From assignment 1, it was found that market efficiency exists when the available information provides an accurate reflection of prices. This efficiency is based on two levels, that is, micro and macro levels. In micro level, market efficiency is arrived at when the prices of financial securities reflects the prices of other securities in a given asset class. Whereas, macro efficiency is concerned with whether the entire market reflects the existing available information ( Easton&Kerin, 2010). Security markets became efficient, due to the acceptance of the efficient market hypothesis in the financial markets. They provided useful information that captured the conditions in the stock market. Hence, that theory holds that an investor should make a rational decision (Malkiel, 2003). Therefore, there exists a relationship between the research from assignment 1 and Tex Matdasu’s scenario.

It should be noted that for Tex to make a rational decision, he should be able to understand how the security prices have been in the stock market. This is because the efficient market hypothesis and the concept of random walk have been used together. This concept dictates that, if prices reflect extensive information, the following costs variations depend on the current news. This implies that security prices will be random since the news is not predictable.

Due to Global Financial Crisis, the credibility of efficient market hypothesis was questioned. It noted that the theory does not incorporate all the required information while predicting stock prices. Therefore, Tex’s portfolio of assets can be restructured once the information that was left out during the prediction of stock prices has been incorporated.  Although this criticism holds water, it is not possible to have a perfect efficient market. This makes the EMH stand a chance of influencing investment decisions in the stock market.

Question 2: Asset allocation

1. (i) benefits of including fixed income in Tex’s portfolio

Fixed income in the portfolio provides capital stability. Due to the existence of annual interest payments, Tex’s income will increase if he invests in fixed income. This is possible as the securities of fixed income, accrue payments to its various classes. Also, it will enable Tex rebalance his portfolio if need be. Finally, it is of benefit as it is subjected to lower risks.

 

1. (ii) Selection of funds from Fixed Income APL

Aberdeen Standard Australian Fixed Income Fund and Aberdeen Standard Diversified Fixed Income Fund should be included in Tex’s portfolio. This is because he has taken time to invest in fixed income. As he states, he was affected by the Global Financial Crisis. Therefore, the reason why he was disappointed is that he made an investment decision upon the predicted prices where all the information about the stock market was not captured. Hence, it will be of great Importance for Tex to consider the aforementioned fixed income funds. This is because the Global Financial Crisis that affected him has provided adequate information that will be used in the process of decision making. For instance, the international fixed income fund is diversified. This implies that if Tex invests in it, he will lower the risks that may lead to a high capital loss if diversification does not exist.

1. (iii) Problems with the risks of the international fixed income asset class.

Some of the challenges that may be involved depending on how the economic market behaves. For example, if one chooses to sell a bond before it matures, he/she can make a profit or incur a loss depending on the price at the secondary market (Gupta&Sharma,2016). This implies that any price that is below the face value will result in a loss and any price above the face value will result into a profit. The currency hedging issue that can arise is the transfer of the foreign exchange risk, from an investor to the business handling the risk.

1. (i) Benefits of alternative investments within a portfolio.

It is not advisable for investors to rely upon returns from a single investment.  This is because your investment portfolio can experience a risk that may lead to capital loss. Therefore, in case of that event, your expectations on returns from the affected investment will be shattered. Hence, there is need to diversify your investment portfolio. This will ensure that you have spread your capital across various investments. The diversification ensures that the risk of loss is minimized, as the performance of the investments may vary. Meaning, under the same period, when one investment is underperforming, the other investment is performing better. Therefore, you can get some returns compared to when you could not have spread the risk. This leads to the generation of returns as one is dependent on different investments. It also results to the preservation of capital. Since Tex is aiming to retire at 60, diversification is a better option as it will enable him to take care of his savings. This is because, at 60, he will not be in the phase of accumulating resources.

1. (ii) Inclusion of AUD fund in Tex’s ABC Super Portfolio.

It will be better if this fund will be included in Tex’s portfolio. This is because it has a broad diversification to offer the investors. This aspect of diversification is crucial to all matters of investment. It ensures that the risk of loss is spread. This will help an investor to spread his capital across many investments. Due to variations in their performance, an investor will not incur capital loss in case of a bad season which will result in underperformance of some investments. Since the aim of this fund is to ensure the growth of capital over medium and long terms, it will be of benefit to Tex if he settles on it. Now that he is aged 35, his capital is likely to grow rapidly because he plans to retire at 60. Therefore, this fund can result to capital preservation as it ensures the protection of savings (Gupta&Sharma,2016).

1. (iii) Satisfaction of Tex’s property component issues.

Some of the issues that should be addressed in Tex’s property component portfolio include; diversification of the $ 500,000 deposit and reduction of the 5 years of buying a property. Diversification will spread risk and lower the loss that may be incurred. Reduction of the period will result to higher returns. This is because property always goes up.

3. Platforms and products

.a. (i) benefits and disadvantages of using a fund manager.

The benefit of using a fund manager is because managed funds open a way to many investment opportunities. This is evident as it accesses an investment that could not be accessed through direct investing. Also, the manager subjects the individual investor to a constant system of getting some regular incomes. This is irrespective of high or lower risks. Managers are always on the ground, and therefore they know all that is happening in the market (Cremers et al., 2016). That is why it is always of benefit to use them as they are more knowledgeable than then real investors. This leads to capital growth which is the main aim of any investor. Some of the disadvantages of this method are that the individual investor might not know the benefits that are attached to this system of investing. It is also possible that the manager can alter the information that he/she gives the individual investor.

1. (ii) A table showing the performance of funds on the ICR

Asset Class	Managed fund name	APIR code
Australian equities	Morningstar Australian Shares Fund	INT0022AU
International equities	Morningstar International Shares (unhedged) Fund Morningstar International Shares (hedged) Fund	INT0052AU INT0050AU

 

From the review, it is clear that the funds in Tex’s ABC super fund are doing well when managed. This is because the manager is well conversant with what is happening in the market.

1. (i) Advantages and disadvantages of gearing.

Gearing brings about tax savings due to the reduction of tax obligation. It happens when the loss arises from an investment that was geared negatively. Gearing results in potential cash benefits. This one is achieved after taking the tax obligation that is based on reduction. On the other hand, gearing has some disadvantages. For instance, one may fail to get the expected returns. When the sources of income cease, it subjects on to greater financial risks. Also, it experiences budgeting problems when investments are geared negatively.

1. (ii) Ways in which investors can meet margin calls.

One way is by trading with the available cash. Understanding the maintenance requirements of margin is necessary. Also, the use of trailing stops does not entertain margin calls. Therefore, Lachlan should use the first strategy to avoid problems. He should trade using the available cash. This will help him as he will not subject himself to borrowing.

4. Tactical asset allocation.
5. (i) advantages and disadvantages of ‘buy and hold’ approach.

This strategy is easy. Once one has bought, you relax and wait until that period your investment has grown. Therefore it does not subject one to a lot of pressure. This implies that one can protect his/her savings that will accrue to a huge profit after some time. It is not bound with anxiety that results from trading. This is because it is not affected by the active price variations that exist in the stock market. This implies that one is not stressed with the existing prices as there is no agency to make a sale. Its disadvantage is that the money that has been put into the stock takes longer for one to get the returns (Rousis&Papathanasiou, 2018). This makes it impossible for one to benefit from his/her money in case of an emergency. It implies that, once you have invested your money, you have to wait for the right period, to make a sale. This will result in profit making.

1. (ii) Whether the buy and hold strategy has worked for Tex.

This strategy has worked for Tex can be seen in his asset portfolio. He has spent 15 years of life just as the accumulation phase. He also thinks of investing in buying a property that will be held for some time before it is sold. Therefore he is concerned with buying after which, he will hold the property to sell in a later date.

1. (i) what to consider when adopting TAA approach as opposed to using SAA

TAA refers to when an additional value is utilized by the portfolio managers, due to the exploitation of existing situations in the market. This knowledge will be used in advising the investor, on the right and profitable investment to risk in. This information will influence the decision that will be made. Some of the issues to be considered include the following; Rate of return on investment, taxes to be paid and the nature of accepted risks, unique circumstances of the investor and legal requirements. These considerations will result in the final decision, whether an investment will be made or not.

1. (ii) issues on current asset weightings.

The issues that can be identified in Tex’s ABC super portfolio include the rate of return. This will ensure that Tex has got a prior knowledge of the returns he will get, once he makes an investment. The available information will drive him towards making a ration investment decision.

1. Impact of the rising interest rate on the asset class.

The rising interest rates will ensure that the investors are enjoying the conditions in the market. The increase results in the rewarding of the investors who are prone to higher benefits/returns. These returns arise from the risk investments where the investors put their capital. An example of such risky investments is the investment in stocks. Therefore in this scenario, Tactical Assets Allocation can be utilized to fullest to gain some benefits. For example, due to an increase in interest rate, tax will increase (Neely, 2015. This implies that the stock prices will go up and as a result, the costs of properties will shoot as well. Some of the recommendations that will result in some adjustments on the asset class in Tex’s case include the following. There will be an increase in the interest rate in Australian equity and international equity. This is due to the rise in the US interest rate. This will bring a balance of the available market situations.

5. Passive versus active funds.

Passive funds are the ones that are controlled by a computer. Their primary purpose is to study how the market operates. They are used to purchase all the available assets in the said market. This is aimed at depicting the existing situations in the market. On the other hand, active funds are the ones that are managed by trained fund managers. Some investment companies also run them. They are tasked with the responsibility of making investment decisions. For instance, they have the mandate of deciding when and in which company can an investment be done in. Also, it is their role to determine when to sell an asset or when to buy an asset.

It should be noted that all the decisions that they make, they do it on behalf of the investor. The professional fund managers ensures that they are always in touch with other companies to analyze their prospects, before deciding where to invest. They are also involved in conducting some research in various markets and sectors. It should be noted that passive funds operate in a way similar to the macro level efficiency. It tries to provide whether the entire market reflects the existing available information as was noted in assignment 1 (Easton&Kerin, 2010).

Therefore from this discussion, it is clear that for the case of Tex, he should consider using the active funds. This is due to the many advantages that are attached to it. Due to the use of professional fund managers, there is an advantage because they can access some investment opportunities that Tex cannot get as an individual. This implies that, if Tex will embrace the use of active funds, he is likely to diversify his investments thus making him rely on various investments. This will increase his returns thus resulting in the growth of his capital. When one uses active funds, he is likely not to make an investment mistake that will bring regrets later. This is because trained fund managers are aware of what is taking place in the market. Therefore, they will invest where they are sure the returns will be available after a given period.

Another advantage is that the fund managers are more knowledgeable than the investor himself. This is because they always conduct research in various markets and sectors. This research provides them with relevant information as to where to invest and during which period to gain the returns. Therefore, Tex should subject all the money in his portfolio to professional fund managers. This will help him in increasing the profits. This is due to the important investments that will be done by managers.

6. Core-satellite versus blended approach, Ethical Funds, and style blending
7. (i) core-satellite versus style blending approach in portfolio construction.

As a method of constructing the portfolio, core-satellite as a method is concerned with softening the market conditions thus making them favorable. Its main aim is to reduce the tax, cost and volatility cases. This aimed at making the stock market to underperform. On the other hand, a blended approach is concerned with the combination of some significant sources that can achieve the need s of the client/ investor.  Therefore for the case of Tex, a style blending approach is used. This is because, all factors that can result in the realization of his goals, have been put together. As a result, he will accept the constructed portfolio as it will help him get the returns that he is expecting.

1. (ii) Tex’s asset classes associated with core-satellite and blended approaches.

The asset class of property is associated with core-satellite. This is because the information provided in the portfolio corresponds/reflects what is existing in the market. Therefore the entire market operates at a percentage holding of 15 %. This reasoning is behind the knowledge of passive investments that are associated with core-satellite. This implies that Tex will minimize the cost and volatility in order to make an investment that will meet his returns’ expectations. On the other hand, cash and fixed interest are suited to the blended approach. This is because their combination brings about the realization of Tex’s goals.

1. (i) overview of the investment process.

Some of the key characteristics of the fund include having a logical investment plan and analysts take credit of their observation. Therefore this shows that its investments are made after a due process. This is aimed at ensuring that the investors get what they expect once they have invested. They believe in the philosophy of working with companies that have acquired fixed incomes. This is aimed at being sure of financial security.

1. (ii) performance of the fund in 12 months time.

I don’t expect this fund to underperform in the next 12 months. This is because its investment is based on reason and logic. This means that, the fund values diversification which is of importance to all investors. Therefore with this component, it is not possible for the fund to underperform as it will attract many investors. As they will invest with the fund, they will ensure its growth.

1. (i) characteristics of a socially responsible fund.

Socially responsible funds have the characteristics of investing in those companies that have a mutual understanding of society. It is perceived that those companies operate under good leadership. The leadership makes them have a good system of adjusting the risks. Therefore, making them outperform when there exists a market crisis.

1. (ii) a socially responsible fund listed in the APL

Exchange Traded Funds is the socially responsible fund that will be suitable for Tex. This is due to its social principles. For instance, it offers diversification. This is great as it will ensure the spread of risks. This will ensure that there is no total capital loss of an occurrence of a risk. It will also ensure that Tex does not rely on returns from a single investment. Therefore it will result in an increased capital base. Its existence will lead to the protection of savings as well. It also dictates that cash should be allocated to the fixed interest. Therefore, this will be better for Tex since he has not invested in fixed interest for some time. It also tolerates the use of fund managers. This sounds better for Tex, as he will get an opportunity to explore other investment opportunities that will be noticed by the fund managers.

1. (i) style drift and how it can be monitored.

Style drift is the existence of a fund divergence from its main objective. It occurs when there is an appreciation of capital or when there is a mismanagement of a fund. Therefore, this implies that fund managers can influence the divergence of funds from their objectives. This exists when prices in the stock market rise rapidly. When this happens, the fund managers are very keen to ensure that they take advantage of the higher rates in the market. Therefore, they will shift the funds from their initial objectives to trade on a different goal. This is because the prices in the market are prone to variations. This implies that if they do not rise to the occasion, then that opportunity may disappear and never come back again. On the other hand, the fund manager has the right to shift the fund from its objective. This is for the case of those funds that have some parameters. Meaning, the manager can invest in other stocks that are investable according to his/her knowledge.

1. (ii) an example of a style blend strategy fund.

Managed funds could be used in the style blend strategy. These funds are suitable for this strategy as they can be listed in the global shares market. Therefore, they give an investor the opportunity to maximize the comprehensive investment portfolio. This is because the investor is given a chance to diversify his/her investments. As a result, this scenario results in creation of increased returns that accrue from the global investments. This act results in the increased growth of the investor’s capital.

7. Hiring and firing

(a) Considerations and problems in replacing managers.

According to West & Ko (2014), hiring managers is a difficult task. The difficulty is said to exist due to the struggle one goes through, to get somebody who will outperform the market. Therefore this makes it difficult for managers to get the right manager who can manage their funds. Therefore investors should consider keeping their managers as much as they tighten their selection skills. Technology is one of the challenges that alter the process of replacing managers. This is because an investor can choose to monitor all the financial operations using his/her phone.

Investors have the responsibility of assigning weights to managers (Stewart, 2013). They have to consider various attributes in the manager. For instance, they have to find whether the manager is active and progressive. The ability of the manager to understand how the market operates is another consideration. A problem arises when an investor fails to know a manager whom they share the same vision. This becomes a challenge as it makes it difficult to find a person who will spearhead the investor’s wants. It also becomes a challenge to the investor to identify, a manager who is diligent and persistent. Therefore these problems are difficult to handle, but because the system dictates that there must be a manager, then the investor has no choice but to select one.

The costs associated with hiring and firing managers are contained in the concept called ‘chasing performance.’ This is where a company hires a manager expensively but sells the manager cheaply. This practice results in loss-making as it involves chasing for the manager who will score highly in terms of performance. In this process of firing and hiring, the loss is experienced as the asset plans are affected terribly (Rimkus, 2013). Therefore, this is a clear depiction that the process of hiring a productive manager, it is not a simple task as many can think.

(b). Considerations and the questions that I will ask the managers.

In this portfolio, I would have professional fund managers. Some of the considerations that I will take into the account are their commitment and aggressiveness to the job. Some of the questions I will ask them are, do you know how the investment market operates? Will you consider buying my vision on this journey?