CASE STUDY 1 – INVESTMENT PORTFOLIO CONSTRUCTION You currently work as an individual client adviser for Ord Minnett Limited, a leading Australian stockbroking and investment advisory firm, which...

CASE STUDY 1 – INVESTMENT PORTFOLIO CONSTRUCTION

You currently work as an individual client adviser for Ord Minnett Limited, a leading Australian stockbroking and investment advisory firm, which provides investment advice, share trading and wealth management services primarily to high net-worth individual and institutional clients. These clients pay full-service advisory and commission fees to your firm in return for the provision of initial investment planning and evaluation services, ongoing investment and related advice and the development and management of investment strategies and portfolios on their behalf. You have just been assigned a new client to represent. Due to the ongoing adverse impacts of the COVID-19 pandemic on local and international tourism, they have recently sold a network of franchised travel agency businesses and are looking to invest some of the sale proceeds in an investment portfolio focusing on Australian and international sharemarkets. The client has allocated A$8.5 Million for the creation of an investment portfolio, and they have approached your firm for investment advice and to act as their stockbroker and portfolio manager in developing and managing this investment portfolio in the future. The client has provided the following brief and guidelines associated with their desired investment strategy and portfolio requirements:

•  Risk profile: Relatively High (Risk Score of 8.0 out of 10) - Willing for funds to be invested in individual equity securities, listed investment securities and exchange traded products (ETPs), equity market futures contracts and options, currency forward contracts, cash and digital currency, but with some downside protection; Open to investment exposure in both Australian and international financial markets.

•  Return focus: The client would prefer the investment strategy and associated portfolio to be focused on capital growth but is open to future reinvestment of dividend or other income distributions.

•  Investment horizon: Minimum 10-year investment (holding) period, but with active management over the investment period.

•  Country focus: At least 50% of the available funds are to be invested in constituent companies included in the S&P/ASX 200 index and/or securities providing exposure to the Australian Securities Exchange and at least 20% of the available funds are to be invested in companies included in the US-based Nasdaq 100 index and/or in securities providing exposure to the Nasdaq Stock Exchange.

•  Share component and diversification: At least 65% of the total portfolio funds are to be invested in individual company equity (share) securities. To ensure a prudent level of diversification, no more than 10% of the total available funds are to be invested in any one individual company or security.

•  Industry focus: Based on their business background, they would like a minimum of 15% of the total available funds to be invested in companies or securities providing exposure to the travel and tourism industry.

•  Business style focus: Based on the changing corporate landscape, developments in technology and digital capacity, and trends in business transformation and innovation, they would like at least 15% of the total available funds invested in companies or securities providing exposure to disruptive business platforms (Note that the industry and business style focus investment components should be separately and independently met).

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•  Indirect equity investment: Some portfolio investment in Australian or international sharemarkets is allowable through holdings in LICs or ETPs, but this investment component is to be limited to a maximum of 30% of the total available funds (A list and price history of preferred LIC and ETP investment options is provided in the spreadsheet document forwarded by the client).

•  Short selling: Short selling of direct equity and LIC/ETP securities is permissible if it is consistent with the proposed investment strategy, although sufficient cash and/or digital currency reserves are required to be held to meet position closing out (re-purchasing) requirements.

•  Portfolio hedging: Some downside risk protection for the Australian sharemarket component of the portfolio against adverse equity market movements or shocks is desired through hedging using derivative securities (such as market index futures contracts or options) of a minimum of 50% of the Australian market-focused investment component (including direct equity, LIC and ETP investment) value.

•  Preferred derivative securities: Approved equity index futures contract and option securities to be used for any speculation or hedging positions are:

oPreferred SPI futures contract: December 2021 SPI 200 Futures Contract with a closing price (value) of 7,202 on 02/07/21 (Contract value represents A$25SPI 200 value). Each contract will require creation of a A$10,000 settlement account to meet margin movements.

oPreferred equity market call option: S&P/ASX 200 Index (A$10S&P/ASX 200 index value) call expiring on December 16th2021 with an exercise price of 7,000 (ASX code: XJOQV7). The premium for this call option is $407.90 on 02/07/21.

oPreferred equity market put option: S&P/ASX 200 Index (A$10S&P/ASX 200 index value) put expiring on December 16th2021 with an exercise price of 7,000 (ASX code: XJOQW7). The premium for this put option is $205.10 on 02/07/21.

•  Currency hedging: Given the recent increasing trend in Australian dollar exchange rates after COVID-19 pandemic lows, hedging of a minimum of 60% of the value of the US stockmarket security exposure is required. This can be achieved using equity securities, LICs/ETPs or a currency forward contract. The client’s primary bank, Westpac Banking Corporation Limited, is prepared to initially enter into a currency forward contract up to $1.2 million in notional value with a 1-year forward margin of -86 basis points based on the AUD/USD exchange rate of XXXXXXXXXXAUD$1.00 = USD$ XXXXXXXXXXon 02/07/21. The client is required to provide a 1.50% security collateral deposit based on the total forward contract value.

•  Cash investment: A maximum of 20% of the total portfolio funds can be invested in cash, which will be invested at the 180-day dealer biller rate of 0.650% per annum as at 02/07/21. The client has an existing digital currency wallet and is also willing for any cash component of the portfolio to alternatively be held in Bitcoin. One Bitcoin is worth US$32,999.50 on 02/07/21.

  Required:

  This case study requires the preparation of an investment portfolio proposal document to be provided to the client, which should include the following information:

•  A brief and informative summary of the current investment environment, both in Australia and internationally and linking with the client’s requirements, and identification of any key economic or financial indicators or events impacting on the near-term investment environment.

•  Presentation of the underlying investment philosophy and portfolio strategy proposed for the client, including consistency of alignment with the indicated requirements of the client.

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Explanation and justification for this strategy, individually or relative to alternatives, should be provided, which could include backtesting or other quantitative and qualitative analysis.

•  A description, in table or similar format, of the recommended portfolio components, indicating the selected assets / securities and the magnitudes of investment in each.

•  If required, a brief explanation of how each of the recommended investment components aligns with the overall investment strategy.

•  Assume this portfolio construction is being done on Friday 2ndJuly 2021.

•  Students completing the subject in face-to-face mode can complete the investment strategy development and portfolio construction requirements using data accessed from the Bloomberg terminals in the Finance Trading Room, whereas students undertaking the subject in online mode should use the spreadsheet file provided with the case study information to complete the investment strategy development and portfolio construction

  requirements.

  This is an individual case study task and contributes 25% to the overall assessment for the subject. The investment strategy and portfolio proposal document is due to be submitted to the client by 5.00pm on Monday 9thAugust 2021, via the FIN3CSF subject LMS site. The suggested word limit, excluding any figures, calculations and the portfolio presentation, is 1,000-1,500 words.