Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Final Assessment
MONEY MANAGEMENT
STUDENT ID: 1212425
Table of Contents
Introduction .................................................................................................................................................. 2
Money: A Means to an End....................................................................................................................... 2
My Character and Lifestyle ....................................................................................................................... 2
The Plan................................................................................................................................................. 3
Why Should I Invest?............................................................................................................................. 3
Time Horizon and Risk Profile ................................................................................................................... 3
Investment Vehicles ...................................................................................................................................... 4
Mutual Funds ............................................................................................................................................ 4
Exchange Traded Funds (ETFs).................................................................................................................. 6
Replication Methods used by ETFs ....................................................................................................... 6
Mutual Funds or ETFs? .............................................................................................................................. 7
My Portfolio .................................................................................................................................................. 8
Portfolio Construction Method ................................................................................................................. 8
Equities Exposure Based on Geographical Location ................................................................................. 9
Risk Profile Matching .............................................................................................................................. 10
Analysis of the Individual Components in the Portfolio ......................................................................... 11
Vanguard S&P 500 ETF ........................................................................................................................ 11
iShares Morningstar Large-Cap ........................................................................................................... 12
Templeton Global Bond A Load Waived ............................................................................................. 13
iShares US Energy ETF ......................................................................................................................... 15
PowerShares QQQ ETF ........................................................................................................................ 16
American Funds New World R6 .......................................................................................................... 18
Conclusion ................................................................................................................................................... 19
Bibliography ................................................................................................................................................ 20
Introduction
Believe it or not, a huge portion of our lives is spent thinking about money, wish we had more of it and
wonder how we would spend it. We hear about financial sector in the news and watch it on television,
calculate our income and expenses on a regular basis or might even criticize our loved ones for spending
too much of it.
In essence we continually focus on MONEY 1.
Any item or verifiable record that could function as the medium of exchange, a unit of account and a store of
value is considered money. (Mankiw, 2012)
2
Jean-Jacques Rousseau, was a philosopher, composer and writer of the 18th century. His political philosophies
influenced French Revolution and the modern sociological and educational thoughts. (Bertram, 2010)
1
I love to learn about the lives of people in different settings, and I want to be able to understand their
feelings, hence the selection of teaching as my main job. I love to feel the people in their own life
context and I want to be able to learn different languages currently spoken around the world as the first
step toward this goal. Learning not enough languages has been among the few regrets in my life and I
am sure it will be in the future if I do not act on it now.
I usually spend a good amount of time on planning, and once I believe that the planning part is done
correctly, I try not to act on emotions in the process of plan execution.
The Plan
One of my major plans is to start traveling around the world for 3 years before I am 40 years old and I
plan to stay at least 6 months in the regions with cultural roots that has affected surrounding countries,
so I should be able to financially support myself during that time, maintaining my own lifestyle, and be
able to afford to suspend my jobs during that time. So it brings the idea of investing to forefront.
With the level of return which I should expect from my investment in the mentioned time period I am
willing to accept high level of risk and major fluctuation in my capital without resorting to emotional
behaviors, So I dedicate around 70% percent of my capital to asset classes with relatively higher risks
like equities and around 30% to lower risk fixed-income assets like bonds and cash, and due to the
mentioned time horizon my risk profile would be categorized as Aggressive. (BCGE, 1996)
Investment Vehicles
Investment vehicles are products that are used by investors with the intention of having positive
returns. These vehicles range from certificates of deposit or bonds which are low risk, to stocks, options
and futures which carry higher level of risks but possibly higher returns. (Investopedia, 2015)
Investment in some of the mentioned vehicles, such as stocks, as an individual, would be a time
consuming task, as it needs continuous study of the market to keep track of them. It requires a fairly
high level of knowledge to decide what to buy and when to buy or sell but, even with a high degree of
skills an investor needs to diversify his portfolio to lower the risk which, in turn further complicates the
investment.
These prompted the need for introduction of new investment vehicles called investment funds.
Investment funds are collective investment schemes in which the investors capital are pooled together
to benefit from economies of scale, lower costs, increased diversification, which is usually impossible
with small amounts of money, and hiring of the professional managers who can further increase
efficiency and reduce the risks. It also enables the investors exposure to markets normally unavailable
to them as individual investors.
These investment funds can be actively managed by a team of professional managers who constantly
monitor and select the underlying assets, in the case of mutual funds, or can passively mimic a market
index to replicate its performance, in the case of index-funds or ETFs.
Mutual Funds
A mutual fund is an actively managed investment fund, and the term usually refers to the funds that are
regulated and sold to general public.
Investors purchase their share from the fund itself or through a broker, and cannot purchase the shares
from other investors on the secondary market such as stock markets. (U.S. Securities and Exchange
Commission, 2015)
The price that investors pay for each share of the fund is the funds net asset value (NAV) 5 per share plus
any fees that are charged upon the purchase, such as entry fee 6. This price is based on a forward pricing
mechanism as NAV is calculated usually in 24-hour intervals 7, and is not known exactly at any moment,
the investor will pay the quoted price plus or minus any deviation at the time of NAV recalculation.
The shares in these funds are redeemable which means that when the investor wants to sell his
shares, he sells back to the fund itself or the broker acting on behalf of the fund, at NAV minus any fees
such as redemption fee 8.
As most of these funds 9 are actively managed by professional fund managers, they charge a
management fee 10 while the management team ideally try to allocate the assets under management
(AUM) to the best possible investment opportunities.
A good mutual fund has:
High level of transparency regarding its fund managers, such as their names and their
backgrounds.
Clearly stipulated costs in the form of total expense ratio (TER 11) and not just the management
fees in term sheets.
Clear strategy regarding where the investors money is going to be invested with monthly
manager report.
A good track record 12
Regular, preferably daily, update on NAV calculation and performance.
As fees can reduce investment returns considerably, they are an important factor which investors should
consider when buying a share in mutual funds.
Net asset value of an investment fund is the funds total assets minus its total liabilities but the term NAV is
usually used instead of NAV per Share.
6
Sales Load or Sales Charge terms are sometimes used instead of Entry Fee.
7
Each fund has an authorized administrator to perform regular NAV calculation and registration of relevant
transactions. (Costa, 2011)
8
Deferred Sales Load or Exit Fee are alternate terms which are sometimes used instead of Redemption Fee.
9
There are passively managed mutual funds which track an index.
10
These fees are calculated as a percentage of investors assets and not their profits.
11
TER is calculated by dividing the total fund costs (management fees, trading fees, legal fees, auditor fees and
other operational expenses) by funds total assets. (Investopedia, 2015)
12
Although stellar past performance is not a guarantee for the future returns, it is all we have for now. (Costa,
2011)
5
There is also another popular method of index tracking called synthetic replication in which the
manager instead enters a swap agreement with an investment bank which agrees to pay the index
return in exchange for a fee and any returns on collateral held in ETF portfolio. (Morningstar, 2015)
Since there is no actual trading of security in synthetic method, this method eliminated the tracking
error but comes at the cost of counterparty credit risk. ETFs attempt to minimize this risk by holding
collaterals which are higher in value than the ETFs assets.
It is a ratio of portfolio returns above the return of the benchmark index to the volatility of those returns. The
information ratio measures the ability of the manager to generate excess returns compared to a benchmark index,
it is also shows the consistency of the manager. (Investopedia, 2015)
18
In simple definition alpha is known to represent the value that the fund manager adds to a portfolio.
(Investopedia, 2015)
17
My Portfolio 19
As my country of residences currency is linked to U.S. Dollar, it is logical to go with that currency investing in
vehicles with underlying assets denominated in USD, but as for the vehicles with underlying assets in other
currencies I tried to select vehicles which are USD currency hedged.
20
I said loosely because the fixed-income portion of the portfolio is allocated only to an actively managed fund.
19
Analysis of the total underlying assets in portfolio clearly shows the exposure level to equities in
different geographical locations.
By simply looking at the holdings in the portfolio, someone might think that it matches the Dynamic
risk profile (30% allocated to a bond fund) but upon deeper inspection of what makes the underlying
assets 21, it becomes clear that it matches my stated Aggressive risk profile.
21
Around 49.23% of Templeton Global Funds assets is kept as cash. (Morningstar, 2015)
10
The percentage of investors asset deducted each fiscal year for fund expenses is called Expense Ratio. It
should be noted that transaction fees, sales load and brokerage costs are not included in this ratio. (Morningstar,
2015)
23
The Sharpe Ratio is the measure to calculate the risk-adjusted return of a funds portfolio (Investopedia, 2015)
by dividing the funds annualized excess returns over the risk-free rate (such as U.S. treasury bills rate) by its
annual standard deviation. (Morningstar, 2015) The higher the Sharpe Ratio, the better its risk-adjusted
performance.
24
This is the lowest expense ratio among all funds tracking S&P 500 index. (Morningstar, 2015)
22
11
25
It should be reiterated that past performance is not an indicator of the possible future performance
12
Any commission of sales charge is called Load. There are two flavors of loads, a front-end load which charges
the investor upon the purchase of the fund or a bank-end load which is charged upon the redemption. There is
also another type of load which is called Level-Load or 12b-1 by which the investor is charged annually as long
as it holds the fund. A fund with a level-load no more than 0.25% can call itself a no-load fund in market in market
literature. (Investopedia, 2015)
27
This is included in net expense ratio mentioned above.
26
13
In the following diagram you can see the growth of 10,000 USD investment in this fund vs category and
an index tracking the same category.
Net expense ratio of 0.89% which is expected to reach 0.90% is higher than ETFs but for an actively
managed fund with global exposure is attractively low.
14
Through this ETF I am seeking to achieve broad exposure to U.S energy sector 28. With 34% of underlying
assets invested in integrated oil and gas firms, 31% in exploration and production firms, 17% in
equipment and services companies, 7% in pipelines, 7% in refiners and 7% in drillers, this ETF offers
diverse exposure to various industries that comprise the energy sector. (Morningstar, 2015)
Over 90% of the fund underlying assets are invested in companies which possess an Economic Moat 29,
or sustainable advantage. (Morningstar, 2015)
This ETF net expense ratio of 0.43% is considered high for an ETF but, compared to its category average
of 0.48%, combined with its lower risk it should still be considered as a viable investment vehicle.
I had decided to allocate this portion of portfolio to commodities, but due to recent abnormal high volatility level
of commodities market I was inclined to invest in companies with high correlation to this market instead.
29
By Morningstar definition, a company that has an economic moat has the ability to its competitors at bay.
Network effect, high level of intangible assets, cost advantage, high switching costs for customers and efficient
scale are some of the attributes that can give companies economic moat. (Morningstar, 2015)
28
15
In Infrastructure as a Service IaaS cloud computing model, these computing resources are categorized as
Compute (Processing Power and RAM), Storage and Network Bandwidth which will be abstracted from
hardware subsystem and the allocated to clients.
30
16
With historical cumulative returns of over 190% this ETF is well suited to my high risk profile and the
following chart (Morningstar, 2015) shows the historical 10 year period growth of $10,000 investment in
this ETF compared to its benchmark.
17
68%
Cash
US Stock
Non US Stock
Bond
Other
The fund net expense ratio of 0.65%, compared to 1.56% ratio of the category average (Morningstar,
2015) is very reasonable for an actively managed fund with such high exposure to international equites
market. It is very transparent in posting the managers profiles, strategy and top holdings in the fund,
and its return level vs its associated risk, makes it even more attractive to be included in any portfolio.
18
Conclusion
Today an individual investor is presented with a myriad of investment vehicles and investment
companies that promise high returns on the capital, and unless the investment objectives, time horizon
and level of risks that can be tolerated, is properly identified, the odds are that the investment is likely
to fail to meet the expectations of the investor.
To avoid such scenario, it is crucial that, after properly identifying the investment time horizon and risk
profile, the investor conducts and in-depth research into the available vehicles to evaluate whether
these vehicles had lived up to their promises in the past and have clear strategy in their asset allocation
policies.
Once selected, it is important to note that having too many vehicles in the portfolio can actually lower
the performance of the portfolio so it is a good practice to keep the portfolio simple but yet well
diversified.
It is also worth noting that keeping track of the investment is very important and while over-trading and
emotional behavior are considered to have detrimental effects on the performance of the portfolio,
sometimes rebalancing of the assets is needed to maintain the consistency with the initial allocation.
(Costa, 2011)
Finally every investor should know that if he, himself doesnt care about his money no one else will.
19
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