quotes and references within the body of the answer are included in the word count. Numerical tables, calculations, and reference lists are not included. For more information on word counts and their rationale, go to Assessment Assignment General assessment information. •Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question. •The ‘General assessment information’ section in KapLearn contains information about format and presentation, word limits, citations and referencing, collusion, plagiarism and other policies, useful resources, submitting your assignment and accessing your results. •Full workings must be shown for all calculations. Show all calculations in the text of your assignment and NOT attached as an appendix. Appendices to assignments will not be read. •Answers are to be in your own words. Reference and cite all your sources (within the text of your answer) when quoting or using material from external sources. Include a reference list at the end of your assignment. Refer to the ‘Referencing and Citations Guide’ available from the ‘Library and Resource Centre’ in KapLearn for further information on referencing. •Indicative weightings are noted beside each question. Use these weightings to assist you with your allocation of time and resources. The weightings indicate the relative importance of each question. •State all assumptions used in providing your answer. •Requests for special consideration or information pertaining to special consideration written in the body of the assignment will not be considered by the marker. Refer to the ‘special consideration’ section of the Assessment Policy on Kaplan’s website for more information. Learning outcomes (LO) mapping Marks 1.Analyse the processes involved in managing an investment portfolio. 20 2.Explain the theoretical concepts underpinning investment management. 20 3.Apply the process of asset allocation and portfolio construction. 55 4.Assess manager selection and portfolio management styles. 5 Total marks 100 Criteria-based Marking Guide The Criteria-based Marking Guide provided at the end of each question is designed to assist students to understand what is expected of them in each question and to let them know how their performance will be judged. It provides advice about the criteria used in the marking of the question and what discriminates between an excellent, satisfactory and unsatisfactory answer. Background information: ABC Superannuation Fund ABC Superannuation Fund (ABC) is a scheme that was originally only available to state public servants. It has two parts: •a defined benefit (DB) scheme •a defined contribution (DC) scheme. The ABC DB scheme was closed to new members a number of years ago and is currently in ‘run-off’ mode. The scheme was only ever available to public servants. In a DB scheme, the fund essentially bears investment risk rather than investors. Investors receive a return at retirement in the form of a pension or a lump sum, based solely on salary and years served in the public service. As the final payment (or lump sum) is effectively guaranteed by the government, members are not provided with information regarding performance. Actuaries have calculated that ABC’s DB scheme is marginally underfunded. At current rates of withdrawal, approximately 3% of the fund’s capital is withdrawn each year and the fund will need to meet liabilities for the next 45–50 years. The average age of investors in the fund is 55, with the youngest 2% of members being age 40. There are only a few DB schemes left in Australia and each scheme has a different member demographic base. The DC scheme is popular with both current public servants and those past public servants who now work in the private sector. There are eight options available to members including a number of asset class specific options, a number of diversified options and a socially responsible investing (SRI) option. Almost 80% of DC members are invested in the ‘Balanced Fund’, which also serves as the MySuper option. The average age of members in the Balanced Fund is 50, which is around 20 years above the average member age for other similar funds (peers). The average balance is $105,000, well above the average balance for peers, and the average salary of those members is $100,000 p.a., which is also well above the average salary of members in other Balanced Funds. Most of the DC scheme’s options, including the Balanced Fund option, have provided fairly competitive returns over the past five years. Nonetheless, in the aftermath of the global financial crisis (GFC), the trustees of the fund would like to undertake a full analysis of the DB scheme and the Balanced Fund option in the DC scheme to ensure that the funds are likely to meet members’ expectations in the future. They are aware that, for example, the members invested in the Balanced Fund do not represent the average cohort in a Balanced Fund, thus their needs may be different. They believe that the funds have been too focused on achieving returns competitive to peers rather than providing long-term real returns or considering the true needs of members. As the other options in the DC scheme are small, they will be considered as a separate project after this one is completed. Scenario You are a consultant who has been asked by the fund’s trustee board to work with ABC’s investment team to review a number of facets of both the DB scheme and the balanced fund option in the DC scheme. In your initial dealings with ABC, you have gathered copies of the incomplete investment policy statements (IPSs) (see Appendices 1 and 2), which provide the basis for the way the investment team manages these funds for both the balanced fund option in the DC scheme and the DB fund. In addition to reviewing the IPS’s, the Investment Committee (IC) has also asked that you specifically address four topics in your report. First, the committee has asked that you address the impact of potentially higher inflation on the portfolio. Their concern is that after a long period of low inflation the risks a higher inflation rate may be under-estimated and they want to consider the impact of this on the portfolio as well ways of protecting /hedging the portfolio should higher inflation eventuate. Second, the committee would like to understand whether the portfolio would benefit from a higher allocation to additional assets classes, specifically alternatives including hedge funds and private equity as well multi-strategy funds? Third, the IC is also looking at the issue of re-balancing and the frequency with which this takes place. Their specific concern is that the asset allocation bands are too wide and that the portfolio would benefit from reducing the bands and having more frequent re-balancing. A final issue is that after a recent member survey of the DC fund one of the notable trends was a very marked increase in the number of investors who wanted to be able to invest in an Environmental, Social and Governance (ESG) fund. The IC wants a brief overview of this style of investing as well as whether an ESG overlay to a fund manager’s process contributes to performance? Note to students: Clearly mark all sections and sub-sections of your answers. Question 1(12 marks | Word limit: 600 words) LO1: Analyse the processes involved in managing an investment portfolio. (a)Analyse the objectives of the defined benefit fund in terms of the return requirements. How do you think they could be improved? (2 marks) (b)Analyse the objectives of the defined benefit fund in terms of risk management. How do you think they could be improved? (2 marks) (c)Propose two (2) new objectives for the defined benefit fund based on both return and risk requirements. (2 marks) (d)Analyse the objectives of the balanced fund in terms of the return requirements. How do you think they could be improved? (3 marks) (e)Analyse the objectives of the balanced fund in terms of risk management. How do you think they could be improved? (3 marks) Criteria-based Marking Guide for Question 1(a)–(e) Excellent (Mark range: 9–12 marks) Satisfactory (Mark range: 6–8.5 marks) Unsatisfactory (Mark range: 0–5.5 marks) detailed analysis of objectives and their appropriateness for the DB fund in terms of return requirements and risk management at least 4 suggestions on how the objectives of the DB fund could be improved 2 new well-structured objectives identified for DB fund detailed analysis of objectives and their appropriateness for the balanced fund in terms of return requirements and risk management at least 4 suggestions on how the objectives of the balanced fund could be improved basic analysis of objectives and their appropriateness for the DB fund in terms of return requirements and risk management at least 2–3 basic suggestions on how the objectives of the DB fund could be improved at least 1 new well-structured objective identified for DB fund basic analysis of objectives and their appropriateness for the balanced fund in terms of return requirements and risk management at least 3 basic suggestions on how the objectives of the balanced fund could be improved incorrect or no analysis of objectives of the DB fund in terms of return requirements and risk management incorrect or no suggestions on how the objectives of the DB fund could be improved poor or no new objectives identified for DB fund incorrect or no analysis of objectives of the balanced fund in terms of return requirements and risk management incorrect or no suggestions on how the objectives of the balanced fund could be improved Insert your answers to Question 1(a)–(e) below this line End of answers to Question 1(a)–(e) Question 2(13 marks | Word limit: 400 words) LO1: Analyse the processes involved in managing an investment portfolio.
Answered Same DayNov 17, 2019FIN206

Answer To: Question 1 (12 marks | Word limit: 600 words) LO1: Analyse the processes involved in managing an...

David answered on Dec 27 2019
127 Votes
Answer 1(a):
In defined benefit scheme investors does not bear the risk of portfolio performance or market movements. Investors receive a return along with benefits at retirement either in the form of a pension or a lump sum, which are determined by stated criteria usually associated with years of service, salary at retirement and inflation.
The main objective of defined benefit fund in terms of Return requirement is to achieve a total return sufficient to cover pension liabilities in an inflatio.n adjusted base. For example returns will exceed inflation by at least 3% over rolling 3 year periods.
In order to improve the return requirements the scheme should always try to achieve a return over the assets benchmark by forming the portfolio.
However in case of Over-funded scheme the fund should be managed with a long term growth oriented being major focus on capital appreciation.
In case of Under-funded scheme, which is the current scenario in our case, it is recommen
ded not to take an aggressive investment approach and at the same time sponsor should increase contributions
Answer 1(b):
The objectives of the defined benefit fund in terms of risk management
· Is to achieve high current and expected firm profitability with low debt to equity ratio of the firm.
· Is to maintain young average age or greater active lives in comparison to retired lives
In order to achieve these objectives, there should be no or very little provisions for early retirement and lump-sum payments. In other words, the focus should be on reducing the time horizon and minimizing the liquidity requirements.
Answer 1(c):
In addition to the general objectives of the defined benefit fund i.e. to achieve sufficient returns to cover pension liabilities of the employees considering inflation factor and to maintain the liquidity requirements, the company should also focus on
· Designing strategies to improve and maintain employee health while containing costs.
· Reduce the number of injuries through enhanced safety efforts and Increase the Return to Work placements.
These objectives will help the company in long run by maintaining the low proportion of retires and terminations respect to active ones. Secondly these provisions provide higher employee satisfaction and ensure no early retirements.
Answer 1(d):
Balanced funds also know as Hybrid fund are a combination of equity, debt and money market component as well in a single portfolio. With the help of these funds one can achieve targeted objectives as these funds can provide either a moderate or higher equity component or can provide higher fixed income for conservative group.
The main objective of balanced fund is to provide investor with the mixture of safety, income and modest capital appreciation.
The best attribute of the funds is that, they can be re-balanced in any market condition depending on the needs of the investor.
The performance of balanced fund can be improved even in difficult market situation if they have a cushion of debt so that they can be better equipped to withstand shocks in falling market. Secondly, in case of rising market, the fund can perform better with hundred percent equity components.
Answer 1(e):
Balanced funds are for those who do not want the hassle of investing in a basket of products that needs to be re-balanced at regular intervals. In other words, these funds are for those who don't want high risk.
The main objective of these funds is to put the cap on the risk .i.e limit the maximum risk and providing moderate return at the same time.
In order to achieve or improve the objective of balanced fund in terms of risk management one should take a balanced Fund with 70% exposure to equity and 30% to debt. If the stock market falls, the fund's equity exposure will drop to the extent of the fall, leaving with no option but to buy more shares to maintain the 70 per cent equity level and at the same time debt provides safety.
Answer 2 (a)
Investment managers are the one who deploy plan assests in such a way which is in best interest of the client or beneficiaries. Investment manager selection process is one of the crucial, often taken lightly, a final step in establishing and implementing a comprehensive investment plan which begins with formulating an investment policy statement.
A specialist investment manager is selected on the basis that they are capable of meeting the client’s investment objectives. It is also necessary to ensure that the manager is well briefed and understands what is expected of them.
Weaknesses:
· The guidelines stated for choosing investor manager are quite theoretical and not sufficient enough to make the correct choice on the basis of funds.
· The investment policy statement share by the committee does not explain about the performance of the funds.
· The current investment manager fails in re assessing the existing investment portfolio inspite of the disappointing investment performance, usually re-assessment done by them annually in the current case.
· The criteria used by the committee for choosing managers is same for both the schemes which is highly unrealistic as same fund manager can never be able to handle and meet up to the expectations of different set of investors
Strengths:
· While forming or choosing the invest manager team or investment manager they are looking for the out performance and A rated managers from their team as well in addition to the external one.
· Similarly they were able to explain the asset allocation policy as well for both defined benefit and definite contribution scheme
· The guidelines clearly explain what is expected from the investment manager.    
According to Tipple, “Disappointment with investment manager selection can be reduced by considering the tangible ‘4 P’s’ (people, process/philosophy, portfolios, and performance) and the intangible ‘4 P’s’ (passion, perspective, purpose, and progress).”
Answer 2 (b)
Even after having a good knowledge on equity analysis and market portfolio theory there are certain technical elements of portfolio management which should be addressed by investment manager hence, the selection of investment manager plays a very crucial role. Once it has been determined which asset class and strategies will be used in practice, the manager selection process can be initiated.
The process of selection of managers for equity portfolio can be improved by reviewing the techniques of alternate managers and monitoring current managers. One should also aim at considering the value of quantitative and qualitative method for selection of investor manager.
Equity portfolio management is either passive of active.
In case of Passive management, the investment manger should spend more time in closely observing the performance of the benchmark index rather than trying to beat it. In other words, passive management is basically a buy and hold strategy.
In active management, manager needs to use his or her analytical skill and research with the aim to achieve the results above index. The strategies which are used by portfolio managers to beat the indices are fundamental analysis, technical analysis and quant analysis.
While selecting the manager for equity portfolio, whether one should be active management or passive management, the criteria for the same should be compared in terms of:
· Management fees
· Transaction costs
· Risk and return differentials, based on the needs of the investor.
Answer 2 (c)
ESG over lays implies integrating Environment, social and governance issues in investment decision making. Examples of these issues include air and water pollution, bribery etc. It often called as responsible investing which means one should also consider intangible factors of the company in addition to the financial data while making any investment decision i.e. how that company dealing with its labour force how it deals with the environment and with other stakeholders.
Not considering the ESG factors while making the decision often led to incorrect decision making, in other words it involves screening of investments from ethical point of view.
Research on ESG overlay
This study, published by Alex Edmans in 2011, shows that the higher the employee satisfaction, the better the stock returns.
Abstract
This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing (SRI) screens may improve investment returns.
Answer 3 (a) (i):
The strategic asset allocation (SAA) of the balanced fund, calculated using a mean variance optimiser is a part of modern portfolio theory (MPT).
The underlying assumptions of MPT include:
• Normal distribution of asset returns — asset returns are distributed around an average return in a ‘bell-shape’ manner
• Rationality of investors — investors will look to maximise returns
• Risk aversion of investors — investors prefer lower returns with known risks over higher returns with unknown risks
• Homogenous investing — investors have the same information on...
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