Investment Management For Currencies And Cash Equivalents

Passive Strategy

Discuss about the Investment Management for Currencies and Cash Equivalents.

A portfolio is a cluster of the financial assets such as stocks, bonds, currencies, bonds, cash and cash equivalents and also the counterparts of their funds which are inclusive of the mutual funds, exchange traded and the close funds. The real estate, art and also the private investments can form a part of the portfolio. These portfolios are managed by the financial professionals or the investors directly and also through the money managers.  It is natural to have more than one portfolio for different purposes (Giansante and Dragun, Investment Strategies Network, 2014).

Under the portfolio two strategies are mainly used by the investors to calculate the returns and analyse the price at the end of the month or the quarter. 

Passive management also called as the passive investing is the type of the strategy that is used to track the market weighted index or portfolio. The tracking of the index involves the good diversification of the investment, low turnover and the low management fees. With the low fees the funds would generate the higher returns against the similar funds with the similar investments but having the higher management fees and the turnover costs (Corter and Chen, 2016).

The most common market for the equity market is the passive management, where the index funds tracks a stock market index. One of the largest equity mutual funds is the Vanguard 500 is passively managed. The two major firms like Black Rock and the State Street, are primarily engaged in the passive management strategies (Edesess, LFG Inc, 2016).

• In the long term the investor will be having the market average equals to the average before costs performance. Henceforth, the average investor will be beneficial more from the reducing the investments cost in order to beat the average.
• The efficient market hypothesis illustrates that equilibrium prices of the market fully reflects all the available information. There is still some kind of the information that is still not reflected(Holloway, 2013).
• Reduce expenses: Passive Investing helps in reduction of the costs as it generally costs around 0.20 to 0.30% a year in terms of the fees as compared to the 1.35% in case of the active investing.
• Diversify into the funds using index: the investor is required to select the asset classes they want to hold. The inherent strategy of the index will describe whether to buy or sell the asset(Bouwman, Frishkoff and Frishkoff, 2013).
• Minimal Taxes: The limited buying and selling strategy under the passive investing method tends to reduce taxes relating to the investment.
• Exhibit Discipline: during the market fluctuations it becomes easy to maintain the investment discipline through relying on the strategy of an index fund puts a bridge between the buying and selling decisions (Harvey, 2011).

• Usually the passive management is guaranteed underperform the index after costs, which means that one cannot expect better or good returns against what the benchmark delivers(Brinson, Hood and Beebower, 2015).
• When all the costs are accumulated and taken into consideration, it is confirmed that the passive funds are not that cheap and can be expensive. There are several hidden costs inclusive of the brokerage fees and taxes. Many of the fund managers tend to publish the gross performance figures of the fees and the expenses and theses costs are not transparent in nature(Malkiel, 2014).
• Fund managers in case of the passive investments might fail to replicate the index with 100% accuracy because of the sampling errors and categories under which the stocks are kept (Chandra, 2017).
• With the passive fund the investors’ new proceeds are forced to purchase the shares which already form the part of the index and many of which are expensive and highly over valued and limit the potential of the upside.
• Passive investment strategy fails to offer the risk management cover. For example when the stocks in the class of the technology are outperforming the passive fund will be tech heavy and thereby making the stocks more volatile in nature(Rudd, 2013).
• Regardless of the fact that the particular asset will give how much return the passive investors are forced to buy simply because they form the part of the index. 

Active Management Strategy on the other hand refers to one of the portfolio strategies under which the manager chooses the specific investments with the aim of outperforming the benchmark index set for the investment (Gutiérrez and Philippon, 2018).

The idea behind using the active strategy by the managers is to make the ample utilisation of the market inefficiencies by purchasing the securities which are below the original value or by short selling the securities which are mostly above the existing price (HA Davis and Lleo, 2015). The methods which are discussed above can be used either individually or in the combination. Here the managers believe in taking the less risk with the aim of creating an investment greater than the benchmark.  The active portfolio managers use a variety of the perks and the methods to construct their portfolio. The techniques that are included in this are price earnings ratio and PEG ratios, sector investments that give a base to the managers to estimate the long term macroeconomic trends, the information on the purchasing stocks of the companies which are not working in the market or which have been selling at a discount or the intrinsic value (Fichtner, Heemskerk and Garcia-Bernardo, 2017).

• There are several benefits of the active strategy among which one of them is it acts as a tax efficient manner for the investors and the flexibility to react nimbly when there are changes to a quality of the bond’s credit. It also allows the investment to adjust the duration of the portfolio as the rates of the interest fluctuates and helps to manage the risk (Lan, Moneta and Wermers, 2016).
• One of the strength of the active portfolio is that the active strategy provides an opportunity to beat the market return and most of the fact the actively managed mutual funds perform better than the actively managed peers.
• Dynamic administration enables portfolio directors to attempt different systems which can relieve dangers related with specific market sections amid troublesome circumstances. For example, if the saving money segment is battling because of poor execution or confronting headwinds because of some new regulation, active managers can reduce or eliminate exposure to the sector to reduce the overall risk to the portfolio (Sushko and Turner, 2018). 

Active Strategy

• Exchanging gobbles up picks up.
• The average dynamic financial specialist isn’t as broadened, which frequently prompts second rate returns(Gao, 2018).
• Normally dynamic directors hold more money than do latent supervisors, which harms returns.
• Numerous dynamic systems are not really fitting for the retail financial specialist.

The reason to categorise the stocks into the passive and the active is because of the trends of the price and the ability to generate he returns in future. The above table determines the list of the active stocks as well as the passive stocks.

Talking about the active stock in the quarter 2007 the total profit and loss of the active portfolio is 1203.48 whereas that of the passive stocks is 28844.10. The reason behind such a variance is the price of the stock which the investor segregates according to the trends. Under the portfolio the price of the Macquarie Group Ltd is highest in the year 2006 and from in 2007 it reaches to the 46.33 which is still more than cumulative of the stocks in the active strategy (Refer to excel).

PE Multiple is also used to compute fair value of the stock using earnings per share and industry PE ratio.

The results of PE Multiple Model show that the fair value of the stock is $5.85 which is greater than the market price of $3.85 prevailing as on today. As per PE Multiple, the stock is overvalued.

The technique that can be used to determine the stock prices is the line chart in relevance to the historical trends. 

The stocks which performed better are ANZ Banking Group Ltd, Transurban Group Ordinary Shares/Units FP Triple Stapled, National Australian Bank and Sun Corp Group Ltd in the active portfolio whereas in case of the passive portfolio the CSL Ltd, Macquarie Group Ltd, RIO Tinto Ltd and Commonwealth Bank performed more than the normal benchmark of the market. However, the CSL limited reached from 13.16 to 124.37 in the past ten years and the Macquarie Group Ltd price rose up by 87.66 in the last ten years as can be observe from the graph above. The rise in price indicated the investor that the stock will perform better and is worth investing.

The support and the resistant model is also one of the techniques to determine the performance of the stock. For example under the passive strategy the CSL limited Stock’s price is 197.56. The range if the stock is from 119 to 199.42. Thus it can be concluded that the resistance level of the stock is 199.42 and the support level is 119. The price of the stock cannot go down beyond the support level and if it falls there will be a severe crash however, if it rises the revenue can be utmost. Therefore, these two techniques are the basic reasons for choosing the stocks and are segregated accordingly. 

Why and which stock performed better

Conclusions and Recommendations

At the ends of the year 2016 the balance of the Origin Energy Strong Buy and Sun Corporation Group Ltd is 1900 and 300 shares respectively. As per the trends the Sun Corp and the Origin energy are growing at a slow pace and therefore it is recommended to hold the share until a suitable price is achieved. As per the portfolio the return are depicted in the form of the table and as per the benchmark which is S&P ASX 200 the index return for the period of the ten years is -37%. The stock of Amcor Ltd is sold entirely and the profit generated is of 7767.75 which is a reason why the stock can be purchased again on the other hand the stocks of the Telstra Corporation can be sold entirely and shall not be purchased again as during the period of the ten years the performance is below average and the returns are low. Therefore, it is observed that the passive returns generated overall 9% and the active returns generated 17% and the portfolio prepared is better in terms of the S&P ASX200 index. 

References

Bouwman, M.J., Frishkoff, P.A. and Frishkoff, P., (2013) How do financial analysts make decisions? A process model of the investment screening decision. Accounting, Organizations and Society, 12(1), pp.1-29.

Brinson, G.P., Hood, L.R. and Beebower, G.L., (2015) Determinants of portfolio performance. Financial Analysts Journal, 51(1), pp.133-138.

Chandra, P., (2017). Investment analysis and portfolio management. McGraw-Hill Education.

Corter, J.E. and Chen, Y.J., (2016) Do investment risk tolerance attitudes predict portfolio risk?. Journal of Business and Psychology, 20(3), p.369.

Edesess, M., LFG Inc, (2016) System and method for generating and displaying risk and return in an investment portfolio. U.S. Patent 5,884,287.

Fichtner, J., Heemskerk, E.M. and Garcia-Bernardo, J., (2017) Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk. Business and Politics, 19(2), pp.298-326.

Gao, R., (2018) July. Active Pursuit or Passive Escape? Revisit the Linkage between IFDI and OFDI in Emerging Markets. In Academy of Management Proceedings (Vol. 2018, No. 1, p. 11668). Briarcliff Manor, NY 10510: Academy of Management.

Giansante, J.E. and Dragun, B.C., Investment Strategies Network, (2014) Investment portfolio selection system and method. U.S. Patent 6,275,814.

Gutiérrez, G. and Philippon, T., (2018) Ownership, Concentration, and Investment. In AEA Papers and Proceedings (Vol. 108, pp. 432-37).

HA Davis, M. and Lleo, S., (2015) Risk-Sensitive Investment Management.

Harvey., C. R. (2011) Active Portfolio Strategy [online] Available from https://www.nasdaq.com/investing/glossary/a/active-portfolio-strategy [Accessed on 27th July 2018]

Holloway, C., (2013) A note on testing an aggressive investment strategy using Value Line ranks. The Journal of Finance, 36(3), pp.711-719.

Lan, C., Moneta, F. and Wermers, R., (2016) Holding Horizon: A New Measure of Active Investment Management.

Malkiel, B.G., (2014) Passive investment strategies and efficient markets. European Financial Management, 9(1), pp.1-10.

Rudd, A., (2013) Optimal selection of passive portfolios. Financial Management, pp.57-66.

Sushko, V. and Turner, G., (2018) The implications of passive investing for securities markets.

Yahoo Finance, (2018) CSL limited [online] Available from https://in.finance.yahoo.com/quote/CSL.AX?p=CSL.AX&.tdata-src=fin-srch-v1 [Accessed on 27th July 2018]

Yahoo Finance, ANZ bank Limited (2018) [online] Available from https://in.finance.yahoo.com/quote/ANZ.AX/key-statistics?p=ANZ.AX [Accessed on 27th July 2018]

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