Fund Manager I Am Often

¶ … fund manager I am often charged with investing relatively large sums of monies for specific periods of time in with specific goals and objectives for those investments. On February 4th, I was charged with investing 100,000,000 euro for a period of time that would end on April 14. The investment objective was to provide a return that was higher than what could be received in the money market. The money market rates during the investment period fluctuated between 2.57% and 2.98% with an average daily yield of 2.62% according to Crane 100 Money Fund Index. Therefore, the target return on this portfolio should be at least higher than the money market rate, and any losses should be limited and explainable in detail.

To achieve a higher rate of return more risk would have to be assumed and the volatility of the stock market in general as well as specific stock and industry risks would have to be examined and contemplated. Since it is the fund manager's personal philosophy to seek substantially higher return than what can be achieved by investing in the relative safety of a money market account, the portfolio would be designed accordingly.

An additional factor to consider when investing for such an extremely short period of time, is the time factor itself. Stocks are known for an enhanced volatility and a two-month time frame does not allow for a recovery period when stocks take an inevitable dip.

EXECUTIVE SUMMARY

The equities market itself can be so volatile during a two-month time frame that the entire market can be off substantially and with such a short period of time to recover, the objective to beat the money market is a relatively difficult task. For this particular portfolio the market risk is very high, the industry risk is high and the specific stock risk is relatively low.

CONTENT PAGE

Executive Summary

Strategy

Selection and Adjustments in Asset Values

Portfolio Performance

INTRODUCTION

The desired objective(s), return on equity, and risk assumption levels of the investor should all be considered when investing monies for the investor. A sense of responsibility towards the investor, and the investor's monies, should be diligently maintained by the manager of such funds. Acquiring the necessary information concerning the investor should be accomplished before the fact and both parties should have an equal understanding of the investment objectives and the risks that will be taken by the manager in order to achieve those investment objectives.

It is the manager whose job it is to determine what investment philosophies and strategies to use to meet those objectives, and it is the investor's responsibility to ensure that the manager knows what those objectives are. If either party is uncertain as to the specific goals and methods of the investments are, then action should be taken to rectify that uncertainty.

In this specific portfolio the investment strategy is understood to be an equity portfolio that is particularly vulnerable to market risk due to the relatively short period of time for which the investment will be made. Other risks assumed by the manager for this portfolio include; industry risk and company risk. Many of the equities will be of a volatile basis but the stock market itself will provide the most risk due to the worldwide uncertainties such as wildly fluctuating (and increasingly higher) oil prices, mortgage woes and recession fears.

INVESTMENT STRATEGY

An asset allocation theory will be used by the manager while investing these funds that will seek to maintain an 20% liquidity, and an 80% equity investment model. Because the return being sought is one that is higher than the money market rates currently available this allocation provides the opportunity to reach that objective. 15% of the overall portfolio will be invested in Chinese stocks with an additional 10% of the portfolio to be invested in two Ireland banks. The remaining equities will be divided between U.S. companies trading on the S & P. And companies trading on NASDAQ. A maximum of 5,000,000 euros will be invested in each individual equity.

Since two months is a short investment period, few if any trades will be made whether the investments are up or down. It is the philosophy of the manager that such trades would cost the investor more than what it would be worth to do the trades.

It is expected that the Chinese stocks will provide the most volatility and it is the fund manager's correlating belief (with other experts) that the return on those stocks will be low due to that volatility. Fernald and Rogers wrote; "We attribute low Chinese expected returns to the limited alternative investments available in China" (2002, p. 417). There are also two separate classes of equities issued in the Chinese markets, one class is for foreign investors and the other class is for domestic investors. The foreign shares are the ones that will be purchased for this portfolio, even though domestic stocks average a 4% higher yearly return.

SELECTION and ADJUSTMENTS

The following investments were chosen based on a variety of considerations. Primarily each stock was evaluated as to its potential return, the company's track record of yearly returns, profitability, industry position, products or services provided by the company, number of stock issued, and any projected dividends.

The three Chinese stocks selected were Sinopec, COSCO, and China Unicom. All three companies are leaders in their industry with COSCO a diversified shipping company, Unicom a national communications and media firm and Sinopec a leading petroleum and chemical company.

The two investments in Ireland were both banks the Bank of Ireland and the Allied Irish Bank. Both institutions are highly rated and perceived as sound investments. The Bank of Ireland was charted in the late 1700's and is known for its stability. The shares offer a current dividend yield of just under 5%. The Allied Irish Bank offers a return on average equity of over 20% per year.

The remaining 11 equity investments were divided between U.S. small cap and large-cap companies.

The small cap companies included; Computer Science, Unisys, Check Point Software, AES Corp, Amarin Corp., Avon Products and Dell Computer. The large cap companies included; General Motors Corp., Coca-Cola Co., Apple Inc., and Google Inc.

Many of these firms have relatively high betas, but also offer opportunities to achieve above average rates of return. Most of the stocks were purchased at prices well off of their recent highs (with a few exceptions).

SELECTION and ADJUSTMENTS

The only adjustment made on the portfolio during the investment period was the sale of Amarin. It was purchased at a price of 2.48 per share with an initial investment of 5,000,000. Within one month the stock had gained substantially and was consequently sold for 6,370,967, for a tidy profit of 1,370,967 which translates into approximately 28% profit in one month. The profit and initial investment were swept into the money market fund to sit until the end of the investment period. No additional changes were made to this portfolio.

CHANGES in ASSET VALUES

The portfolio displayed a high degree of volatility that affected the individual stocks. Many of the U.S. stocks were affected positively, while all three of the Chinese stocks were affected in a negative manner. Even though the manager purchased foreign Chinese stocks, there would have been no noticeable difference of domestic Chinese shares had been available to purchase. "Many companies on China's stock markets have traditionally had separate, restricted classes of domestic residents and foreigners. These shares are identical other than for who can own them" (Fernald, Rogers, 2002, p.418). All three investments were down substantially by the end of the investment period, and in fact, were the primary reason why the portfolio itself showed a loss rather than a gain overall. Sinopec and COSCO were both down over 40% and China Unicom was right behind them down almost 40%.

All three companies were affected by the negative publicity suffered by China as the country's leaders cracked down on citizens of Tibet who were demonstrating for independence. Many free nations viewed the actions as further proof of the totalitarian thinking of Chinese leaders that in most eyes are undesirable conditions for investments.

The two investments in Irish banking institutions showed a break even in one and down slightly in the other. This was to be expected since the Bank of Ireland was purchased primarily for the dividend and the Allied Irish Bank provides a long-term return that is higher than average, but short-term results will be mixed.

PORTFOLIO PERFORMANCE

Total profitability for the portfolio was a modest decline of just over 4%. The portfolio's value decreased from 100,000,000 to 95,931,331.67. While this was not where the manager wished the portfolio to be, it was not entirely unexpected. The short-term nature of the portfolio's duration lent itself to the volatility of the market. Exactly what was predicted to happen, did happen. The Chinese market in particular was hard hit, and affected the three Chinese firms in a very adverse manner. The firm's financials have not changed, but the perception of the unrest there led to uncertainty in the marketplace, that in turn affected these three stocks.

As mentioned before, Amarin was sold for approximately 28% profit, and six of the remaining ten U.S. investments were all up at least 5% with a range of 4-16% profitability. The four U.S. investments that declined averaged 10% with the largest being General Motors with a decline of approximately 23%.