Assignment purpose; IT IS A GROUP ASSIGNMENT, SO AT THE END I WILL PASTE MY PART

As a financial planner, one of the roles involves determining a client’s requirements and creating a product or products that satisfies client’s objectives and constraints. The purpose of this assignment is to give students a mini version of the process - from requirement analysis through to portfolio construction.

The assignment consists of two parts. In teams of 3–4, you will create and analyse an investment portfolio for the client. In Part 1 you will create three SAA portfolios and discuss your strategic asset allocations. In Part 2 you will create an investment policy statement and recommend the best portfolio for the client.

In the last week of semester you will need to present key elements as you would to a client. Refer to Assessment 2B Investment Portfolio Presentation for more detail.

Assignment information

Due Date:
End of Week 10

The assignment consists of two parts. In teams of 3–4, you will create and analyse an investment portfolio for the client. In Part 1 you will create three SAA portfolios and discuss your strategic asset allocations. In Part 2 you will create an investment policy statement and recommend the best portfolio for the client.

Word

limit:
5000 words +/- 10% (include appendix)

Grading:
Refer to the marking rubric for more detail

Part 1: SAA portfolios

1. Relationship between asset classes and their roles in portfolio management

2. Portfolio construction and asset allocation decision

3. Performance reporting

4. Comments on the portfolios

Part 2: Investment policy statement

1. Return objective

2. Risk objective

3. Investment constraints

4. Investment portfolio selection

General

1. Presentation and writing

Strategic Asset Allocation

Your client has asked for your advise in constructing three potential portfolios with different features as listed below:

1.
Growth
- Invest 65-80% in equity and the rest in fixed interest and cash. Aim for higher return over the long run.

2.
Balanced
- Invest 50-65% in equity, and the rest in fixed interest and cash. Aim for reasonable returns but less than the growth fund to reduce risk of losses in bad years.

3.
Capital stable
- Invest 60-80% in fixed interest and cash, the rest in shares. Aim to reduce risk of losses over the long run.

Your client’s strategic asset allocation is based on the long-term investment horizon perspective. Short-term liquidity requirements are anticipated to be non-existent, however your client indicates that he wishes to allocate at least 5% in short-term money market instruments for emergency purpose. Your client understands that some risks must be assumed in order to achieve the investment objectives. However, your client would like to minimize the chances of negative returns in any given year. Your client also states that these portfolios should be monitored and reviewed yearly.

Asset class guidelines:

You should focus on long-term investment performance. Interest-generating investments, such as bonds and short-term money market instruments, have historically provided little opportunity for real long-term capital growth due to their susceptibility to inflation.

Equity investments, on the other hand, have significantly higher expected return but have the disadvantage of much greater variability of returns. As such, the client has specified four asset classes for investment: (1) Australian equities; (2) US large equities; (3) Australian Government Bonds; and (4) Australian short-term money market instruments.

For the purpose of diversification, each asset class in a portfolio should receive a minimum of 5% weight. The table below provides monthly return data for the asset classes.

Table 1
Monthly return data for various asset classes

Individual Client Detail

Archer Doorah, aged 48, is an architect and earns an annual salary of $160,000 (plus SG) before taxes. He recently inherited $300,000 (after wealth-transfer taxes) in cash from his father’s estate. In addition, Archer has accumulated $100,000 in his mortgage offset account and has $220,000 in his superannuation fund.

Archer’s family’s annual living expenses (includes min mortgage repayments of $30,000 per annum) is $95,000. Archer wants to invest the inheritance ($300,000) into superannuation for retirement in 17 years time. During your discussion Archer expresses concern about achieving retirement goals of having at least $1.3M dollars (in todays dollars) in 17 years to provide a net annual retirement income of $65,000(in todays dollars).

Archer does not seem to be able to tolerate high volatility in his investment portfolio. Assume the long-term average inflation rate is 2.5% per annum. You can assume Archer’s effective tax rate is 32% and remember that superannuation is taxed at a flat rate of 15%.

Data

You are provided with historical monthly price/return indices on the asset classes (June 1996 to June 2016)

Required Information:

Part 1 Strategic Asset Allocation

For this part, assume all investments are at benchmark. Do not take into consideration the impact of any active investments. For simplicity, do not consider taxes and transaction costs on any income generated.

1. Analyse the performance of each asset class and examine the relationships among them. Also, discuss the role of each asset class in an investment portfolio.

2. Use “intermediate Term Consensus Forecast” as the expected returns for the asset classes going forward (and any other relevant historical statistics), come up with three appropriate SAA portfolios (growth, balanced and capital stable). Discuss your asset allocation decisions in detail.

3. Based on your asset mixed decisions, calculate the performance of your portfolios based on historical data (from June 1996 to June 2016). You must at least provide the following:

a. Average portfolio returns (arithmetic for both monthly and yearly) and Sharpe ratios over the sample period;

b. Average returns (yearly) of trailing 3, 5 and 10 years at the end of every year;

c. Graph and compare the performance of your portfolios over time;

d. Standard deviation (both monthly and yearly) of your portfolios over the sample period;

e. Probability of a negative return (and returns less than 1.5 and 3 percent) in any one year over the sample period

4. Make detailed comments on the performance of your portfolios. What are their expected performance and risk profiles? How do investors benefit from investing in these portfolios? What are the investment objectives each portfolio aims to achieve?

Part 2 Investment Policy Statement

For this part, you need to create an Investment Policy Statement for Archer and recommend an investment portfolio (choose one portfolio from the three SAA portfolios you have created in Part 1 above) that satisfies his retirement objective.

(a) Formulate the return objective of an investment policy statement for Archer. Calculate the pre-tax return that is required to achieve his retirement objective.

(b) Formulate the risk objective of an investment policy statement.

(c) Formulate the constraints portion of an investment policy statement by addressing each of the following:

• Time horizon

• Liquidity requirement

• Tax concerns

Based on the investment objectives you have identified, give investment advice and choose an appropriate investment portfolio (based on the three portfolios you have created in Part 1 above) for Archer.

Tasks to be performed by the second member -

a. Calculation of returns of each asset class given in the question.

b. Analysis and evaluation of the performance of each asset class calculated in point no. (a).

c. Discuss the role and importance of each asset class in the respective portfolio. If some asset class is not considered in a portfolio, the reasoning for not considering the same.

d. Performance evaluation of each portfolio's actual return Vs expected return based on their risk profiles.

e. Benefits to the investor if invested in these portfolios.