FINA312 / 517 13S

FUND MANAGEMENT SIMULATION

PROJECT Report 01

01

Item
Name

Passive Fund
Telecom Corporation etc

Active Fund
PEC etc

02

Benchmark

Maximum of 5% tracking error Has to above the average avenue of the

on performance of NZX50

03

04
05

performance of TSX

Initial Asset 95% in component stocks of 95% in stocks, 5% in cash

Allocation

NZX50 and 5% cash

Risk Level
Targeted

Low
High
Investors, retirees and the risk Investors willing to accept higher risk

Investors

averse who prefer low risk; and

Institutional

investors

and want to get a higher return from the

who investment with a long-term time

want to earn market return but horizon; and Institutional investors who
dont want excessive risk
06

want an investment that will outperform

Objectives

the benchmark index

To follow the movement of the Be efficiency and investing in various

of Funds

trends

and

be

consistent, instruments, monitoring the marketing

provide useful information and conditions and decrease the risk of fund
technology to help investors as low as possible, help investors to get
07

Constraints

decision making
At any time, the fund must:-

of Funds

have

no

exposure

more profit as well

At any time, the fund must:in

be limited to a minimum of 45% of

derivatives;

size of fund in equities;

be limited to NZX stocks

be limited to a maximum of 55% of

only;

size of fund in fixed income

be limited to a maximum of

instruments;

20% of size of fund in fixed

be limited to a maximum exposure

income instruments; and

in a single stock of 15% of size of

have minimum 10% cash

fund; and

holding
08

Initial

have minimum 10% cash holding

As per NZX50

Sectoral
allocation

(DIXON, 2012)
09

Stock

Steady change of stock

price
Successful companies

stocks
Equity securities
NZX50
Risk
Rating of securities

MACD
RSI

Selection
Strategy

10

Initial
Stock

11

Filtering
Trading
technical

Economy
Industry
Stock

Yield return of stocks

Capitalizations

MACD
RSI

analysis
tools

Reasoning and Rationale

Item 01: We choose four stocks (Telecom etc) from NZX50 as passive fund, and choose four
stocks (Pengrowth Energy Corporation etc) from TSX as active fund.
Item 02: The bench mark in passive fund is that maximum of 5% tracking error on
performance of NZX50, it means these stocks trend is much similar with NZX50 index trend.

Item03: We have put 95% of initial asset into stocks and 5% in cash both in passive found
and active found.
Item 04: For the passive fund, the risk level is low because of that its profit return depends
on the market average revenue and its cost of manage is low. Whereas for active found, it
wants a higher profit return than passive fund, therefore it is high risk by managers moves in
short-term.

Item 05: The passive fund has lower risk than the active fund so it makes the passive fund
more appropriate for retirees and small investors. According to this reason, we find that the
active fund is more suitable for the younger and larger investors that desire a higher return
from their investment.
Item 06: Our objectives are to help investors fulfil their investment goals by offering the two
different funds suited for different investment objectives.
Item 07: We have chosen to not invest in derivatives in order to keep the portfolio risk to a
minimum as investors in passive funds tend to be risk averse. The passive fund is limited to
NZX stocks only because of the ease of gaining information on these companies and making
better informed judgments. This will also reduce the risk associated with exchange rate
fluctuations. The maximum of 20% in fixed income is set to provide a certain level of
stability to the fund. The 10% cash holding is to be maintained in case of redemption by
investors. For active funds, the reason for New Zealand stocks is the same reason as we chose
for the passive fund. By setting a minimum amount of 45% to be invested in shares, the fund
will be assured of remaining active, as allowing too much to be invested in other types of
investment will undermine the activeness off the fund. This will provide a higher return at
this percentage due to the higher risk of the shares. We have allowed for a larger amount of
fixed income instruments (55%) due to the higher risk of the stocks. The maximum exposure
of 15% in a single stock is to guarantee diversification within the portfolio.

Item 08: For passive portfolio, these stocks comes from NZX50, so the initial sectoral
allocation is according to NZX50 allocation which includes property, services, investment,
primary, energy and foods. For active fund, these stocks are Canadian stocks (TSX) and the
energy and financial stocks dominate in TSX, which both are 20%. The second sector is
industrials which is 14%. Other sectors and industries from larger to smaller are industrials,
consumer discretionary, materials, consumer staples, health care and cash.
Item 09: For the passive portfolio, the strategies of choosing stock are depending on their
changes of stock price, equity securities, in addition, we prefer to choose big and successful
companies because we think it is more safety. For the active portfolio, the factor of stock,
economy and industry should be considered, because this kind of stocks would be more risky,
so it needs to understand what level investors will face.
Item 10: The passive portfolio stocks are from NZX50. These kind of companies are big and
famous in New Zealand, so we look at their stock price moving and other information to find
whether this stock has more risk or not. During this filtering, we choose some less risky
stocks to invest. For the active portfolio stocks, the main point is making profits much and
quick, so it will be with much risky. Therefore, we prefer to find stocks yield return and
capitalization.
Item 11: For both portfolios, Moving Average Convergence Divergence (MACD) and
Relative Strength Index (RSI) are being used as the trading technical analysis tools. . MACD
is the trend indicator that can let investors know what time is good to buy or sell stocks.