Investment and Fund Management

INVESTMENT AND FUND MANAGEMENT

MODULE HANDBOOK

2010/11

SEMESTER 2

MODULE PROGRAMME OF DELIVERY

TUTOR CONTACT DETAILS:

MODULE SPECIFICATION:

The module aims to cover the range of skills involved in managing assets and liabilities against specified criteria. It is intended to be useful for input into treasury operations, asset/liability management in financial institutions and fund management in pension funds, mutual funds and other collective investments. It is applicable to both public and private sector operations and will cover the international aspects of fund management. The module also aims to provide scope for personal development in that many of the techniques and methods have potential uses for personal financial management.

Intended Learning Outcomes:

Upon successful completion of this module students should be able to:

• Explain the investment objectives of the different institutional and individual investors;
• Compare the major types of investment policies and the constraints which the different institutional and private investors are subject to;
• Evaluate the expected return and risk of portfolios that are constructed by combining risky assets with risk free investments and discuss the concept of an optimal portfolio in the context of institutional and personal requirements;
• Construct efficient portfolios for a range of investors;
• Demonstrate choices to be made in actively managing a fixed income portfolio and formulate immunisation strategies for different investment horizons;
• Assess portfolio management performance and decompose returns into

attributable factors.

Skills Development Opportunties:

• collection and evaluation of investment data through various methodologies;
• decision making skills;
• case study and problem-solving skills;
• identification of preferred learning and problem solving styles, considering the implications for self-development;
• working effectively as a group member.

Learning Methods:

The teaching and learning strategy will be built upon the inter-dependent and independent learning skills which have been developed earlier in the programme and students will be expected to take a high degree of responsibility for their own learning.

A lecture programme will provide the conceptual underpinnings for the module. This will be supported by student-led and tutor-led seminar sessions which will cover a variety of activities to give students the opportunity to further develop their critical awareness of the concepts and implications of these for investment and fund management. Activities will include discussions, case studies and research centred tasks.

Assessment Methods:

The assessment will consist of coursework with two components:

1)Creation of an investment portfolio for a specific individual taking into account strategy, policy, needs and asset allocation. Worth 20% of module. Prior to final submission, students will have the opportunity to submit drafts and receive formative feedback.

2)A detailed, critical analysis of a case study or scenario facing an individual fund manager or personal investor. Students will be required to submit an individual report that includes appropriate research in support of their analysis and recommendations. Worth 80% of module.

Syllabus Content (Indicative):

1) The Investment Environment:

• the household, business and government sectors;
• financial innovation and derivatives
• globalisation, securitisation, credit enhancement and financial

engineering

2) Diversification and Portfolio Analysis:

• risk and risk aversion
• building the optimal risky portfolio
• simple, superfluous and Markowitz diversification

3) Portfolio Management - practical applications:

• active and passive strategies

• security analysis and allocation
• forecasting market movements
• portfolio monitoring

4) Performance Measurement and Portfolio Protection:

• interest rate and yield curve risk
• immunisation, cash flow management and combination strategies
• strategies with derivatives and futures
• managing equity, bond, interest rate and currency risk
• attribution analysis

5) Fund Classes:

• Pension Funds
• Fixed Income Funds
• Personal Investment Portfolios
• International Funds

ACTUAL ASSESSMENT:

The assessment for this module comprises two in-course assignments as follows:

Part A - an individual assignment to be submitted by Wednesday, 16th March 2011

(counts for 20% of total mark)

(to be handed in to Reception, Rose Bowl, by 12 noon).

Part B – an individual assignment to be submitted by Tuesday, 3rd May 2011

(counts for 80% of total mark) (max of 3000 words)

(to be handed in to Reception, Rose Bowl, by 12 noon)

RECOMMENDED TEXTS FOR BACKGROUND READING:

3) Appropriate journal articles and relevant websites.

SEMINAR WORK

Session 1:

Introductory Quiz (Page 14)

Presentations on:

• Shareholder Value Analysis
• EMH
• CAPM

Session 2:

Group Discussion (page 27)

Exercises;

a) Imagine that your favourite aunt has just been advised to invest all her money in

the following unit trusts:

• Investec UK Smaller Companies
• Standard Life UKEquity High Income
• Artemis UK Special Situations
• Morgan Stanley Emerging Markets Debt
• Gartmore UK Focus

She is totally confused – advise her.

b) Susan is trying to decide which of the following ordinary shares to purchase. What

would you recommend?

Session 3:

See XStream

Session 4:

See Page 34

Session 5:

See Page 40 and Page 46

Session 6:

See Page 57

Session 7:

See pages 65 and 67

Session 8:

See Page 71

Session 9:

See XStream

Session 10:

See page 84

ASSIGNMENT

Part A (worth 20%)

You are required to imagine that a friend of yours has just won £1 million on the British National Lottery. Your friend knows very little about investment and finance generally and she has asked for your advice.

She will definitely give up employment and retire and is looking for an income of about £100,000 per year. She wants her £1 million not only to remain intact but also to grow, at the very least, in line with inflation. She is quite risk averse, so she requires a good spread of investments so that only relatively small amounts are ‘at risk’ in any one instrument, company or country.

You are required to suggest a suitable portfolio of investments which might be expected to achieve your friend’s objectives. You are required to submit your suggested portfolio according to the following deadlines:

If you chose, you can E-Mail your first draft portfolio to by 5pm on Friday,25t February 2011, for feedback. You will receive comments and criticisms of your portfolio (by e-mail) by Friday, 4th March 2011.

Present a final portfolio (taking into account the comments and criticisms received) on Wednesday, 16th March 2011 – to be handed into 2nd Floor Reception, The Rose Bowl, by 12 noon. Please hand in paper copy and also copy on CD.

Your portfolio submission should include a brief explanation and justification of each of the investments you suggest.

Provisional marks for Assignment A will be available on X-stream by Monday, 6thApril 2011.

Notes:

a) Brevity is important here – please try to keep your portfolio and justification

to two pages maximum.

b) Marks will be awarded for:

• A sensibly diversified portfolio
• A logical justification of your choices of investment
• An attempt to meet the investment objectives of your friend

ASSIGNMENT

Part B (worth 80%)

An individual assignment based on the following case study is to be submitted by Tuesday, 3rd May 2011 (max 3000 words) – to be handed into 2nd Floor Reception, the Rose Bowl, by 12 noon.

Fortunes Inc is a successful London print shop. It is a co-operative which was set up ten years ago after an industrial dispute. The business is run by its 25 workers, including printers, graphic designers and sales staff. It has a flat management structure, which means that no-one is more senior than anyone else. Everyone earns the same no matter how many years they have worked for the business. The ages of the members range from early twenties to mid fifties.

Staff turnover is very low largely, it is felt, because the members like having an equal say in the decision making. They can decide how to structure their hours, what benefits they should have and what equipment they need to buy for the business.

Unlike many co-operatives, banks have had the confidence to lend it money. The loans have been used mainly to expand. The question that faces the co-operative now is just how big can it grow before making decisions by committee becomes too complicated and unworkable. Fortunes Inc believes that a staff of 30 would probably be the upper limit. Summary profit and loss accounts for the last two years are shown below:

Summary Profit and Loss Account for year ended

Fortunes Inc originally came into existence as a result of things going wrong. An industrial dispute was threatening to bankrupt the business so the employees got together and took it over. It is operated just like many other co-operatives all over the world:

• Decisions are taken by all the members of the co-operative
• Responsibilities are shared
• Profits are shared

However also like many other co-operatives they have sometimes suffered from a lack of management skills. They have experienced problems with accounting, marketing and general administration for example. One such difficulty is occupying the minds of the co-operative members at this present time. This is the thorny issue of their pension provision.

From the early days of the co-operative there was disagreement over whether or not the company should be responsible for pension provision. Some members felt that they should each be responsible for their own arrangements and many were ready to start their own personal pension plans. However, in true co-operative spirit, it was finally decided that the company would set up its own fund and run this collectively like the rest of the business.

The pension is a defined benefits scheme with all members paid one 60th of their basic salary for each year of employment with the co-operative. In addition a lump sum equivalent to one year’s basic salary will be paid. Founder members (of which there are still 12 with the company) will be paid a lump sum based upon the amount they contributed when the co-operative was originally formed. The average amount was £5,000 and the agreement was that the original amount should be paid with 5% compound interest added annually (the 12 members affected have on average 20 years to retirement). The non-founder members have on average worked five years for the co-operative to date. At the moment the co-operative contributes a fixed sum per annum to the fund equal to 6% of the total wages bill. There has been debate over whether this should be more but no conclusion has yet been reached.

The pension fund itself has been built up in a rather undisciplined (some would say chaotic) fashion. The portfolio reflects a collection of ad hoc decisions made by the trustees at their monthly meeting when they would decide to invest the contributions for that month in whatever seemed sensible at the time. Initially this approach worked well, benefiting as it did from the recent long bull run. However of late the portfolio has started to look a little ‘inappropriate’ as the markets have started to turn down. Some of the older members are also starting to question the composition of the portfolio. The fund is made up as follows:

Fortunes Inc have asked you to advise them on how they might put their pension fund ‘on a better footing’. A slight majority of the members are determined to continue to manage the fund themselves. There is however a minority which holds that they just do not have the time or the expertise to manage a pension fund properly. You have been specifically asked to ensure that your report should fully justify and explain all your recommendations. They also want to be sure that their future investment strategies have a sound theoretical basis backed up by reliable empirical evidence. One of the things that has exercised their minds most is how to develop a portfolio that suits the differing needs of their members. They have projected that the retirement profile of the present staff could be something like the one given below:

This analysis of course excludes replacements for existing staff who retire and any extra staff as a result of expansion.

It is recognised by many of the members that the company ought to at least think about employing the services of an actuary and some have made the point that they think it might actually be a legal requirement. However the co-operative as a body has always been loath to pay for outside services if it could at all avoid it, and would like to know at least what is involved here.

Your report should contain sections on:

• Analysis of present portfolio

• Investment objectives and strategies
• Risk Management
• Security Analysis
• Asset Allocation
• Recommendations for alternative portfolio
• Performance Evaluation

Note: This assignment is not about pensions as such. It is primarily

concerned with Portfolio Management.

Session 1

Introduction

Introductory Quiz

Please answer all the following questions:

This quiz is designed to test your previous exposure to this topic area. To some extent the way in which content of the course is delivered will be influenced by the outcomes. Be honest, if you do not know please just say so.

1. Distinguish between a financial asset and a real asset
2. Describe the risk-return trade-off faced by all investors. What other constraints besides risk do investors face?
3. What is meant by the term efficient market? Why is it significant to investors?
4. What is technical analysis? What is the link between Technical Analysis and Value Analysis?
5. What is Fundamental Analysis? What significance has ‘Enron’ had for this technique?
6. What is meant by ‘equity risk premium’? How is it measured?
7. Define risk. How is it measured by investors?
8. All equity investments are risky. Discuss.
9. What sort of risk was involved in the Split Capital Investment Trusts scandal?
10. Are all bonds basically the same?
11. Briefly analyse Boots plc’s decision to refocus its pension fund portfolio.
12. What is duration?
13. What role does duration play in the concept of immunisation?
14. How does duration differ from time to maturity? What does duration tell you?
15. What is a rights issue? How do you decide whether or not to subscribe?
16. Why might the yields quoted by Unit Trusts be misleading?
17. Give an example of a ‘guaranteed product’ that went wrong.
18. What is the difference between an Investment Trust and a Unit Trust?
19. What is OEIC?
20. What is meant by ‘Zero’? When might this be relevant when considering investments?
21. What are FTSE and FT All Share used for?
22. Distinguish between liquidity and marketability.
23. Why can you not necessarily trust the ‘experts’ when choosing shares to buy/sell?
24. What is meant by Asset Class’? Give examples.

You may find the list on the next two pages useful in completing this exercise.