coming up with investments from three geographical regions

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Executive Summary

In coming up with investments from three geographical regions, we chose the US market, the Australian market and the Taiwanese market.  In recommending investments in this market, we chose US equities through a mutual fund, Reliance Growth, an Australian Gold Miner, Newcrest Mining Ltd, and using Taiwanese Index Options, combined with Australian bonds to speculate on an Asian growth market. In making these recommendations we have also recommended a hedging policy to secure our investments in US dollars.  The philosophy behind our investment is that equity exposure is a must, and because of this using gold and its negative correlation to US equities offers true diversification for little cost.  Finally to take advantage of the current condition of markets, and the emerging growth stories coming out of Asia, we have decided to speculate on Taiwanese Index call options, but have protected our principle by investing most of the funds allocated for this Asian excursion in Australian bonds.  In doing so we have picked appropriately liquid markets with the amount of money we have been assigned to research upon  and as will be evident much consideration has been made in coming up with our recommendations and how our client should go about pursuing them.

Recommended Portfolio:

As a junior analyst in an investment bank, the group has been given the task of recommending and marketing a portfolio of three securities to a valued client.  As an opportunity to show our knowledge and analytical abilities, issues such as market structural differences, transaction costs and liquidity ad time frames will be taken into account.  With an investment capacity of over 10 million US dollars to be shared between three investments the market impact costs could substantial if not catered for in the investments.  This is also part of a wider portfolio that to us is unknown, and as such our investments should be able to stand on their own merits as a solid and well justified medium term portfolio.  As such we have chosen a diverse portfolio, sourced from three regions utilising different classes of assets.  The investments will be looked at, both on their individual appeal, and also on how well they contribute to the suggested portfolio.  Much emphasis has been placed on the balance of this portfolio, but room has still been left to speculate.  The following will outline our investment philosophy and will look into the reasoning behind our investment decisions.

The US market

Our foray into the US market will be through the Reliance Growth fund.  We see the main goal and purpose of investing in the US market will be to obtain a reasonable exposure to the market and its risks, whilst still earning a competitive return.  In keeping with this vision, our search was for a fund that spread its portfolio over a variety of stocks in keeping with our investment strategy for the US.

Much consideration of the current global economic climate is inevitable in today’s world of investment.  This is especially so when considering an investment in the US.  Whilst it is easy to dwell on the lingering effects of 9/11, it would also be foolish to attribute too much negative sentiment surrounding these extraordinary events.  After 9/11 the US market recovered quickly.  Not only that, but the global economy has also shown strong growth.  According to a report from the IMF, the global economy will grow this year by 5%, the highest rate of growth in nearly three decades (BBC 29 September, 2004).  Therefore, all the factors do cautiously indicate that the US market is facing another fast growing period.  There are however many factors that threaten the US market.  More specifically:

  • A high oil price

The oil price has reached historical highs which will affect not only the pace of the US economic recovery, but also the growth of the wider global economy.

  • The shadow of possible terrorist attacks

After the war in Iraq, the confidence of investors may still be low, and the lingering sentiments of the past could quickly adversely affect the investment market in the US should anything sudden happen.

  • Interest rates

The US Federal Reserve is expected to increase the benchmark lending rate by a quarter of a percentage point in the next three months.  A higher rate of interest may reduce borrowings that may be currently used for investment in the markets and as such the market may fall.

After carefully considering the factors above and our investment strategy, we selected the Reliance Growth Fund () to be our investment in the US market.

Portfolio analysis

The last two years have been marvellous for Reliance Growth.  After gaining 55.75% in 2002, Reliance Growth is up another 117.78% for the year till December 1, 2003 (Reliance Growth Offer Document, 2003).  The fund is also unique for the diversity of stocks it holds, be it large or small-cap, growth or value stocks.  With such a strong performance, it is a compelling case, despite its high portfolio turnover.

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Through the major part of Reliance Growth’s portfolio consists of quality stocks, it hardly holds anything for long.  No matter what the stock, the fund will keep on selling and buying at every rise or fall in their share prices.  Thus on occasions it gets out of stocks before any gain is realised.  The other thing of note about this fund is that is does not hesitate to be the only mutual fund to own a new stock.

If it isn’t already apparent from its performance, the fund is also more partial to mid-caps that other diversified equity ...

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