This report sheds light on evaluation on a balanced type fund – Investment Trust combined with investment and portfolio theories. Past performance in respect to capital gains, dividends yield and interest income of the portfolio has been calculated, measured and discussed. Although the fund had achieved higher return yield compared to that of FTSE ALL SHARE INDEX for the corresponding investment period, it still suffered from a series of deficiencies in terms of asset allocation proportion and investment type selection which may not comply with its aims of maximizing income without impacting unduly on long term capital returns. This report has also identified and measured both systematic risk and unsystematic risk of the Investment Trust and provided recommendations for proper changes to the existing portfolio so as to better realize its investment aims.
Table of Content
Executive Summary
1.0 Introduction
2.0 Measurement and discussion on the performance of the fund
2.1 Brief introduction to the portfolio on the inception date
2.2 Fund Performance measurement and critical discussion
3.0 Risk identification and measurement
3.1 Systematic risk
3.2 Unsystematic risk
4.0 Recommendations for changes to existing portfolio
5.0 Conclusion
Reference
Appendix
1.0 Introduction
Accompanied with acceleration of property and wealth accumulation, increasing amount of idle cash had been invested into diversified types of assets including bonds, shares and derivatives etc. Nonetheless, while it often takes considerable energy and abundant expertise for investors to manage their assets, investment funds will provide specialized management and satisfy different risk preference of investors. As different types of fund possess distinct returns and risks, this report will focus on the management of an investment trust fund from the inception date on 1st January, 2011 to the cutoff date on 18th March, 2013, which included eight UK stocks, two treasury, one loan and residual cash sourced from Datastream. Due to balanced objective of the investment trust which tries to realize maximization of income without impacting unduly on long term capital returns, this fund will diversify its investment options and ensure both its security and value addition.
As a fund manager, this report will firstly measure and discuss the fund’s performance such as capital gains, dividends and interest income from 1st January, 2011 to 18th March, 2013 under 1.5% Annual fee taken on 31st December each year. Then it goes to identify and measure (where appropriate) main risk inherent in the portfolio which may stop the fund in realizing its objectives in respect to stock risk and asset allocation. Finally it will make some recommendations for appropriate changes in the portfolio so as to realize its initial aim of maximisation of income without impacting unduly on long term capital returns.
2.0 Measurement and discussion on the performance of the fund
2.1 Brief introduction to the portfolio on the inception date
It can be seen from table 1 that the portfolio consists of eight shares listed on London Stock Exchange, two treasuries, one War loan and residual cash. It attached greater importance to equity investment with 86.25% fund been invested in the eight stocks, and more than 50% fund in Royal Dutch Shell Plc and Unilever PLC. With only 8.46% and 5.29% fund been invested into bond and cash respectively, it can be inferred that the overall investment strategy is relatively radical, which may not comply with the aims of the balanced fund type with proportional investment into diversified types of assets.
Table 1: Initial portfolio on 1st January, 2011
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(Source:Thomson Reuters Datastream)
(Note: All share price data used closed price on London Stock Exchange and sourced from Thomson Reuters Datastream)
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Graph 1: Classification of assets in the portfolio on 1st January, 2011
(Source:Thomson Reuters Datastream)
2.2 Fund Performance measurement and critical discussion
- Capital gains
Table 2: Capital gains from share price variation of the portfolio from 1st January, 2011 to 18th March, 2013
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(Source:Thomson Reuters Datastream)
(Note: Annual realized returns on capital gains = (1 + Accumulated returns on capital gains)^ [365 / (365*2 + 77)] – 1 )
illustration not visible in this excerpt
(Source:Thomson Reuters Datastream)
Graph 2: Accumulated and annualized stock return from capital gains (share price variation from 1st January, 2011 to 18th March, 2013)(note: management fees had not taken into consideration)
It can be inferred from table 2 and graph 2 that seven out of eight stocks in the portfolio had achieved positive return for the whole investment period except for the stock BP. British American Tobacco PLC and Unilever PLC had enjoyed highest stock returns, which belong to the tobacco and foods & retails industry respectively. Comprehensively speaking, the stocks in the portfolio had achieved an average 14.93% accumulated return from 1st January, 2011 to 18th March, 2013, which was higher than 9.22% return yield of FTSE ALL SHARE INDEX in the corresponding period without the consideration of dividends distribution. It indicated that the overall performance of stocks in the portfolio was sound and had brought about extra return for fund investors.
Table 3: Capital gains from bond price variation of the portfolio from 1st January, 2011 to 18th March, 2013
illustration not visible in this excerpt
(Source:Thomson Reuters Datastream)
Compared to relatively higher capital gains from share price variation, the overall bond return was relatively lower with only 3.44% annualized return. However, this figure had already been high under the basis of low risk of treasury and loan investment.
- Dividend yield
Table 5: Dividend yield rate of stocks in the portfolio from 1st January, 2011 to 18th March, 2013
illustration not visible in this excerpt
(Note: 1: Dividend distributed in the form of US dollar $ had been transformed into UK GBp £ based on GBP-USD exchange rate; 2: Overall dividend is the sum of 2011 and 2012 dividend payout per share)
(Source:Thomson Reuters Datastream)
It can be inferred from table 3 and graph 3 that compared to more volatile share price variation, dividend yield rate of those eight stocks are relatively stable (except for considerably lower dividend yield rate of HSBC Holdings Plc), which is beneficial for achieving aims of the investment trust for the maximisation of income without impacting unduly on long term capital returns. In comparison, the overall return from capital gains was approximately twice the dividend yield rate for the stocks in the portfolio. One phenomenon should be noted is that while BP Plc had suffered price decline over the investment period, its dividend yield rate was the highest among the eight stocks. Thus it can be said that dividend can provide more stable return compared to capital gains.
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