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Brief about Investment Management

Introduction

            Every individual saves some part of his or her income for any unforeseen situation. In addition to this, saving is also important for every person as adequate amount of money in the account after retirement will ensure a better and tension free life. But putting money just in locker is considered as dead investment as the saved amount will not grew. Further, it is also a well known fact that human being is a greedy animal (Pihlman, et. al., 2011). He wants to see his money growing in leaps and bounds and for this purpose only, instead of putting money just in the lockers, now day people are more interested in investing their capital in certain areas which gives good returns (Pihlman, et. al., 2011). In order to make quick bucks, people are investing their savings in different schemes which delivers good returns. In this regards, stock market has come up as one of the most popular areas in which people are readily investing their money on different-different stocks for getting higher returns. Putting money in savings accounts does not reap higher returns, so now day people are more interested in share market as it has generated better returns in recent past (Focardi and Fabozzi, 2004). But before investing money in the stocks of different companies, it is essential for every investor to have adequate knowledge regarding the investment management.

            Investment management can be defined as purchase and sale of investments within a portfolio. The area of investment management is quite wide which includes banking, budgeting activities and taxes; but in general perspective investment management refers to trading of securities and portfolio management to attain some desired goals (Pihlman, et. al., 2011). Major activities involved in investment management are:

  •          Analyzing financial statements of the companies
  •          Selection of stocks
  •          Selection of assets
  •          Implementing desired plan, and
  •          Continuous monitoring of investment activities (Fabozzi, 2008).

Investment Objectives and Philosophy

Objectives

Below mentioned are main objectives of all the investors depending on their risk taking capabilities and stage of life:

  •          Income: The main motive behind making investment of all the investors is generating income. They consider share market as alternative source of income and invest in securities which deliver higher returns (Focardi and Fabozzi, 2004).
  •          Growth and income: Another investment object of an investor is both; capital gain and income. Most of the people don’t only want extra income; rather they also want appreciation of their capital. Capital appreciation is associated with the risk taking capability of an investor.
  •          Safety: Investments are never considered to be safe as some kinds of risks are always associated with them. Still there are some investment products such as government bonds, fixed deposits which deliver low but continuous returns. People who invest in such instrument have main objective of security of their invested capital (Fabozzi, 2008).
  •          Growth: Unlike growth and income, an objective of some of the investors is only growth, that is, they do not want any income from their investment, rather just want to see their capital growing. Such investors invest in commodities, property market, gold, mutual funds, etc.
  •          Active trading / speculation: Another objective of investors is active trading or speculation of the market activities (Focardi and Fabozzi, 2004).

Apart from above stated objectives, some of the other objectives of investment are tax exemption and liquidity.

Philosophy

            Different people have different motive behind making investment in any form of instrument. Thus, investment philosophy defines certain principles on the basis of which an individual makes decision of investment (Swensen, 2009). These philosophies may vary from people to people such as:

  •          Fundamental Investing: With this philosophy, an individual or group evaluate the earnings prospects of the firm and on the basis of that makes their investment decision.
  •          Value Investing: In such kind of philosophy, investor analyzes all the stocks and identifies the companies whose stocks are undervalued. Further, such individuals believe that there are higher chances of these stocks to deliver better returns (Brentani, 2003).
  •          Growth Investing: Investors with such philosophy believe that it is beneficial to invest in those stocks which are form the emerging sectors. Products and services which are from emerging sectors have higher growth prospects and are expected to deliver returns at higher rates (Smithson, 2003).
  •          Technical Investing: These are the individuals who invest on the basis of past performance of the stock and neglect its current standing. Such investors evaluate the past data of the companies and on the basis if analysis of the data makes sell or buy decision (Kendall and Rollins, 2003).
  •          Socially Responsible Investing: Investors with such kind of philosophy looks for those stocks which actively participate in corporate social activities. They feel those companies which follows ethical business standards and stick to moral standards will produce better results in comparison to other companies (Focardi and Fabozzi, 2004).
  •          Contrarian Investing: Investors with this kind of philosophy are handful in the market. They perform just opposite kind of activity in relation to the rest of the market. There trading decisions are contradict to the majority of the market. For example, if the other investors will go for buying of certain stocks, they will go for its selling and vice versa (Pihlman, et. al., 2011).

Portfolio Strategy and Asset Allocation

Portfolio Strategy

            Investors invest in more than one stock on the basis of performance of particular stocks. Thus, combination of all the stocks is known as portfolio of stock. Portfolio strategies are not but general guidelines that help investors in strategically investing in stocks of different companies so as to meet their financial goals. It deals with designing of optimal portfolio and asset pricing. In this regards, risk return trade off is the best tool which is widely used by the investors in selection of optimal portfolio (Kendall and Rollins, 2003). Further, the Capital Asset Pricing Model (CAPM) shows that measure of sensitivity (β) is in proportion to the asset’s risk premium.

Asset Allocation

While putting money in any investment instrument, it is essential to properly allocate the funds in different assets. Thus asset allocation can be termed as investment strategy that helps in adequately investing money into different stocks or instruments so that the portfolio can achieve a balance between risk and reward. In other words it can be said that this strategy deals in adjusting the percentage of different assets in the portfolio as per the investment time frame, goals and risk tolerance capacity of an investor (Kendall and Rollins, 2003). Basically this strategy is adopted by the investor for diversifying its investment portfolio so that overall risk from the investment can be reduced. Return of an investment is majorly dependent on the allocation of the assets in the portfolio. Characteristics of different assets are different from each other and they perform differently in different economic scenario and market conditions. Further, different investment instruments deliver different returns and these different returns are not perfectly correlated (Kendall and Rollins, 2003). Thus, an optimal portfolio is one which is quite diversified, that is which consists of different-different investment instrument with varied characteristics so that overall risk from the investment can be reduced and still the investment reaps higher returns. Here are some of the strategies that can be used for achieving optimum assets allocation:

Strategic Asset Allocation: this is the most common method of asset allocation and focuses on the concept of basic policy mix. That it, it includes stocks form each asset class based on their expected rate of returns. For example, the portfolio may consist of fifty per cent bonds with annual return of five per cent and fifty per cent stock with annual return of ten per cent so as to achieve a return of about seven and half per cent (Focardi and Fabozzi, 2004).

Constant Weighting Asset Allocation: The above focus on buy and hold concept. Thus, even if the scenario changes, the portfolio remains the same. To overcome from this, one may adopt a constant weighting asset allocation approach. In this approach, the investor keeps on rebalancing the portfolio as per the changes in the economic and market conditions. For example, if some stock is not performing well and its prices are going down, investor can invest on it and other the other hand, if price of any particular stock is going up, the investor can sell that stock (Focardi and Fabozzi, 2004). As such there is not thumb rule for time of rebalancing the portfolio in strategic and constant weighting assets allocation, but generally it is advice to rebalance the portfolio when the actual value of the portfolio changes five per cent from its original value.

Tactical Asset Allocation: If an investor invests for longer time duration, in such cases the above stated allocation strategies proves to be rigid (Pihlman, et. al., 2011). Therefore, sometimes it is beneficial to invest in some securities for shorter time period to practice tactical deviation and to benefit from exceptional investment opportunities. Further, this strategy brings flexibility. This is regarded as moderately active strategy but in this the investor must have knowledge of short term investment opportunity, so that later on he can again rebalance the portfolio (Pihlman, et. al., 2011).

 Dynamic Asset Allocation: Next strategy adopted by some of the investors is dynamic asset allocation strategy. It is also an active asset allocation strategy in which investor keeps on adjusting the proportion of different investment instruments with the rise and fall of market. Further changes in the economic conditions also force an investor to change this asset mix (Pihlman, et. al., 2011). Dynamic asset allocation strategy is just opposite of constant weighing strategy as in this strategy investors buys or hold those assets which are rising and sell those assets which are declining. For example, due to certain reasons if stock market starts declining, an investor starts selling his assets assuming that the market will fall further and similarly if stock market starts performing well, investor buys stocks with a hope that the market will continue to perform well (Focardi and Fabozzi, 2004).

Insured Asset Allocation: Another asset allocation strategy which is practiced by many investors is insured asset allocation strategy. Under this strategy an investor set the base value of the stock and tries that the portfolio value does not go below the base level. As long as the value of portfolio is above the base value or is increasing, investor practices active management and tries to keep on increasing the value of the portfolio (Focardi and Fabozzi, 2004). On the other hand, if the value of the portfolio, due to some reason starts declining, investor starts investing in risk free assets such as government bonds, fixed deposit, etc. so as to limit the base level. This type of strategy is practiced by investors who want secured returns and are involved in limited active portfolio management (Pihlman, et. al., 2011).

Integrated Asset Allocation: Last in this series is the integrated asset allocation strategy. Under this strategy, while deciding the elements of the portfolio, investor considers both the parameter; his economic expectation and his risk taking capabilities (Kendall and Rollins, 2003). All the above stated asset allocation strategy only considers future economic expectations of an investor and does not focus on his risk taking capacity or his investment risk tolerance. But in case of integrated asset allocation strategy, it considers various aspects of all the above stated strategies. In addition to economic expectation, it also accounts for rise and fall in stock market and risk tolerance capabilities (Focardi and Fabozzi, 2004). Among all the strategies, integrated asset allocation strategy is the broadest asset allocation strategy, but it allows investor to practice only one asset allocation strategy at a time, either dynamic asset allocation strategy or constant weighting asset allocation strategy (Kendall and Rollins, 2003).

References

Fabozzi, J. F. 2008. Handbook of Finance, Financial Markets and Instruments. John Wiley & Sons.

Focardi, M. S. and Fabozzi, J. F. 2004. The Mathematics of Financial Modeling and Investment Management. John Wiley & Sons.

Pihlman, J. et. al. 2011. Investment Objectives of Sovereign Wealth Funds - a Shifting Paradigm. International Monetary Fund.

Swensen, F. D. 2009. Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. Simon and Schuster.

Brentani, C. 2003. Portfolio Management in Practice. Butterworth-Heinemann.

Smithson, C. 2003. Credit Portfolio Management. John Wiley & Sons.

Kendall, I. G. and Rollins, C. S. 2003. Advanced Project Portfolio Management and the PMO. J. Ross Publishing.

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Investment papers are written for a variety of purposes, and should be comprehensive while drawing specific conclusions based on evidence presented in the paper. Your audience should be able to draw a straight line from the supporting information presented to the conclusions you provide, although investing decisions always have some subjectivity. Maximize the amount of the investment decision that is objective by including detail such as supporting exhibits and valuation models. Investment papers written for specific audiences may vary somewhat in the components you choose to include, or the depth of information included.

Use a Securities and Exchange Commission Form 10-K filing as a template for your investment paper.

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Company Description and History

First provide a description of the subject company, along with its history, management team background and operations. A company with a longer operating history is generally less risky. This approach echoes the standard format you might see in a Securities and Exchange Commission 10-K filing, which is likely the investment summary most widely used by domestic investors.

Market Analysis

A competitive analysis should include a deep analysis of the market in which the company operates, the overall industry and economic forces that can affect the company's financial performance. This demonstrates that you have performed a thorough analysis of the company's external business environment. Determine the subject industry's position in the business life cycle: startup, expansion, saturation or decline. If your subject company is genuinely innovative, it may be able to outperform in an industry in decline. Also, industries may be subject to shorter-term cycles, which typically last three to five years. These are natural cycles of expansion and contraction.

SWOT Analysis

An analysis of a company's strengths, weakness, opportunities and threats -- better known as a SWOT analysis -- can ensure that your analysis is comprehensive and considers qualitative factors that may not be evident in your quantitative analysis. Note threats and weaknesses such as a lack of stability in historical financial performance, competitive threats or even existential threats. Important weaknesses include a company's failure to embrace technological advances, a general lack of innovation or management's unwillingness to reinvest earnings in new machinery, technology or human capital.

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Financial Analysis

Include either summary or standard financial statements, preferably for more than one accounting period. Use these numbers to perform common-size and ratio analysis to support the quantitative portion of your paper. Include the analysis as an exhibit or exhibits within your investment paper or as appendices. The common-size statements show each income statement item as a percent of total sales, and each balance sheet item as a percent of total assets or liabilities, for competitive analysis. Use ratio analysis to cover size, growth, liquidity, profitability, leverage and turnover. Include a ratio and performance trend analysis and comparison to the company's peer group. Note any positive or negative trends. Use this analysis to provide compelling evidence of your subject company's financial strength relative to competitors or peers.

Investment Thesis

Examples of valuation models include relative valuation, comparable security analysis and discounted cash flows.

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Conclude with your investment thesis, in which you suggest a specific action to be taken. Support your conclusions using exhibits such as valuation models, payoff structures and payback charts. Even if your thesis is to simply purchase a security you believe is undervalued, include results supported by a valuation model and explain these results in the context of the bigger investment picture. For example, sell-side analysts conclude their investment papers with a buy, sell or hold recommendation.