The Balanced investment portfolio is a portfolio having exposure to different kinds of assets classes, which have varying maturities. The balanced portfolio investment has securities and assets classes that have defined term period plan of investment from short plan to long-term plans of investing. The investment of the portfolio gets divided into different sets of assets classes with different time horizons. Balanced Investment Portfolio is generally suitable for investors who are less or moderate risk averse. The balanced fund gives them the benefits of debt and equity and other assets classes, which have different characteristics. The find usually has a weightage on the debt or secured source of investing and a less focus and weightage to the equity sources and risky assets classes. The debt exposures help the investors earn income in the form of interest earned from investing in the debt sections like the bonds and commercial papers. While the capital growth is functioned by the growing equity or the rising share price of the company (Kindig and Milstein 2018).
The balanced fund provides the benefits of diversification to the investors from investments in varied assets classes. The diversion of fund into various assets class according to the profile and risk and return characteristics feature of the particular assets class provide the benefits of diversification benefit (Chandra 2017). The fund currently has $A1 billion dollars of assets under management available for investments. The return, which could be expected out of the portfolio, will be around 3% plus inflation. The return would be calculated after analyzing a well-diversified portfolio after deducting all the expenses and taxes incurred while transacting the same. The return expected from the assets classes would be a mix of different sources of income like the interest, dividends and rents. The various kinds of assets classes considered, as an asset class for the Balanced Portfolio is Australian Fixed Interest Deposits, Cash, Equity, Real Estate, Overseas Fixed Interest Rate, and Alternative Investments (Petri 2018).
The asset class is diversified in the portfolio, the different kinds of assets involved in the portfolio provides an equal exposure to an investor with the market type fund and safe heaven type assets which includes fixed deposits and cash equivalents. The balanced investment portfolio also focuses on the fact about risk dispersion in the asset classes. The various components and type of assets classes that offers such exposure and benefit of mix return through dent, equity, real estate, commercial papers is through balanced funds. The empirical theory suggests that the balanced fund in the long term has proven better returns and sustainable returns, whereas equity fund and capital market funds has shown volatile returns in the past years. There are different kind of assets classes according to the risk and return characteristic feature incorporated amongst them. The risk hierarchy among the various assets classes (Jenner 2016).
There are different kind of investors along with their risk preferences and their assets class approach. The investors risk preference and there nature can be divided as risk averse person and risk tolerant person and the way of their investing differs the class of investor, which is risk tolerant will opt for equity oriented or pure market fund which is formed by concentration of equity funds as the highest weightage (Altuntas and Dereli 2015). The cash and fixed income securities is given the least amount of weightage in this case. While the balanced fund believes in diversification of investment into various assets classes such that the risk exposure from the same gets mitigated.
Cash and Cash Equivalents and short term investment, the investments are done for shorter period or for horizon which are generally less than six months of time. The cash and cash equivalent is done by the company is done for keeping up the investments in hand. There are certain redemption and investments that occur in the asset management company. There is a certain amount of funds which are parked in the cash and cash equivalents in order to meet these requirements and the daily operating expenses of the fund. The empirical evidence suggests that the return on such kind of assets is composed of various components like the amount parked in the bank, short term treasury and commercial bills and papers. The return from such asset classes is around 2.02% to 2.56% return from treasury rates investment or the risk free rate of return (Arrow 2017).
The return from the one month treasury rates is around 2.02% in the year 2018 itself, the trend for the same is increasing the return has increased from 0.99% to 2.02%. The 3 month and the 6 month treasury rates have also shown a considerable amount of increase (Danielson, Heck and Shaffer 2015). The balanced fund should invest around 5% of their asset under management
The Australian Fixed Rate Interest or the deposit rate is another class that is best suitable for balanced fund portfolio. The fixed interest rate investment is a secured investment with no risk involved. The return calculated from such a fund is that the interest generated from the deposit is the only source of income for the asset class. A fixed interest rate investment is done for such an asset, where the asset class has no risk from the rise or fall in the value or it suffers any additional market or economy risk unlike equities and real estate. The only hindrance to this type of asset class is that the income generated in the form of interests is taxable as per the applicable tax rate in accordance to the Australian taxable income slabs. The trend analysis for the same is shown below, which shows that the interest rate for 6 months is around 2.75% on a minimum investment of about $5,000. Whereas, the return in the 12 month time period is around 2.65%. The asset management house should go with the investment in the six month investment horizon period which would provide a shorter cash turnover with a better return and investment style (Keller and Keuning 2016).
The Equity as an as assets class defines buying and selling share of a company either directly o through a professional portfolio manager. The equity as an assets class provides the benefits of exploration of capital market along with the varied capital market scenarios. The investors investing in this assets class is usually risk tolerant class of investors where the exposure to risk and return is quite high. The return from the asset class is seen in the terms of both dividend and capital appreciation. The asset class provides the best way of exposure to capital market, financial risk and the rewards for the same is quantified by the risk return characteristics. The balanced portfolio should include and allocate a percentage of about 20% of the assets under management in the particular asset class. The assets class is usually risky and will help the portfolio explore risk and rewards characteristics of the capital market. The economic conditions and the capital market factors get included in the portfolio giving a good diversification to the portfolio investors. The return from the asset class is around 13% in the two year trend period, October 2016 to September 15th 2018. The ASX 200 the benchmark index portfolio was chosen as the base for evaluation and trend analysis in the return forecasting period. The benchmark had a value of about 48,118 in the October 2016 and was 60,628 in the year September, 2018. The portfolio can enjoy the booming returns from such assets class where beta is usually greater than 1. The fund investment of 20% would not increase the volatility in the returns and the risk of the portfolio
because of the balance made by the debt oriented funds assets
The real estate as an asset class also provides better returns to the investors with exposures in the form of investing into real estate property and other commercial property’s. The real asset has been the best inflation hedge investment according to the empirical evidence. The real estate is a moderate risk and return characteristic asset class (Hartzell, Sun and Titman 2014). The real estate return for the asset class has been volatile the real asset class has shown volatility in the returns of the index because of the changing economic conditions and changing economic scenario for the same. The asset class would provide the investor of the portfolio of the balanced fund with real estate exposure and diversion benefits among various type of residential and commercial properties. The asset class has provided a superior return but volatile which can be balanced by the stable and moderate volatility assets classes such as equity, which was deemed to have an consistent
The Overseas fixed deposit interest rate could also be explored by the portfolio manager in the form of investing in different forms of fixed arte assets classes, which provides the same assets class approach as the fixed deposit rate, the difference will be exploring the same in the different geographical boundaries. The same would be done in order by investing in countries that offers the highest amount of interest rate on fixed deposits or the risk free investment assets class. The assets class suffers from exposures such as country risk or the sovereign risk and the currency risk which cannot be ignored in such fixed overseas deposit rates (Conejo et al. 2016). The economic or the financial or the business risks does not comes into play in such a scenario. The balanced portfolio should invest an amount which is equal to 15% of the total investments in order to get exposures to the fixed interest rate of various countries offering various kind of risk free treasury products and investment assets class. The balanced portfolio can also have the exposure to foreign currency by such investments. The empirical evidence says that the returns for the same is diverse in nature with different returns provided in different countries that are stable and up to the range of 6.5%.
The Alternative source of investment is the source and type of assets class that is apart from the traditional portfolio approach of assets and liabilities. The assets class includes investments into hedge funds, Real estate investments trusts, commodities, private equity fund and various other assets class. Commodities is one of the best chosen as an alternative source of investment rather than the traditional approach of equities and debt oriented products and services because of the inflation hedging facility the commodity as an asset class provides (Jurek and Stafford 2015). The investments in the alternative investments fund should be considered about 10% of the fund could be allocated to commodities, real estate investment trust funds, private equity and other assets class. The return from these assets classes have usually given a stable returns and consistently better and growing returns. The inflation hedging feature of the commodity as an asset class is one of the best feature of the commodity and thus the investment portfolio should think for considering the asset class because of the diversity present in the asset class and the feature and the underlying if the same. The investment into assets classes such as private equity funds and hedge funds should be well assessed as the risk associated with such an asset class is usually high. The investments into private equity funds involves investments into venture capital funds and startups where the assessment of the future cash flow is not certain and thus should be avoided given the balanced or the secured portfolio approach. The portfolio manager could go for Real Estate Investment Trust which are a certain type of assets class where the funds are invested in a diversified way in the rental and commercial property. The fund is treated and its workings is same as that of a mutual fund companies where the asset class investment is dispersed and the performance for the same could be tracked by the index (Melton et al. 2014).
The summary for the Investment Portfolio is given after the above analysis performed on the various assets classes such as equity, cash and cash equivalents, fixed rate deposits, real estate, overseas fixed rate investments and alternative investments. The total 1 billion funds is diversified according to the portfolio approach of balanced fund. The diversification and the risk preference were the some common factors considered while preparing the investment portfolio (Knetsch and Nagengast 2016).
|
Balanced Investment Portfolio |
||
|
Asset Class |
Amount Invested |
% of Assets Invested |
|
Cash |
5,00,00,000 |
5% |
|
Australian Fixed Rate Deposits |
35,00,00,000 |
35% |
|
Equity |
20,00,00,000 |
20% |
|
Real Estate |
15,00,00,000 |
15% |
|
Overseas Fixed Interest Rate |
15,00,00,000 |
15% |
|
Alternative Investments |
10,00,00,000 |
10% |
|
Total |
1,00,00,00,000 |
100% |
|
Asset Class |
Risk Associated |
% of Assets Invested |
|
Cash |
Low |
5% |
|
Australian Fixed Rate Deposits |
Low |
35% |
|
Equity |
High |
20% |
|
Real Estate |
Medium |
15% |
|
Overseas Fixed Interest Rate |
Medium |
15% |
|
Alternative Investments |
High |
10% |
|
Total |
100% |
There are certain recommendations that should be analyzed and induced in the portfolio is that the assets class of the portfolio is the market and financial risk, which can directly or indirectly influence the asset class return and risk characteristics (Levy 2015). There should be proper analysis of the assets class and the changing market condition under which the assets class operates. Extreme deviations and volatility should be noted down and the reassessment of the portfolio should be done by observing the trend and the quantitative features and qualitative features of the assets class. The reassessment of portfolio is necessary in order to bring in view the changing market conditions and risk return characteristics of the asset class. The investors risk assessment towards the asset class is also one of the important factors to be considered while investments. The principles and guidelines of investment should be followed strictly by the investment portfolio in order to act in the best interest of the investors and the stakeholders of the portfolio.
Reference
Altuntas, S. and Dereli, T., 2015. A novel approach based on DEMATEL method and patent citation analysis for prioritizing a portfolio of investment projects. Expert systems with Applications, 42(3), pp.1003-1012.
Arrow, K.J., 2017. Optimal capital policy with irreversible investment. In Value, capital and growth (pp. 1-20). Routledge.
Barchart.com. (2018). Treasury Rates, Interest Rates, Yields – Barchart.com. [online] Available at: https://www.barchart.com/economy/interest-rates [Accessed 17 Sep. 2018].
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
Conejo, A.J., Baringo, L., Kazempour, S.J. and Siddiqui, A.S., 2016. Deciding on Alternative Investments: A Real Options Approach. In Investment in Electricity Generation and Transmission (pp. 269-325). Springer, Cham.
Danielson, M.G., Heck, J.L. and Shaffer, D., 2015. Shareholder theory–how opponents and proponents both get it wrong.
Hartzell, J.C., Sun, L. and Titman, S., 2014. Institutional investors as monitors of corporate diversification decisions: Evidence from real estate investment trusts. Journal of Corporate Finance, 25, pp.61-72.
Investing.com Australia. (2018). S&P/ASX 200 Net Total Return Historical Rates – Investing.com AU. [online] Available at: https://au.investing.com/indices/s-p-asx-200-net-total-return-historical-data [Accessed 17 Sep. 2018].
Jenner, S., 2016. Transforming government and public services: realising benefits through project portfolio management. Routledge.
Jurek, J.W. and Stafford, E., 2015. The cost of capital for alternative investments. The Journal of Finance, 70(5), pp.2185-2226
Keller, W. and Keuning, J.W., 2016. Protective Asset Allocation (PAA): A Simple Momentum-Based Alternative for Term Deposits.
Kindig, D.A. and Milstein, B., 2018. A Balanced Investment Portfolio For Equitable Health And Well-Being Is An Imperative, And Within Reach. Health Affairs, 37(4), pp.579-584.
Knetsch, T. and Nagengast, A., 2016. On the dynamics of the investment income balance.
Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty. Springer.
Mason, C. and Harrison, R., 2016. Spatial variations in the role of equity investment in the financing of SMEs.
Melton, G., Gibbons, G. and Harrington, B., JOHN HANCOCK LIFE INSURANCE CO (USA), 2014. Methods and apparatus for performing an analysis of sustainability of a retirement investment portfolio. U.S. Patent Application 13/607,292.
Petri, P.A., 2018. The interdependence of trade and investment in the Pacific. In Corporate links and foreign direct investment in Asia and the Pacific (pp. 29-55). Routledge.
RateCity.com.au. (2018). Best Fixed Interest Rates Australia. [online] Available at: https://www.ratecity.com.au/term-deposits/best-fixed-interest-rates-australia [Accessed 17 Sep. 2018].
Tradingeconomics.com. (2018). Australia House Price Index | 2002-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/australia/housing-index [Accessed 17 Sep. 2018].
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