Investment Strategies and Portfolio Management: Case of Nelly Capital - Coursework Example

Investment Strategies and Portfolio Management 15 College: Word Count: 2257 Investment Strategies and Portfolio Management 2014/15 Nelly Capital The success and ability of Nelly Capital inevitably relies on its investment committee to make rational judgments on its future strategic asset allocation and tactical asset allocation ranges (Darst 2008). Anything short of this will render the firm vulnerable following the ever increasing fierce competition. There is no single time in any investment where the withdrawal of funds should exceed the funds inflow as forecasted for the June 2015. Indeed, the situation becomes more complicated since the mentioned cash outflow is never meant for new investments but rather perpetually leaving the firm. For the company to thrive the fierce competition, they investment committee must rethink the decision to strategically and tactically revamp the looming inevitable collapse should the forecasted withdrawal by member validates. The central framework or concern the should influence the decisions at the meeting is how the firm investment committee can strategically and tactically realize a more cash inflow from new and existing contributors to support the withdrawal. In short, before any cash withdrawal from the members is permitted, there must be the unquestionable strategy of withdrawals even if it calls for pleading with the members never to withdraw in masses. The analysis of the current situation future strategic asset allocation and tactical asset allocation ranges strategic reveals a weaker framework to stand the impending cash outflow. Therefore, the contributors’ primary aim of achieving growth in value to finance an educational objective such student’s university fees stand to be shuttered should the committee fail to revamp the looming mishaps. Despite, the initial contract the permitting the eligibility of the contributor to withdraw their money after the fourth year, the chief objective was never to withdraw in masses but to ensure to contribute funds to support the education and to add value to the education-hungry students who might be unprivileged though gifted and talented alongside possessing higher learning abilities. Current issues in the investment environment The committee should know that currently, their strategic and tactical asset allocation can never support the forecasted member withdrawal. This is demonstrated by the fact that cash withdrawal exceeds the cash inflow. This can be illustrated; cash withdrawal by members less cash inflow from existing and new members divided by total asset gives a percentage of six. The interpretation of the six percent is worse for the firm since there would be more cash outflow than inflow, and thus the firm will be unable to fund its projects. Also, it should be clear that there is increased competition from similar firms, and, therefore, all strategies currently embraced must work towards developing a competitive advantage. Therefore, the investment committee must put in place better strategies to ensure that cash outflow do not exceed the cash inflow. To this end, I will explain to the committee the concept of the strategic asset allocation and tactical asset allocation ranges. The firm committee must clearly aim at establishment appropriate asset mix. The committee must understand that this is a dynamic process and central to the determination of the overall risks and return attached to their portfolio. The committee should develop a portfolio’s asset mix that reflects the firm’s goal at all time. Therefore, I will showcase various strategies of the effective establishment of asset allocation and further analyze their principle management styles. Strategic Allocation Here, the committee must clearly understand the whole mechanism. The committee must know the need to set the target allocations and periodically rebalance the portfolio back to the set outlined targets as the return on investment skew the initial asset allocation percentage. The committee must further understand the need to uphold the principle of a ‘buy and hold’ instead of the active trading mechanism. The committee must further appreciate that asset allocation target are changeable with time. They should always be keen on checking the changes in the goals of the client alongside the client’s needs. In fact, the college or university funding time horizon will always grow shorter. The strategic asset allocation establishes and complies with the base policy mix that captures a proportional combination of assets driven by the particularly expected returns for each class of assets. Therefore, the committee should understand the constant weighing Assets Allocation since strategic asset allocation rests a buy-and-hold mechanism. The committee should understand that the shift in values of assets triggers a drift from the original established policy mix. Hence, the committee must consider embracing a constant weighing strategy to asset allocation. Therefore, the committee of investment at Nelly Capital will persistently rebalance their portfolio (Campbell at al. 2002). The investment committee must check for any asset declining in value and consider purchasing more of it and sell the asset as the value rises. However, the investment committee must also fathom that there is no hard-and-fast principle guiding the timing portfolio rebalancing with respect to constant-weighing asset allocation. Nonetheless, the portfolio must be rebalanced to its initial mix should any particular asset class moves above 5% relative to its original value. Tactical Asset Allocation The principle behind tactical asset allocation is that it permits a range of percentages per individual asset class that should always be between 40 to 50 percent in the case of stocks. The 40-50% is the minimum and maximum acceptable percentages that warrant IA to exploit the opportunity presented by the market conditions within the stated limits. Therefore, market time particularly with respect to minor form is guaranteed by the IA move higher end of the range with a better expectation of returns from the stocks but downward movement in case of a bleak economic outlook. The tactical asset allocation helps the firm to revamp the situation as strategic asset allocation becomes relatively rigid in the long run. Therefore, the firm must consider indulging in occasional short-term, tactical deviations from the mix to maximize on the unusual and exceptional investment opportunities. Such flexibility adds a market timing ingredient to the portfolio permitting the firm to take part in economic conditions favorable for a particular class of assets relative to the others. The tactical asset allocation is linked to a moderate active strategy. The reason is that the entire strategic asset mix is re-incorporated when the desired short-term profits are accomplished. However, the active strategy calls for particular discipline since the investment committee has to recognize initially when the short-run opportunities have run their course and subsequently rebalance the portfolio to the long-run asset position. Passive and Active Investment The committee must always be equipped with the clear distinction between these investment concepts before making any investment strategies. Indeed, these terms determine whether it should be a tactical or strategic asset allocation. The strategic asset allocation is always connected to passive investment mechanism, but tactical asset allocation relates to active investment style (Schneeweis at al. 2010). The active investment is currently required in this case in order to help the firm occasionally deviate and engage in short term investment and later rebalance to the passive investment. The firm must engage in active investment to enable it accrues cash to correct the situation by increasing the cash inflows. There is a need for immediate embracing of a further asset diversification. The diversification allocation is an integral strategy of active investment. Alternatives for Tactical Asset and Plausible Strategic Allocations Dynamic Asset Allocation Dynamic asset allocation is the tactical strategy that helps the firm to adjust the mix of assets constantly due to rise and fall of the markets situations, as well as weakening and strengthening of the firm. In this, both conditions affect the Nelly Capital hence the inevitability of dynamic asset allocation (Rice at al. 2012). For example, we are told of the fierce competition in the market hence affecting the firm’s ability to survive with the passive strategy. Moreover, the market is always in the movements falling and rising and hence the firm must check for those assets values and sell or buy when a particular asset value rises and declines respectively. Putting this into perspective, it is true that the firm is weakening since there will be more cash outflows and fewer inflows. Therefore, should the company remain passive and maintain the strategic asset allocation, it stands to collapse holding the competition constant. Therefore, the Company must re-allocate part of the money held either in bonds or equities and added it to the only 4% left for active tactical strategy. In so doing, the firm will benefit from the short-term investment and adds to the cash inflow and thus closing the gap between cash outflow and inflow. Indeed, the primary goal that the investment committee should stress on how to make the inflow of the investment surpasses the withdrawals by members. The firm must, therefore, apply this direct opposite to constant-weighing investment and sell those assets that are declining shift such money to tactical active investment. Insured Asset Allocation The insured asset allocation is also feasible in this case. The investment committee must establish a base portfolio value upon which such a portfolio is never permitted to decline. This will ensure that, the cash outflow do not outweigh the cash inflow as it supports the principle of buy-and-hold strategy. Therefore, the top management will check on the movement of the portfolio with respect to its achievement against it base and then embrace active management to increase the portfolio once the portfolio’s return is above its base (Nyholm 2008). However, should the portfolio decline past its base value, the committee will consider investing in risk-free assets to ensure a fixed base value. In fact, the investment committee must even consider re-allocating the assets or overhauling the entire investment strategy (Lee 2000). The community must proactively understand the appropriateness of insured asset allocation to risk aversion. Currently, the firm does not effectively practice asset diversification as it only engages in risky assets such as equities and bonds hence difficulty to averse risk of fluctuating market prices. Therefore, by setting a baseline under which the portfolio is never permitted to decline, the firm will be risk aversive, and its security guaranteed (Reilly & Brown 2012). In fact, despite the demand by members to withdraw their cash, it will minimize the possibility of such withdrawal surpassing the inflows from the new and existing members added to the returns on investments. Integrated Asset Allocation The Nelly Capital investment committee must adopt an effective integrated Asset Allocation strategy. The committee will consider their economic expectations as well as the risks attached to establishing an asset portfolio (Maginn 2007). The Integrated Asset Allocation takes into consideration both investment risk tolerance and expectation for future market returns. There is a need for the investment committee to embrace integrated asset allocation strategy that accounts for the changes in capital markets and risk tolerance. Therefore, it saves the Nelly Capital the time and cost associated with conflicting investment where particular strategies compete. Recommendations Asset Diversification The analysis of the current asset allocation mix falls short of effective diversification. The initial process in investment has however been met by the firm as they have determined the target asset allocation percentages. For instance, within the bonds, little diversification is demonstrated and, therefore, the committee should incorporate other types of bonds besides the corporate and government bonds (Carrel 2008). This will ensure increased returns on bonds than limiting it only to the two types of bonds hence helping the firm to increase its cash inflow to cater for the withdrawals. In addition, the investment committee needs to dig deeper and uncover all the possible options within the corporate bond category. The committee should then examine the lucrative investment by selecting the short term, convertible and high-yield instead of long-term, investment-grade and then rebalance back to the long term once they restored the situation where the inflow should exceed the outflow. Further, the investment committee must clearly understand the concept of market capitalization (Litterman & Goldman Sachs Asset Management. 2003). Here, the committee must diversify across stocks based on various market capitalizations either small-cap stocks or micro-cap stocks based on the evaluation of market fluctuations. Therefore, following the expected inability by the Nelly Capital to support the withdrawal, reliance on new and existing contributions will be disastrous once the members start to withdraw their funds. There is, therefore, a need for the committee to focus on returns on investment to supplement the contributions to remain relevant. Diversification of funds in various reasonable investments assists the firm to reduce risk in asset mix (Graham & Snelson 2005). However, as the Committee embraces the diversification, they should be keen and solely focus on optimization of portfolio rather than being over diversified that attract serious dangers to the firm. Also, the funds currently should mainly focus on active investments. Conclusion In conclusion, the long term investment (passive) should remain the bedrock but with current situation, it would be relevant for the firm to invest more in short-term investments to get the returns needed to support the withdrawals by members (Ferri 2011). However, the committee will remain keen and always rebalance and move back to the initial passive or strategic portfolio position. The firm should engage in derivatives and other short-term investments that will present the returns in the short-run but ensure that they remain integrative in their management (Collins & Fabozzi 1999). There must be at all a merger between tactical and strategic asset allocation always rebalancing back to the initial strategic asset allocation since the long-term investment are always feasible. Bibliography Campbell, J. Y., Viceira, L. M., & Oxford University Press, 2002, Strategic asset allocation: Portfolio choice for long-term investors. Oxford: Oxford University Press. Campbell, J. Y., Viceira, L. M., & Oxford University Press, 2010, Strategic asset allocation: Portfolio choice for long-term investors. Oxford: Oxford University Press. Carrel, L, 2008, ETFs for the long run: What they are, how they work, and simple strategies for successful long-term investing. Hoboken, N.J: Wiley. Collins, BM., & Fabozzi, FJ, 1999, Derivatives and equity portfolio management. New Hope: Fabozzi Ass. Darst, DM, 2008, The art of asset allocation: Principles and investment strategies for any market. New York: McGraw-Hill. Ferri, RA, 2011, The power of passive investing: More wealth with less work. 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Schneeweis, T, Crowder, GB, & Kazemi, H, 2010, The new science of asset allocation: Risk management in a multi-asset world. Hoboken, N.J: John Wiley. Read More