FIN206-Investment Management Report Writing – Management Assignment Help

Assignment Task

Task

Scenario:

You are a consultant who has been asked by the fund’s trustee board to work with AUSBIG’s investment team to review a number of facets of both the DB scheme and the balanced fund option in the DC scheme.

In your initial dealings with AUSBIG, you have gathered copies of the incomplete investment policy statements (IPSs) (see Appendices 1 and 2), which provide the basis for the way the investment team manages these funds for both the balanced fund option in the DC scheme and the DB fund.

In addition to reviewing the IPS’s, the Investment Committee (IC) has also asked that you specifically address the following four topics in your report.

First, the committee has asked that you address the impact of potentially lower inflation on the portfolio.Their concern is that in the lower for longer bond yield environment a continued period of low inflation may occur as the global economy slowdowns. They want to consider the impact of this on the portfolio as well ways of protecting /hedging the portfolio should this eventuate.

Second, the committee would like to understand whether the portfolio would benefit from a higher allocation to international shares versus Australian shares.

Third, the IC is also looking at the issue of re-balancing and the frequency with which this takes place. Their specific concern is that the asset allocation bands are too wide and that the portfolio would benefit from reducing the bands and having more frequent re-balancing.

A final issue is that after a recent member survey of the DC fund one of the notable trends was a very marked increase in the number of investors who wanted to be able to invest in an Environmental,Social and Governance (ESG) fund. The IC wants a brief overview of this style of investing as well as whether an ESG overlay to a fund manager’s process contributes to performance?

Question 1:

(a) Analyse the objectives of the defined benefit fund in terms of the return requirements.How do you think they could be improved? 

(b) Analyse the objectives of the defined benefit fund in terms of risk management.How do you think they could be improved? 

(c) Propose two (2) new objectives for the defined benefit fund based on both return and risk requirements.

(d) Analyse the objectives of the balanced fund in terms of the return requirements.How do you think they could be improved? 

(e) Analyse the objectives of the balanced fund in terms of risk management.How do you think they could be improved? 

Question 2:

a) Evaluate the strengths and weaknesses of the current process to select investment managers.

(b) Explain how you would improve the manager selection process, focusing your discussion on the selection of managers for the equity portfolio.

(c) Provide a brief overview of what is meant by an ESG overlay to an investment process as well as whether any research is available to support the addition of this overlay to a manager selection process?  

Question 3:

(a) The strategic asset allocation (SAA) of the balanced fund has been calculated using a mean variance optimiser with 10 years of past returns, volatility and correlation. As discussed in the IPS (Appendix 1), the SAA is recalculated every year using the past 10 years’ data for the major benchmarks in each sector, subject to peer related constraints.Discuss the merits or weaknesses of this approach, with reference to:

(i) The assumptions underlying the mean variance approach to asset allocation, and therefore underlying this approach.

(ii) The suitability of the data used, suggesting any changes you believe may be warranted.

(iii) The method of calculating asset allocation and the constraints used, suggesting any changes you believe may be warranted.

(b).

(i) Discuss the impact of a slowdown in economic growth, falling inflation and bond yields on equity and fixed interest asset classes. 

(ii) What investments and/or strategies may be available to benefit a fixed interest portfolio if the fund manager expects lower interest rates? 

(c) The trustees are interested in behavioural finance but know very little about it. Explain how you think behavioural finance might impact each fund’s asset allocation. What benefits could behavioural finance insights provide the trustees when setting the objectives and strategic asset allocation for the funds? 

Question 4:

(a) The trustees of AUSBIG have now asked you to consider alternative approaches to asset allocation. Consider the strategic asset allocation (SAA) for the defined benefit fund (as set out in Appendix 2).

(i) Assess three (3) strengths and three (3) weaknesses of the current SAA, including the approach to setting the SAA and the ranges for each asset class.

(ii) Provide a rationale as to whether this allocation is appropriate given the objectives as they are currently expressed.

(iii) Is the SAA appropriate for the two new objectives you formulated in Question 1(c)?

Explain why or why not. Recommend improvements that will increase the probability of your formulated objectives being reached. 

(iv) Propose an alternative approach to setting the SAA for the defined benefit fund and discuss.

why you think it would be superior to the current approach. Provide reasons and evidence to support your view. (Include in your discussion theoretical underpinnings and frequency of review.)

(b) The asset allocation policy for the defined benefit fund is silent on the use of active asset allocation (AAA), which is an approach whereby the fund would vary asset allocation, rather than maintain a fixed or strategic asset allocation (SAA).

Discuss the benefits and disadvantages of the AAA approach in general and explain the difference between active asset allocation and active management. 

(c) The trustees have asked you to also review the strategic asset allocation (SAA) for the balanced fund.

(i) Propose what you consider may be a more appropriate approach for determining the fund’s SAA. Explain why your suggested approach is more appropriate. 

(ii) Propose guidelines as to how often the SAA should be reviewed.  Note: Your answers to part (c) may include approaches previously considered in this assignment.

(d) The IC is concerned that the asset allocation bands are too wide and that the portfolio would benefit from reducing these bands and thereby having more frequent rebalancing. Discuss the benefits and costs of moving to a more active re-balancing strategy. 

(e) The IC wants to consider whether the portfolio would benefit from an additional allocation to international shares. Discuss the role of international shares in a portfolio context by providing the IC with a list of three benefits and three disadvantages compared to an investment in Australian shares.

Learning outcomes:

LO1: Analyse the processes involved in managing an investment portfolio. 

LO2: Examine portfolio management theories and their application. 

LO3: Apply the process of asset allocation and portfolio construction. 

LO4 :Assess manager selection and portfolio management styles. 

LO5: Analyse the characteristics and relative benefits of various asset classes and their impact on portfolio management.

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