This paper analyzes and compares two investment vehicles: Microsoft (MSFT) as a Dow component and the Fidelity Asset Manager 20% mutual fund. The paper examines each investment's asset composition, capital structure, and cash holdings, then evaluates three-year performance relative to the Dow Jones Industrial Average and each investment's beta-adjusted expectations. Key findings include Microsoft's notable cash holdings, the mutual fund's shift toward international equities, and Microsoft's outperformance of both the Dow and beta-based expectations. The paper concludes with observations on the implications of each investment's future asset allocation strategy.
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The paper demonstrates comparative financial analysis — evaluating two dissimilar asset types (individual stock vs. diversified fund) against a common benchmark (the Dow Jones Industrial Average) while also applying risk-adjusted metrics (beta) to contextualize raw performance figures. This technique is essential in finance coursework because it prevents misleading conclusions drawn from absolute returns alone.
The paper opens by identifying the two investments and describing their intended and actual asset compositions. It then examines capital structure and cash holdings for each. A three-year performance narrative follows, comparing both investments to the Dow. The next section introduces beta to reframe performance against risk-adjusted expectations. The paper closes with a forward-looking assessment of each investment's likely trajectory given current allocation trends.
The Dow component selected for this analysis is Microsoft (MSFT), and the mutual fund is the Fidelity Asset Manager 20%. This fund is considered a conservative allocation fund, but its mandate allows it to draw upon most equity classes.
Over time, the Fidelity Asset Manager 20% expects to maintain an asset composition of 20% equity, 50% debt, and 30% in short-term and money market instruments. The present composition of the fund is 13.99% in domestic equities, 7.39% in international equities, 53.80% in debt, and 24.82% in money market. These ratios have changed somewhat over the past six months. The fund has reduced its debt holdings from 58.36%, domestic equities have decreased from 16.57%, and international equities have increased from 4.27%.
These changes most likely reflect a renewed optimism in global economic growth, but a diminished optimism and profit-taking in U.S. equities. The proportion of international equities has increased at the expense of U.S. equities. The fund's cash position has also increased, making it more conservative overall. That said, this figure still falls short of the 30% that the fund intends to hold in cash and money market instruments.
Microsoft holds a high proportion of its assets in cash. An estimated $31.4 billion sits in the company's war chest out of a total asset pool of $77.8 billion. Microsoft has difficulty finding viable investments for all of its cash, although as a matter of company policy it prefers to keep some cash as a cushion against competition, economic downturns, and potential acquisition activity. In terms of capital structure, Microsoft is oriented toward equity. The company's debt-to-equity ratio is just 0.96, and very little of that figure is represented by long-term debt.
While the mutual fund is oriented toward debt and international equities, it holds a smaller cash position as a percentage of assets than Microsoft does — which is highly unusual. The fund, characterized as conservative, has actually taken a more aggressive stand with respect to its asset allocation. This may reflect increases in equity values over the past six months. Where the mutual fund prefers to steer clear of cash and money market instruments in this low-rate environment, Microsoft seemingly cannot find productive investments for its money. In a low interest rate environment, it seems unusual that Microsoft would hold such a large portion of its portfolio in cash rather than seek out equity investments. Strategic considerations are likely the primary reason for Microsoft's emphasis on cash.
Over the past three years, the Fidelity Asset Manager 20% has performed almost as well as Microsoft and better than the Dow Jones Industrial Average. Microsoft recorded a slight gain over the past three years, but demonstrated substantial volatility — rising dramatically in 2007, falling sharply in 2008, and recovering strongly since. The mutual fund has had by far the most stable performance of the three. The fund is slightly down over the three-year period and was below its starting value for most of that time. However, for most of 2009 the mutual fund was performing well above both Microsoft and the Dow. The Dow is the poorest performer of the three, demonstrating surprising volatility during this period and declining more than 10% over the past three years.
Overall, the Fidelity Asset Manager 20% has performed fairly well. The fund's high level of debt and money market holdings has allowed it to weather the recent economic downturn, and the fund has nearly recovered from its nadir in early January 2009. The fund did fail to outperform Microsoft, which itself significantly outperformed market expectations. This indicates that even though Microsoft holds a greater percentage of its assets in cash, it is still able to generate sufficient returns from its invested assets to outperform the market.
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