Investment Portfolio Management Research Paper

Portfolio management is a significant practice in investment organizations. This is because they deal with a range of assets that must be effectively managed for such companies to keep running. This practice entails making decisions regarding the combinations of assets that a company owns and offers to the public. Furthermore, portfolio management involves determining the company’s objectives and the investments that can help attain them (Baptestone & Rabechini, 2018, p. 407). In the current world, the investment industry it faces with a number of issues that have deterred the performance of most companies. Therefore, organizations in this industry have to ensure that they adopt strategies that prevent them from losing their funds. The high competition in the industry is also causing pressure on these companies to manage their assets effectively. Evans Capital is one of the firms in this industry. The company offers several types of assets including bonds, equities, short-term instruments, and cash. By March 2018, the company had assets worth £500 million. Evans Capital has managed to maintain its funds through its 5-year long restriction of withdrawals by their investors. However, the organization’s fund inflows are still reducing and are projected to be less than the outflows by 2019. On this background, the report attempts to evaluate Evans Capital’s current situation and suggest different strategies that the entity needs to adopt for better performance. More specifically, the report contains an evaluation of the current issues in the industry, the company’s objectives and constraints, alternative asset allocation methods, a comparison of active and passive investing, and the appropriate investment style for the company.

Current Issues in Investment
The investment environment is currently facing a number of challenges. The UK is particularly in a difficult situation due to the economic changes that have taken place over the past few years. Seeing that most of the assets that Evans Capital is holding are from the UK, the company is greatly affected by the UK economy. Following the financial crisis of 2008, the UK has made numerous efforts to restore its previous economic growth. However, it has been a long process, and although the economic condition improved after a few years, the UK is now experiencing new challenges that have had a huge impact on investment. This is due to Britain’s decision to separate itself from the European Union. As reported by Ebell and Warren (2016, p. 123), Brexit has contributed significantly to the economic changes affecting the UK.

One of the reasons why the economic condition in the UK is a challenge to the investing environment is the high rate of inflation. The rate of inflation has become a threat to investors, thereby reducing the number of consumers for investment firms. As explained by Onwe and Olarenwaju (2014, p. 195), a high inflation rate is a threat to investors. This is because it leads to a reduction in the purchasing power of their savings, thus decreasing their investment returns. Unfortunately, this problem may take a long time for Britain to resolve. This implies that the investment industry in the UK is likely to keep facing the challenge of reducing consumers.

Additionally, interest rates in the country are inconvenient for investors. According to Wuhan and Khurshid (2015, p. 90), investors rely on high interest rates to gain substantial returns. However, since Brexit, it has been difficult to raise the rates of interest (Dixon & Joy, 2017, p. 8). Although it may be the appropriate step to deal with the high inflation rate, the Bank of England is not in the best position to increase the interest rates. Since the inflation rate increased, the borrowing rate has increased as consumers attempt to keep up with the high cost of living. The appropriate monetary policy to deal with the high credit rate is to maintain high interest rates. This means that the investing business in the UK faces a risk of continuously deteriorating since the number of investors will keep reducing. Brexit has affected the rate of foreign investment as well (Sahr et al., 2016, pp. 45-46). This is because the sterling pound has been depreciating since the vote. This has made companies in the UK unattractive investments. Based on the portfolio balance model, the depreciation of a currency has a negative effect on investment returns. Foreign investors’ confidence is determined by the stability of exchange rates (Khan & Abbas, 2014, p.137). As Chen and Tsang (2013, pp. 187-188) postulate, the International Fischer Effect model indicates that the interest rate differential of two countries can lead to the depreciation or appreciation of a home country’s currency. This implies that the Bank of England’s decision regarding the interest rates of the country may have a detrimental effect of the inflation rate, thus worsening the situation for the investment sector.

The investment industry further faces other challenges caused by the differences in the factors affecting diverse countries. Political factors, particularly, can act as a hindrance to foreign investment. This has been a huge problem in the industry for a long time and still persists. Many companies in the investment sector are seeking to advance their businesses internationally in a bid to expand their markets. However, this expansion is proving difficult as a result of the political risks associated with investing in several nations. According to Elleuch et al. (2015, p. 14442), investors are wary of countries with adverse political conditions. Thus, the performance of investment firms depends on the political stability of the country within which it operates. Besides this, the investment industry worldwide is restricted by the numerous foreign regulations with which they have to comply. As Korutaro and Biekpe (2013, pp. 48) suggest, the regulations of a country may appear too stringent for foreign individuals and firms to invest in companies therein.

Evans Capital’s Objectives and Constraints
The main objectives of Evans Capital include maintaining a large market share and improving its inflow of funds from its investors. These objectives are derived from the company’s current situation. For one, Evans Capital belongs to a highly competitive market. This company has been facing a lot of competition, which has hindered it from attracting a large enough number of investors. For this reason, the organization has to constantly ensure that it offers attractive products to potential investors to remain relevant in the market. Being in a competitive industry puts companies under pressure to attract and maintain consumers. This is because consumers have a significant impact on a company’s profitability.

In addition, this company has a 5-year lock-in period. During this period, the investors cannot withdraw their funds. This is an indication that the firm intends to make sure it always has investors’ funds. The lock-in period is meant to help the firm attain its objective of increasing its investment fund inflow as the firm can control the amount of funding that is withdrawn. Besides, the firm intends to increase its investment funding by improving its investment strategies (Reshidi et al., 2015, p. 30). These strategies may enable the firm to attract more investors over time and maintain higher inflows that outflows of funds.

The attainment of these objectives may be delayed due to the challenges that Evans Capital is facing. The high competition is one of the main hindrances to the success of this firm. This is because Evans Capital’s rivals are making it difficult for the company to attract more investors. This high competition may force the company to compromise its profitability in a bid to provide incentives to its investors. Seeing that they are presented with a wide range of options, investors are likely to choose the company with the most convenient offerings. Thus, Evans Capital may have to increase its interest rates to gain more investors. However, if the company’s rivals adopt a similar strategy and outperform it, Evans Capital faces a risk of being eliminated from the market.

Another challenge that the company is facing is the inability to increase its fund inflows. Although Evans Capital has managed to restrict the outflow of funds, it still faces a threat of having more outflows than inflows by 2019. Based on the firm’s forecast, the fund outflows will be more than the inflows by an average of 6% for the next 5 years. The organization’s performance is dependent on its capital inflows to run its operations (Ajide, 2017, p. 108). Therefore, if the company continues to lose more funds that it gains, it may eventually collapse.

Considering that Evans Capital is UK-based, the company has fallen victim to the impact of Brexit. This means that the firm has been affected by the high rate of inflation, which may be one of the reasons why its fund inflows are reducing. Therefore, the firm may not be able to attract a large number of investors even after introducing new incentives. This is because many of the potential investors are currently unwilling to spend their money. Thus, in spite of the efforts that the company might make to improve its performance, it still depends on the economic condition to improve for the firm to effectively achieve its objectives.
Alternative for Strategic and Tactical Asset Allocations
As stated by Jindal (2016, p. 78), asset allocation is a technique that can be employed to establish an equilibrium between returns and risks associated with investment opportunities. Further, the technique seeks to create a balance between income-focused and growth-focused investment opportunities in a portfolio. There are primarily two main approaches to asset allocation, these are the strategic and tactical asset allocation approaches (Jindal, 2016, p. 78). The two approaches present various alternatives that Evans Capital can utilize to effectively apportion its assets. These alternatives are discussed below.

Strategic Asset Allocation
Asl and Etula (2012. p. 4) opine that strategic asset allocation entails coming up with target allocations followed by a periodical rebalancing of the portfolio. The rebalancing is conducted to ensure the portfolio aligns with the set targets over a long period of time. Moreover, the scholars posit that this is a conventional asset allocation approach which mainly grounded on the modern portfolio theory. This theory hypothesizes that the market is efficient. Thus, it indicates that investors should utilize a static asset allocation strategy to optimize on the efficiency of the market instead of trying to predict the possible future outcomes (Dziwok, 2014, p. 125).

In practical terms, this asset allocation approach provides only one specific alternative which investors can utilize to assign weights to or apportion there securities/assets. This is because it is based on the supposition that unless an investors’ profile changes, his or her asset apportionments should stay fixed (Etula, 2012. p. 5). For instance, if equities at Evans Capital has been historically weighted at 70% and debt at 30%, in case of equities perform better and move to 80%, the strategic asset allocation requires that this should be rebalanced. This entails selling the additional 10% of equities and re-investing it in debt instruments.

Tactical Asset Allocation
According to Dziwok (2014, p. 5), this asset allocation technique entails shifting the proportions of assets held by an investor in various groups with the aim of exploiting certain market inefficiencies or anomalies. The shifting of assets classes is also done with the aim of taking advantage of the sectors that are performing well in an economy. As such, this asset allocation approach enables investors to gain more returns by exploiting certain events in the market (Jindal, 2016, p. 78). Therefore, with this asset allocation strategy, Evans Capital is required to take a more active approach by monitoring the market and altering its long-term targets. This active approach will ensure that the firm is in a position to take full advantage of economic and market opportunities.

This asset allocation approach provides two alternatives which Evans Capital can rely on. These options are the systematic and discretionary tactical asset allocation models. Systematic asset allocation entails the application of complex investment techniques (Faber, 2007, p. 53). This method further relies on abnormalities in the marketplace as well as pricing inefficiencies. The discretionary method, on the other hand, involves the modification of asset allocation with respect to market abnormalities and pricing inefficiencies (Uhl et al., 2015, p. 108).

Passive versus Active Investment Management Approaches
Evans Capital can rely on either of the two core investment management approaches. These are the active and passive approaches to investment management.

Active Investment Management
Cremers et al. (2016, p. 540) postulate that the active investment management entails using measures that are aimed at outperforming the existing benchmark indexes. This means that the investors utilizing this asset management strategy actively monitor the price movements in the market. Moreover, they engage in trend analysis with their main areas of target being the political, market, and economic data. The investors also have to actively examine the industry-specific and firm-specific news to identify crucial information that can raise their levels of returns from a given investment (Ofili, 2014, p. 1). This asset management strategy has several pros which can benefit Evans Capital.

As stated by Ofili (2014, p. 1), one of the pros of this asset management approach is that it enables an investor to easily identify viable investment opportunities. This is because by actively monitoring the market and analyzing the financial and capital markets, a portfolio manager can identify and procure stocks of entities that are that are considered to be unproductive but have great growth potential. This, therefore, will ensure that they gain high returns in the long-term. Besides, the vigorous and comprehensive trend analysis conducted by active managers ensures that pitfalls are avoided (Bird et al., 2013, p. 7). For example, through this approach it possible to discern that a given stock, which is performing well at the moment, is likely to drop by rigorously reviewing the target firm’s accounting practices. This is indicated by the case of Valeant Pharmaceuticals in which the firm’s stock plunged by over forty percent within a day in 2015 due to its fraudulent accounting practices (Grove & Clouse, 2017, p. 836). The managers using the active portfolio management strategy could have easily identified this risk. This is not possible with the passive asset management strategy in which an individual or entity depends on a rigid strategy that does not permit rigorous analysis of opportunities (Cremers et al., 2016, p. 540). Furthermore, the active asset management approach is highly flexible, which ensures that an investor can benefit from forthcoming opportunities in a given market. This is also espoused by the fact that active investors can decide to move from one sector or index to another without any restrictions (Ofili, 2014, p. 2). For example, an active investor can decide to switch from healthcare stocks to energy in an instant. This type of flexibility is not possible with the passive asset management approach.

Based on these benefits, the active investment management approach is ideal for handling the asset with high risk profiles. At Evans Capital, these assets classes include the various types of equities, government bonds, and the short-term security instrument. This is because, it is crucial to closely monitor these assets to avoid potential pitfalls due to the high risks associated with them.

Nevertheless, the approach has its shortcomings. Firstly, it is based on the premise that risk can be suppressed by analyzing trends in the market and using forecasts. This is a fallacy as indicated by the efficient market theory/hypothesis (Ang et al., 2011, p. 166). This theoretical perspective posits that it is impossible to predict price movements in the market since they are efficient. This means that they quickly adjust to both privately and publicly available information (GabrielaŢiţan, 2015, p. 443). The other shortcoming of this approach is that it tends to be costly. This is because the active managers usually bill for their services even in situations where they failed to accurately predict the returns of a given investment opportunity. Additionally, the active managers take portion of the profits earned which lowers the gains (Malkiel, 2013, p. 99).

Passive Investment Management
According to Cremers et al. (2016, p. 540), the passive investment management approach entails utilizing a statistic strategy when it comes to portfolio management. This means that the investors do not alter a given strategy ones it is set. Further, this approach does not require forecasting. As such, with strategy Evans Capital are supposed to implement a fixed and long-term investment strategy. The strategy has several merits with one of these being that it is simpler compared to the active portfolio management approach. This is because it does not conduct an extensive analysis of the market as it only requires an investor to implement a fixed strategy (Ofili, 2014, p. 2). Additionally, it is relatively cheap since it eliminates the high commissions paid to investment managers. Besides, this asset management offers an investor with the opportunity to earn more returns in the long-term since it is not affected by short-term asset price volatilities (Barnes & Scott, 2008, p. 104). Therefore, Evans Capital should utilize the passive asset management when dealing the government bonds. These include the UK and European government bonds. The reason for this is that the two asset classes have low risk profile and returns compared to equities, short-term instruments, and corporate bonds, which mean that they do not need active management.

Nevertheless, Evans Capital cannot rely on the passive investment approach to manage its equities, short-term instruments, and corporate bonds mainly because of its drawbacks. One of these is that it does not provide ways avoiding the short-term price volatilities which usually tend to affect the three classes of assets (Ofili, 2014, p. 2). Additionally, it generates limited return since it does not aim to outperform the market. Thus, it is not ideal for managing equities which requires active monitoring of price movements to take advantage of the high fluxes in returns from shares (Malkiel, 2013, p. 103).

Recommendations for the Appropriate Investment Management Style
The most appropriate investment management style for Evans Capital is active investment. This is based on the analysis of the riskiness of the company’s assets. Considering its asset portfolio, it is clear that Evans Capital is running a highly risky business. One reason for this is that the company’s equities take up 55% of the total assets. Equities are high-risk investments along with other assets which the firm holds such as short-term instruments and bonds. With this investment management style, Evans Capital will have a good chance to keep its risks in check. Seeing how much risk the external environment has caused the company, Evans Capital must ensure that it is managing its internal risks well.

This research report has assessed the current condition of Evans Capital Company and provided recommendations for the strategies that the firm needs to adopt to improve its performance. Based on the analysis, it is evident that Evans Capital belongs to a sector faced with numerous problems that are likely to challenge the business entity for a long time. Being part of the UK market, the company is in a particularly difficult situation. This is due to the adverse economic effects of Brexit. The UK’s economic condition has deteriorated since the Brexit vote. This is evidenced by the high inflation rate and the inconveniently low interest rates. Companies in the investment sector are losing consumers due to the risk of low investment returns. Besides, the investment sector, as a whole, is affected by the political conditions of the countries within which they operate, which are another hindrance to foreign investment. Further, Evans Capital faces difficulties in gaining consumers due to the high competition it is facing. This has put the company at a risk of losing its profits. The company also faces a threat of eventually collapsing since its fund outflows are expected to exceed the inflows in the coming years. The report recommends that the company shifts its asset classes and uses the active asset allocation method. Moreover, the firm should use active investment in order to monitor and manage the risks associated with its assets.

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