¶ … financial assets in order to recommend the appropriate investment vehicle for the client. Analysis of different investment vehicles shows that ETFs are the best investment option for our clients. The ETFs are the basket of securities that combine stocks, bonds, cash, commodities and other securities. The report diversifies our investment options choosing the stocks, bonds and cash from different industries. Based on the historical data, our average annual returns are 38% revealing EUR 32,997 as our annual returns from our initial investment capital of EUR 100,000. After 3 years, the net worth of our investor will be EUR 457,901, which include the cumulative returns and the capital. However, the net worth of our investor will be EUR 5.38 Million after 10 years. The report also carries out the sensitive analysis on the investment option assuming that our investment choice is affected by the macroeconomic forces. The report reduces our annual average returns to 25%. We also assume that our investment options are affected by inflation rates of 3%. The report also assumes that the investor will pay 15% annual tax from the returns. The results of the sensitive analysis reveals that the net worth of our investor will be EUR 314,646.70 after three years and EUR 1.97 Million after 10 years.
Content Outline
Introduction
Justification of the ETFs
Asset Allocations
Returns After 3 years
Returns After 10 years
Sensitivity Analysis
Reference
Appendices
Introduction
Objective of this report is to recommend the asset allocation for our client based on the analysis of the client's financial goals. The analysis is based on the client situation and risk profiles, which include the lifestyle, character, time horizon and objectives. The report uses the assets allocation based on the historical returns and benchmark index of the asset class. Some events such as spending habits are within the client's control, however, the macroeconomic factors such as the fluctuation of the interest rates, market performances and tax policies are not within the clients control. Despite the factors that can affect investment planning, this paper provides a comprehensive advise that can assist the client to meet his financial goals.
Client's Investment Objectives
To invest in order to supplement the retirement income.
To seize the current opportunity with the financial markets to grow the wealth.
The first step in determining the appropriate asset allocations is to carry out the situation analysis and risk tolerance assessment of the client.
Situation Analysis
The investor is an European citizen, aged 54 with 11 to 13 years to his retirement. At present, the client is a founder and Managing Director of a Consulting Company that specializes in Supply Chain, Sourcing, and Procurement process optimization for many industries. Before starting his establishment, the client had worked for several multinational corporations and held different managerial positions within these companies. The client has more than 25 years of working experience across the Europe and globally.
Risk Profile: I am willing to include some calculated risks in my investment profiles . However, I am not willing to invest in high risk assets that carry high volatility and higher performances.
Character: The client is willing to accept a calculated risks in order to grow his investment. In other word, the client is comfortable with investment risks. While aiming for the higher long-term returns, the investor understands that the investment character can lead to a sustained period of poor performances. Thus, the investor is ready to accept a significant fluctuation in value in order to achieve a better long-term returns, record high income and as well achieving long-term capital growth.
Lifestyle
Our client lives from the income earned from his work while leaving some savings for a future investment. However, the client's strategic lifestyle profile ranged from medium to higher risks. As an hardworking individual, the investor live a normal and comfortable life, which assist him to be able to save a significant amount for his investment.
Time Horizon:
Our investor is a moderately high risk investor showing that his time horizon is between 5 and 10 years. From our investor's character, he is ready to support the investment fluctuation that could have arisen during the investment period. It is critical to understand that macro economic factors such as fluctuation of interest rates and inflation can decline the investment returns. Thus, an medium-long-term investment portfolio is associated with high degree of risks. Thus, the report anticipates that our proposed investment portfolios might fluctuate within three years, thus, the investor is ready to leave his investment portfolios for three-year or more before anticipating the investment returns. Costa (2011) recommends that the best time for an investor to expect a return is after 3 years. In other word, a good investor should leave his investment for at least three-year before expecting returns.
Investment Sum: Our client is ready to investment the sum of EUR 100,000.
Analysis of the client's risk profile reveals that the client will benefit from the ETF (Exchange Traded Fund) investment portfolio. Typically, the ETF will be the best investment option that can protect the client's fund from the macro economic factors such as inflation, fluctuation of interest rates and recession.
Justification of the ETFs
An ETF is the basket of assets or investment portfolios that are traded on stock exchanges similar to the traditional stocks. In other word, the ETF combines assets such as bonds, commodities and stocks. The ETF is attractive to many investors because of its tax efficiency, low costs and stock like features. One of the benefits of the ETF is that it allows the diversification of the related investment portfolios. The low expenses ratio is another advantages of the ETF that are lower than the expenses charged by the traditional stock brokers and the mutual funds.
Deutsche Bank (2013) report shows that the ETF is one of the fastest growing investment vehicles that has become a global success. Since 2007, the value of the ETF funds traded in the London Stock Exchanges has increased by 80% and the volume of the traded assets have increased by more than 200%. In the United States, the ETF' increased by more than 30% in 2010 and reached $2.04 Trillion (Costa, 2011). The popularity of the ETF portfolios as a desirable investment vehicle is attributed to their transparency, diversity, flexibility as well as liquidity.
Justice (2013) supports this argument by pointing out that an investor can achieve a long-term results from investing in the ETFs. However, there is still a need for investors to carry out the research to select the appropriate EFT investment vehicle in order to avoid a disappointment from their investments. Justice (2013) compares the ETF with mutual funds and reveals that the low costs and tax efficient traits associated to the ETF make the ETF investment better than the actively managed mutual funds. Costa, (2011) recommends EFT for a prospective investor on the ground that several mutual funds have failed to outperform their investment benchmarks. The authors supports ETF investment vehicles based on the high costs associated to traditional stock trading, which can erode investment returns. Costa, (2011) further points out that nearly 4.5% of the mutual fund underperform their benchmark. In Europe, more than 2.4% of the mutual funds underperform their benchmark and only 17% of the mutual funds outperform their benchmarks. High management fees charged by the mutual funds is one of the major factors that leads to the underperformances of the mutual funds because the high management costs generally affect the rate of returns. For example, many active mutual funds charge 2% as the management costs, which remove 33.5% from an investor total returns. However, the ETFs investment with the management costs of 2% will only remove 3.9% from investors total returns. The mutual funds charge the management costs from assets and anticipated 8% yearly returns will make 25% of investors returns go into expenses. However, 0.2% management costs of ETF will remove yearly 2.7% of expenses from the an investor's returns.
Transparency is another feature that makes the paper recommend ETFs for our investor. Transparency refers that funds should be transparent as required by law showing the investment strategy costs and holding. The other feature of the ETFs is their liquidity. Diversification is an important features of the ETFs that involves diversifying the allocation of shares, stocks, and other assets.
Availability is another benefit of the ETF. Many traditional mutual funds refuses accepting the investment application of foreign investors. For example, the U.S. financial law is very complicated making many mutual funds refusing accepting foreign investors. On the other hand, there is no geographical constraint to the ETF investment. The next step is to provide the asset allocations for the client in order to balance the risks and returns.
Asset Allocations
Asset allocations are the strategy of meeting the investor's financial goals, risk tolerance, objectives and time horizons by mixing different investments portfolios such as bonds, stocks, cash and other securities. Asset allocations assist in diversifying the investment portfolios to protect the investors from the possibility of investment loss. Contrary to the benefits associated to the ETF, some mutual funds, and brokerage firms recommends the individual "hot" stocks for their clients, which this report believes to be generally not a good investment recommendations because these stocks may not be able to sustain the effect of macroeconomic situations. Thus, asset allocations are the cornerstone of sound investment. Asset allocation is the proven theory to control the risk of our client portfolio by mixing between 7 and 10 class of well -balanced assets. The benefit of asset allocations is that the chosen asset will react differently to the macroeconomic factors and market conditions such as fluctuation in interest rates, inflation, and recession. However, asset allocation is different from a simple diversification of mixing 100 of stocks that come from one or two different assets such as large-cap stocks or mid-cap stocks. The shortcoming of s simple diversification of stocks is that these stocks will react to the macro-economic factor or market conditions in the same way and move along the market events in the same way. Similarly, investing in only top performing funds without considering the asset allocations is also an investment mistake. The problem with this kind of an investment strategy is that the top performing funds react to the market forces in the same way. Even if an investor owns 20 top performing funds, these funds generally react similarly to the market conditions. (David White & Associates, 2011).
The benefit of diversification using the asset allocation is that bonds, stocks, and cash do not react to the market forces in the same directions. Thus, a combination of various securities will allow our investor to benefit from smooth investment returns.
This paper divides our investor's fund of EUR 100,00 onto different investment classes, the diversification will assist in offsetting the potential losses and volatility that might have arisen from investing in a single asset. Moreover, the chosen assets are from different industries and different geographical locations. The benefits of chosen assets from different industries and geographical locations is the assets will not be affected by the market forces that may affect a particular industry or a geographical location.
The Table 1 reveals our dynamic assets revealing how we divide our fund onto each asset. We will invest 65% of the fund in Stocks, 30% in Bonds and the rest 5% in Cash.
Table 1: Asset Allocations
Percentage
Stocks
65%
Bonds
30%
5%
The Table 2 and 3 reveal our investment vehicles revealing how our asset allocations are divided among different ETFs and the fund allotted to each investment vehicle.
Table 2: Investment Vehicles Allocation
Percentage
Equities (65%)
"CS ETF (IE) on NASDAQ 100 (IE00B53SZB19 / CSNDX)" (Morningstar, 2014 p 1).
15%
"iShares Core S&P 500 Index Fund ETF (IVV)" (Morningstar, 2014 p 1).
20%
"SPDR Emerging Asia Pacific ETF (GMF)" (Morningstar, 2014 p 1).
15%
"Comstage ETF Commerzbank Commodity EW Index" TR (Morningstar, 2014 p 1).
15%
Bonds (30%)
"Schroder ISF Euro Bond A Acc -- Active Managed Fund"
10%
"iShares Barclays Capital $ Treasury Bond 7-10 ETF"
10%
"iShares Euro High Yield Corporate Bond UCITS ETF"
10%
Cash
5%
Table 3
Allocation
ETF
Ticker
3-Year Return %
Amount
Invested
15%
"CS ETF (IE) on NASDAQ 100 (IE00B53SZB19" (Morningstar, 2014 p 1).
CSNDX
EUR 15,000
20%
"iShares Core S&P 500 Index Fund ETF "(Morningstar, 2014 p 1).
IVV
20.76%
EUR 20,000
15%
"SPDR Emerging Asia Pacific ETF "(Morningstar, 2014 p 1).
GMF
9.46%
EUR 15,000
15%
Comstage ETF Commerzbank "Commodity EW Index TR" (Morningstar, 2014 p 1).
-4.07%
EUR 15,000
10%
"Schroder ISF Euro Bond A Acc -- Active Managed Fund" (Morningstar, 2014 p 1).
29.72%
EUR 10,000
10%
"iShares Barclays Capital $ Treasury Bond 7-10 ETF" (Morningstar, 2014 p 1).
6.6%
EUR 10,000
10%
"iShares Euro High Yield Corporate Bond UCITS ETF" (Morningstar, 2014 p 1).
33.54%
EUR 10,000
5%
"Cash (Goldman Banking Index: Exchange Traded Scheme)" (Morningstar, 2014 p 1).
EUR 5,000
Total
EUR 100,000
Average Rate of Returns
38%
All the ETFs have been existing for some period. The average annual returns of the GMF is as follows:
Net Assets by 05-Dec-2014
$6,569,032,217
Index Ticker
LT09TRUU
Shares Outstanding
62,500,000
Beta
-0.05
Expenses Ratio
0.15%
Price/E
15.7%
ROE
11.5%
CUSIP
464287440
Closing Price
Returns After 3 years
This section calculates the returns after 3 years using the Excel software. As being revealed in the Table 4, the average yearly returns for all our assets are 38%. Using our calculation of 38% annual returns, it is revealed that our investor will earn yearly returns of EUR 32, 997. If our investor does not reinvest the annual returns, the 3-year returns from our investment capital will be EUR 98,990. Since our investor intends to grow his income and wishing to embark on long-term investment, our investor will like to reinvest his annual returns. If we-based our calculation on the same 38% rates and our investor reinvests his annual return of EUR 32,997, the cumulative annual returns will be EUR 457,901.04 at the end of the three-year. The Appendix 1 reveals the monthly breakdown of our investment returns.
Table 4: Allocation
ETF
Ticker
3-Year Return %
Amount
1-Year Returns
3-Year Returns
Cum.3 Yr Return
Invested
15%
CS ETF (IE) on NASDAQ 100 (IE00B53SZB19
CSNDX
15,000
15900
47700
20%
iShares Core S&P 500 Index Fund ETF
IVV
20.76%
20,000
12456
15%
SPDR Emerging Asia Pacific ETF
GMF
9.46%
15,000
15%
Comstage ETF Commerzbank Commodity EW Index TR
-4.07%
15,000
(610.5)
-1831.5
10%
Schroder ISF Euro Bond A Acc - Active Managed Fund
29.72%
10,000
10%
iShares Barclays Capital $ Treasury Bond 7-10 ETF
6.60%
10,000
1980
10%
iShares Euro High Yield Corporate Bond UCITS ETF
33.54%
10,000
10062
5%
Cash (Goldman Banking Index: Exchange Traded Scheme)
5,000
15450
Average Rate of Returns
38%
Total
EUR 100,000
EUR 32,997
EUR 98,990
EUR
457,901
Source (Boursorama, 2014. iShares, 2014, Morningstar, 2014, Morningstarm, 2014. Trustnet, 2014 Trustnet Offshore, 2014, Yahoo Finance. 2014).
Table 5
Cummulative Annual returns
Start principal
Start balance
Returns
End balance
End principal
Year 1
EUR 132,997.00
132,997.00
50,538.87
183,535.86
132,997.00
Year 2
165,994.00
216,532.86
82,282.49
298,815.35
165,994.00
Year 3
EUR
198,991.00
EUR 331,812.35
EUR 126,088.70
EUR 457,901.04
EUR 198,991.00
Returns After 10 years
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