Investment Portfolio and Interpretation of Financial Information

This report provides the information about the different types of investors’ needs by analyzing their profiles. Based on these information, the most suitable portfolios of investments will be provided for investors in order to get high return with the lowest risk as much as possible.

FINANCIAL INVESTMENT OPPORTUNITIES Prepare for assessor: Joey Lai Investment Portfolio and Interpretation of Financial Information Banking Academy, Hanoi BTEC HND in Business (Finance) Prepared by: Tran Quyet Thang – Joe Student ID: F05-194 Number of worlds: 3,278 (Not including in tables) Submission deadline: 20th, December 2013 Table of Contents Introduction 3.1 Identify the needs of different investors 3.2 Design portfolios of investments for different individuals Peter Michael Sandy 3.3 Explain the functions of financial advisers and how to select one 3.4 Explain investors’ rights and the protection available to them 4.1 Explain the information in the financial pages of The Financial Times 11 4.2 Calculate stock exchange ratios and be able to explain what they mean 12 4.3 Describe and evaluate collective investments 15 Conclusion 17 Reference 18 FIO A2 – 2013 Introduction This report provides the information about the different types of investors’ needs by analyzing their profiles Based on these information, the most suitable portfolios of investments will be provided for investors in order to get high return with the lowest risk as much as possible Furthermore, the protections and the rights of investors also are mentioned Moreover, several tips about the different types of financial advisers and the ways to select one are referred to investors Additionally, some significant stock ratios of BIX Companies are calculated The scope of this report includes:  The needs of different investors  Design portfolios of investment  Functions of financial advisers  Investors’ rights and protections  Stock ratios 3.1 Identify the needs of different investors There are four types of needs of different investors: Types of Definition investors’ needs Conservative If you have a conservative investment philosophy, you accept very little Investors’ need risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate amount of current income and preservation of capital (Garman and Forgue, 2011, p 385) Investors’ need Focused on generating wealth over the medium to long term, while for Retirement maintaining some protection from fluctuation or returns in the short term (Sunsuper, 2013, p 5) Balanced Focused on producing returns which are well ahead of inflation over the Investors’ need long-term (Sunsuper, 2013, p 5) FIO A2 – 2013 Investors need Focused on producing returns which are significantly ahead of inflation for Growth over the long-term (Sunsuper, 2013, p 5) Peter is 57 and his need for investment is to prepare for retirement because he will be retire soon in less than years In addition, his saving less than £10,000 – this is a small amount saver during his working time Furthermore, he does not have any experience on investing For these reasons, Peter would want to protect his principal against inflation without experiencing Moreover, he wants to have a stable income in the future for expenditures when retiring Michael is 45 and he has a plan to spend the money in next years It means that he would want to earn high return from his investment for medium or long term with the lowest influence of inflation Hence, his need for investing is growth Furthermore, Michael has some experience about investing It means that he is capable to evaluate his investment in part carefully and logically This also help Michael to take some risk in order to maximize the return In addition, he has more than £25,000 to invest Sandy is so young (only 16) with many ambitions and wishes about the future, especially for education Moreover, she actually needs the assets to pay for college It means that she expects to have high return from her investment in order to prepare for her college in to years Based on these goals, her need in investing is growth Besides, she has non-experience about investing It means that the high term investment with low inflation risk may be suitable for her 3.2 Design portfolios of investments for different individuals To invest more effectively, the investors need to have at least an investment portfolios to consider in order make the decisions about investing Investment portfolios – or, in plain English, collections of assets – can diminish the risk inherent in stock markets by diversification or avoiding having too many eggs in one basket (Cowie, 2013) Based on the needs of the investors, the suitable products will be calculated the return and the risk so that the investors can know how much they can earn and the risks which they have to face The table bellows will show the characteristics, return and risk of some investment products in specific institutions FIO A2 – 2013 Peter The Peter’s profile: Financial position Retirement Plans and Goals Investment horizon Short-term to medium-term investment Risk tolerance Moderately Conservative Investment objective Income FIO A2 – 2013 Based on his profile, a portfolios of investments will be built as follows: Cash ISA is a safe product for Peter to invest, however its return is very low In addition, the inflation rate in UK recently has fluctuated and sometimes it is very high (2.8%) Therefore, Peter should only invest 20% of his money on this product Peter should spend 30% of his money for investing in high yield bonds with higher return than cash ISA Otherwise, this is also a high security capital so it is good for Peter in the future when he retire FIO A2 – 2013 Large-cap equity can bring high return for Peter and this product has high liquidity, so Peter can convert it to cash easily for his expenditure Furthermore, the companies which have the large capital can sustain and increase its share value Besides, this product could grow in the future It means that Peter should invest 50% of his capital on this product in order to enhance the money with lower risk Michael The Michael’s profile: Financial position Retirement Plans and Goals Future Expenditure Needs Investment horizon Medium to Long-term investment Risk tolerance Moderately Investment objective Growth & Income Based on his profile, a portfolios of investments will be built as follows: FIO A2 – 2013 With the need of growth for the investment in order to spend in the next years, Michael should invest 50% to have high return and good liquidity Moreover, this product has low risk In addition, he should invest only 30% of his capital for small-cap equity to make high return on the future However, small-cap equity has higher risk than large-cap equity, so Michael should invest his remaining capital in cash Isa and high yield bonds (10% for each product) in order to diversify the risk of his investment Sandy The Sandy’s profile: Financial position Future Expenditure Needs Investment horizon Medium to Long-term investment Risk tolerance Moderately Aggressive Investment objective Growth FIO A2 – 2013 Based on her profile, a portfolios of investments will be built as follows: Sandy needs the money for the future college so she wants to have higher return and take low or moderate risk Therefore, she should invest most of her capital – 60% in large-cap equity FIO A2 – 2013 Furthermore, she could save her money by purchasing high yield bonds with 30% of her capital which bring her a stable income for her expenditure when she study In addition, she can take some risk by investing 10% in small-cap equity 3.3 Explain the functions of financial advisers and how to select one In order to make the investment become more effective, the investors like Peter, Michael and Sandy should find the help from the financial advisers Financial advisers: A person or organization employed by an individual or mutual fund to manage assets or provide investment advice (InvestorWords, 2013) There are several useful functions of a financial adviser which Peter, Michael and Sandy should know like:  Explain to individuals and groups details of financial assistance available to college and university students, such as loans, grants, and scholarships  Research and investigate available investment opportunities to determine whether they fit into financial plans  Analyze financial information obtained from clients to determine strategies for meeting clients' financial objectives (CareerPlaner, 2013) In addition, there are some different types of financial advisers as follows: FIO A2 – 2013 Peter’s need for investment is to prepare for his retirement and actually he has small savings so he should chose a multi-tied advisers Firstly, the fee for a multi-tied adviser is not expensive Additionally, Peter only needs come to organizations like banks to find out their financial products which meet his requirements While, Michael and Sandy with the similar need is growth Therefore, both of them should select an IFA An IFA can evaluate the financial situation of Michael and Sandy by face-to-face interviews Furthermore, the IFAs also conduct the researches about the products which investors may invest in order to inform Michael and Sandy their returns and risks Besides, the IFAs also provide helpful recommendations According to Hugepages websites, 2013, several questions which investors – Peter, Michael and Sandy could use to investigate the quality of a financial adviser:  Enquire about experience: Ask him questions to find out how long he or she has been in practice as a financial advisor and with what types of companies  Enquire the qualification: A certified financial planner or practitioner (CFP), a Certified Public Accountant/ Personal Financial Specialist (CPA/PFS), or a Chartered Financial Consultant (ChFC) certifications that your financial advisor should carry  Clarify payment terms: Financial advisors may be paid by way of a fixed salary, a commission, or a fee based on agreed upon hourly rate, a flat rate, or a percentage of assets and/or income 3.4 Explain investors’ rights and the protection available to them All investors – Peter, Michael and Sandy will be under the four levels of protections:  Protection from wayward financial services professionals  Regulation markets  Regulation of companies  Self-protection (Arnold, 2010) FIO A2 – 2013 Protection from wayward financial services professionals ‘At the center of UK investor protection is the watchdog, the Financial Service Authority The FSA is described as a ‘super-regulator’ because it regulates so many different aspects of the financial system from stockbrokers, banks and stock markets to independent financial advisers.’ (Arnold, 2010) It means that all people those use the financial services in UK will be protected by FSA This regulation is applied to make sure the financial system stable, eliminate the fraudulent transactions In addition, ‘all firms or individuals offering financial advice, products or service in the UK must be authorized by the FSA’ (Arnold, 2010) Therefore, investors could have a general view to evaluate the suppliers of financial products Regulation market ‘The FSA also conducts market surveillance and monitors transactions on seven recognized investment exchanges (RIEs)’ (Arnold, 2010) These regulations are working together to ensure all people, processes in stock exchanges follow the rules ‘The London Stock Exchange, in the partnership with FSA, also requires companies to disseminate all information that could significantly affect their share prices.’ (Arnold, 2010) This makes investors become more confident and believe that all companies on the stock exchanges are playing fair Regulation of companies The Companies Acts brings a lot of requirements for companies to prepare the published financial statements in order to ensure that these reports have ‘true and fair view’ and follow the standards As a result, investors could base on these information to make decisions In addition, ‘accountants and auditors also function, to some extent, as regulators, helping to ensure companies not misrepresent their position’ (Arnold, 2010) Self-protection There are some tips for the investors to be protect themselves and their assets when investing:  If you want to cover under the FAS rules and compensation scheme, make sure the financial service company is authorized FIO A2 – 2013 10  Make sure you understand the risks of the underlying investment  Make sure that your broker or independent financial adviser ring-fences your money – separates it from their own – so if they go bust your money is safe (Arnold, 2010) Investors like Peter, Michael and Sandy also have sever rights:  Making complaints and taking compensations of their loss because of the authorized companies  Voting  Receiving information about the performance of the organization  Receiving dividend 4.1 Explain the information in the financial pages of The Financial Times ‘The Financial Times (FT) is one of the world’s leading business news and information organizations We’re recognized globally for our authority, integrity and accuracy We provide a broad range of essential services, including news, comment, data and analysis, to the growing audience of internationally minded business people.’ (Financial Times, 2013) In the first article - “Take advantage of false fear, they create future demand’, this title provides audiences a general view about financial situation which involve to the development of shares in the world There is an increase in global demand in different industries Firstly, the author mentions about the raise of the passenger air traffic especially in some emerging markets Furthermore, he also affirm that the reasons for these air travels is not for holiday or vacation After witnessing a terrible crisis, the financial world becomes weakly, so companies not waste their money for staffs taking the trips All of these travels is for business purposes like sales meetings Companies recognize the business opportunities in the emerging markets and they want to take the chances to growth their business and get more income in the future Next, the author talks about the decrease on inventories This sign can bring both positive and negative views for investors about the financial market However, there is a positive news about the development of retailing industry and the global demand for goods because of the increase in sales and more production Finally, the author indicates the world economy is raising considerably by showing the power consumption and intermodal production transportation in leading economic This means that actually the production has increased In brief, this article brings the positive news about the financial market FIO A2 – 2013 11 in the world to the audiences and recommend them should get rid of fears and buy shares now As a result, investors can get high return in the future In the second article - “UK investment intentions at six-year high”, FT reporter advance the specific proofs about the higher investment of three UK organizations including SFL, Fracino and Delcam This sign shows the demand of consumers are increasing and this is a good time to buy shares and have high expectation on return However, investors need to consider the financial situation carefully although the demand has increased According to Carl Arntzen, manager of director of Worcester Bosch, the UK’s largest household boiler marker, investors have to evaluate the sustainable development of these demands in the future by comparing to the first-six-month results in 2014 In my opinion, based on the positive news in global demand like increase in passenger air traffic, decrease in inventories, higher power consumption,…investors should buy share to take more chances get higher return in the future because of the development of the companies These developments are be shown through the plans about investing more in plants and machinery of several big companies in UK It means that the share price of these organizations could go up However, the investors need to observe the performance of the organizations in the half of 2014 to consider the fluctuation of shares’ price By doing it, the investors can make the reasonable decisions about selling or buying shares to maximum the return and reduce the risk as much as possible 4.2 Calculate stock exchange ratios and be able to explain what they mean There are several useful stock exchange ratios which help investors make decisions Based on the data of BIX Company in 2012, all the stock exchange ratios will be calculated Earnings per share (EPS): is a measure of a company's profit Take the profit, subtract the dividends and divide that number by the number of shares outstanding (Parker, 2012) The formula: = ( ) ℎ (Biedenweg, 2002) FIO A2 – 2013 12 EPSBIX = £ ( , , , ) ( , , ) = £4.72 Profit after tax includes preference share dividend and another part belongs to ordinary shares Preference share dividend: £18,000 * £50 * 4% = £36,000 The new profit before tax (include only the value of ordinary shares) £289,000 - £36,000 = £253,000 EPS Ordinary shares = £ , , , = £5.86 EPS tells us how much of that money is flowing down to stock holders EPS tells you how much money the company is making in profits per every outstanding share of stock The higher the EPS is, the more money your shares of stock will be worth because investors are willing to pay more for higher profits (NASDAQ, 2013) It can be seen that the EPS of BIX Company is higher than the industry average (£5.86 and £5.20 respectively) This means that BIX Company has a good performance in financial market In order to increase the EPS ratios, the company may increase the earnings before tax by reducing some costs However these actions will affect both short-term and long term performance of BIX Company Reducing costs Short-term Selling and distribution costs R&D Administrative costs Long-term Sale volumes will be gone down Reducing expense No new products Gain more profits No new markets Low quality management More defective products By improving the EPS ratio, BIX Company also could enhance other stock ratios in order to attract more investors This can bring more capital for the company to expand and develop FIO A2 – 2013 13 Price/Earnings ratio: This number tells you how many years worth of profits you’re paying for a stock and you calculate it by dividing earnings per share by the stock price All things equal, the lower the P/E the better (Dobosz, 2013) The formula: ℎ = ℎ (Biedenweg, 2002) P/E ratio of BIX Company: P/E = £ £ = 9.56 A ‘high’ P/E ratio may imply either high growth or low risk (or both) expected in future Or it may simply mean that the most recent year’s earnings per share figure was abnormally small However, very high yields can be a sign of an unsustainably high dividend that is likely to be cut (Reid and Myddelton, 2005) The P/E ratio of BIX Company is above the industry average (9.5) Dividend Yield: shows how much a company pays out in dividends each year relative to its share price (Investopedia, 2013) The formula: = ℎ ℎ (Biedenweg, 2002) Dividend Yield BIX Company = £ = 6.25% The dividend yield of BIX Company (6.25%) is higher than the industry average (6.00%) As with all valuation ratios, dividend yield must be used with caution Stocks with very high dividend yields might seem like bargains, but these companies are often going through financial problems that have caused their stock price to plunge (News morningstar, 2010) FIO A2 – 2013 14 Dividend Cover: is calculated by dividing per share earnings by the dividend payment So, if cover is three times it means earnings are triple the payout to investors (This Is Money, 2008) The formula: = (Biedenweg, 2002) Dividends cover BIX Company = £ £ = 1.67 The dividend cover of BIX Company is below the industry average (1.50) Furthermore, a high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend (Bized, 2013) 4.3 Describe and evaluate collective investments Collective investment: A fund that is operated by a trust company or a bank and handles a pooled group of trust accounts Collective investment funds combine the assets of various individuals and organizations to create a larger, well-diversified portfolio (Investopedia, 2013) The benefits of investing in collective trust:  access to a professional investment manager with expertise in the markets where you want to invest  access to a diversified range of holdings chosen by a professional who is experienced in spreading risk  Your lump sum investment (or regular contribution) is pooled with the savings of other investments in the fund (Prosser, 2012) Otherwise, there are some disadvantages of investing in collective investments as follows:  CIS’s are seen as medium to long-term investments Investors therefore should not expect to make a profit in the short-term  All investments in securities, including CIS’s, run the risk that the markets may collapse and that investors may lose money FIO A2 – 2013 15  Cost for giving advice by financial advisors can be built into the fund and can diminish the returns, especially if charged as an ongoing percentage of the fund (The Financial Services Board, 2013) It is easy investors to find a collective investment in the London Stock Exchange One of the collective investments is INVESCO INCOME GROWTH This chart below will show the performance of this investment trust in 2013 The chart shows how the share price of INVESCO INCOME GROWTH has changed in one year from Dec-2012 to Dec-2103 It can be seen that the price had increased considerably by 29.5 from 230.75 in Dec-2012 to 266.25 in Dec 2013 From May-2013 to Aug-2013, there is a significant fluctuation The price dropped up 22 from 263.5 on 22-May-2013 to 241 on 25-Jun-2013) and then went up by 34 from 241 on 25-Jun-2013 to 275 on 14-Aug-2013 FIO A2 – 2013 16 The stock ratios of Invesco Income Growth Trust Plc: Based on this chart and the fundamental of this organization, the investors should buy the shares of this company in order to get high and stable return This table shows the increase in dividend yield, it means that the investors can have higher return Furthermore, the PE ratio of this company is also quite good, this ratio is not too high Therefore, this is a positive sign Conclusion In conclusion, this finding indicates that each investor has a specific need for investing, so the investor will need a specific portfolios with different products which suits for their financial goals and a different types of financial advisers in order to help them to invest effectively Moreover, to have the best investment, the investors will look at the stock ratios of a company to have a general view about performance of this company, therefore they can earn money FIO A2 – 2013 17 Reference Arnold, G 2010 The Financial Times guide to investing Harlow, England: Pearson Financial Times/Prentice Hall Biedenweg, K 2002 Understanding Investment & the Stock Market Carson-Dellosa Publishing Bized 2013 Dividend Cover [online] Available at: http://www.bized.co.uk/compfact/ratios/investor10.htm [Accessed: 14 Dec 2013] careerplanner 2013 Personal Financial Advisor Job Description, Duties and Jobs [online] Available at: http://job-descriptions.careerplanner.com/personal-financial-advisors.cfm [Accessed: 12 Dec 2013] Cowie, I 2013 How to build the perfect investment portfolio The Telegraph, [online] 05 May Available at: http://www.telegraph.co.uk/finance/personalfinance/investing/shares/10036319/How-to-buildthe-perfect-investment-portfolio.html [Accessed: 12 Dec 2013] Dobosz, J 2013 Ten ratios to make you money in stocks Forbes, [online] 25 September Available at: http://www.forbes.com/sites/johndobosz/2013/09/25/10-ratios-to-make-youmoney-in-stocks/ [Accessed: 14 Dec 2013] Financial Times 2013 Corporate Information [online] Available at: http://aboutus.ft.com/corporate-information/ [Accessed: 13 Dec 2013] Garman, E and E Forgue, R 2011 Personal Finance 11th ed Cengage Learning HubPages 2013 Role of a Financial Advisor in Financial Planning [online] Available at: http://financialadvisors.hubpages.com/hub/financial-advisors [Accessed: 13 Dec 2013] Investopedia 2013 Dividend Yield Definition | Investopedia [online] Available at: http://www.investopedia.com/terms/d/dividendyield.asp [Accessed: 14 Dec 2013] Investorwords 2013 What is Financial Advisor? definition and meaning [online] Available at: http://www.investorwords.com/1944/financial_advisor.html [Accessed: 12 Dec 2013] Morningstar.co 2013 Share Prices | Fund Prices and Data [online] Available at: http://www.morningstar.co.uk/uk/ [Accessed: 13 Dec 2013] FIO A2 – 2013 18 NASDAQ 2013 The NASDAQ Dozen: Earnings Per Share (EPS) [online] Available at: http://www.nasdaq.com/investing/dozen/earnings-per-share.aspx [Accessed: 17 Dec 2013] News morningstar 2010 Dividend Yield [online] Available at: http://news.morningstar.com/classroom2/course.asp?docId=145100&page=9&CN=COM [Accessed: 14 Dec 2013] Parker, T 2012 Stock Market Metrics Explained [online] Available at: http://www.investopedia.com/financial-edge/0312/5-stock-market-metrics-explained.aspx [Accessed: 14 Dec 2013] Prosser, D 2012 The benefits of collective investment The Times, [online] 10 Mar Available at: http://www.thetimes.co.uk/tto/public/investingnow/article3340887.ece [Accessed: 16 Dec 2013] Sunsuper 2013 Sunsuper for life Investment guide [e-book] Sunsuper Pty Ltd p Available through: Investment guide - Sunsuper http://www.sunsuper.com.au/Forms_and_Tools/Member_guides/Investment_guide/ [Accessed: 13 Dec 2013] This Is Money 2008 Dividend cover [online] Available at: http://www.thisismoney.co.uk/money/news/article-1612628/Dividend-cover.html [Accessed: 14 Dec 2013] FIO A2 – 2013 19 ... collective investments 15 Conclusion 17 Reference 18 FIO A2 – 2013 Introduction This report provides the information about the different types of investors’... returns which are well ahead of inflation over the Investors’ need long-term (Sunsuper, 2013, p 5) FIO A2 – 2013 Investors need Focused on producing returns which are significantly ahead of inflation... show the characteristics, return and risk of some investment products in specific institutions FIO A2 – 2013 Peter The Peter’s profile: Financial position Retirement Plans and Goals Investment