6 www.computerweekly.com
7 www.computerweekly.com
8 www.flug-revue.rotor.com
9 en.wikipedia.org/wiki/British_Airways
3.1c Performance of Shares
the two graphs below show the share price movements of British Airways during my project which started on the 2nd April 2007 (graph 1) and that ended on the 11th of May 2007 (graph 2).
Graph 1
Share Charts for British Airways (BAY)
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The first couple of days went well as I was making a profit until the 11th (shown with the circled black dot) where share price dropped to 503.50 pence from 512.50 pence because Iberia (Madrid: IBLA.MC - news) is hoping British Airways (LSE: BAY.L - news) will increase its stake to fend off a private equity offer10.
10 www.uk-airport-news.info/heathrow-airport-news-110407a.htm
Graph 2
Share Charts for British Airways (BAY)
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On the 2nd May share price increased to 519.00 pence from 505.00 pence (shown with the 2nd circled black dot after 1st May) as the group said that fuel surcharge on longhaul flights of less than nine hours will rise from £30 per sector to £33 and on longer flights from £35 per sector to £38 from May 2nd. It is because of this announcement the share prices had a crash after as you can see the line declines till the 10th where it slowly increases slightly11.
11 www.iii.co.uk (past news 2nd April 2007)
3.2 Experian Group Ltd (EXPN.L)
3.2a Brief Background
Experian is a global information solutions company, with operations in over 30 countries around the world. The largest operation, Experian North America, is a consumer credit reporting agency, considered one of the "big three" along with Equifax and TransUnion in that business in the United States. Experian employs approximately 12,500 people in 34 countries and as of 2005 had clients in more than 60 countries. According to its corporate site, Experian's annual sales exceed $3.1 billion USD (£1.4 billion) and it has assets of $7.644 billion12.
3.2b Shares Selection Motive
I chose to buy the least amount of shares from my project for Experian as I bought only 1,000 (units) shares because I enjoy risk tolerance and wanted to take a gamble on altleast one of my chosen companies. (below are other reasons)
-
As you can see from the performance graph from above Experian’s shares started to do very well at the end of March and although it dropped right at the end of March it shot up high on the 1st April and on the 2nd I decided to buy 1,000 shares because this pattern would remain steady for a few weeks
12 en.wikipedia.org/wiki/Experian
3.2c Performance of Shares
Share Charts for Experian (EXPN)
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As the first circle shows on the 24th of April share prices dropped to 567.50 pence from 578.00 pence this is probably because the company was reported to have bought Hitwise, an internet marketing information company, for about 240 million USD as it repositions its business to meet the online needs of its clients13.
- Since the purchase of Hitwise Experian’s share prices started to increase to 592 pence from 577 pence.
13 www.encyclopedia.com
3.3 Lloyds TSB Group Plc (LLOY.L)
3.3a Brief Background
Lloyds TSB Group plc is a banking and insurance group in the United Kingdom. It was formed in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank. They are currently the fifth largest banking group in the UK, its other subsidiaries include the mortgage bank Cheltenham and Gloucester; life assurance company Scottish Widows; and finance house Blackhorse. In 2000, the group acquired Scottish Widows, a mutual life assurance company based in Edinburgh in a deal worth £7 billion. This made the group the second largest provider of life assurance and pensions in the UK after the Prudential14.
3.3b Shares Selection Motive
I chose to buy 3,000 (units) shares of Llyods TSB because of the following reasons:
-
In September 2000, Lloyds TSB purchased Chartered Trust from the Standard Chartered Bank for £627m to form Lloyds TSB Asset Finance Division which provides motor, retail and personal finance in the United Kingdom under the trading name Black Horse15.
-
It is the 5th largest bank16 and had a price of 560 pence at the time which was cheaper than the other top 4 banks which weren’t doing as well at the time.
- The bank has been giving out a dividend of 23.5 pence since 2001.
-
The company has a P/E of 13.2717.
14 en.wikipedia.org/wiki/Lloyds_TSB
15 en.wikipedia.org/wiki/Lloyds_TSB
16 en.wikipedia.org/wiki/Lloyds_TSB
17 www.reuters.co.uk
3.3c Performance of Shares
Share Charts for Llyods TSB (LLOY)
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The first black dot shows where the company’s share price increased on the 13th April from 570.50 pence to 574.50 pence because the bank has announced that 62,000 Lloyds TSB employees are to share in a £252m windfall payout from the company's shares and bonus schemes. This means that £40m worth of shares will be awarded - with staff getting 3% of their annual salary in shares up to a maximum of £3,000 18.
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The second black dot on the graph shows where the share price fell to 573 pence (1st May) from 581 pence (30th April).
18 www.amicustheunion.org/files/Fina
3.4 Marks & Spencer Group Plc (MKS.L)
3.4a Brief Background
Marks & Spencer plc is a British retailer, with several branches outside of the UK. It is one of the most widely recognised chain stores in the UK and is the largest clothing retailer in the UK, as well as being a multi-billion pound food retailer. In 1998 it became the first British retailer to make a profit before tax of over £1 billion. As of 2007 it is growing further and rapidly increasing profitability, but it is now less than one quarter of the size of the UK's largest and most profitable retailer which is Tesco19.
3.4b Shares Selection Motive
I chose to buy 6,000 (units) shares of Marks & Spencer because of the following reasons:
- In 2006 the ‘Look Behind the Label’ marketing campaign was introduced . The aim of this campaign was to highlight to customers, the various ethical and environmentally friendly aspects, of the production and sourcing methods engaged in by M&S including:
- Fairtrade products
- Sustainable fishing
- Environmentally friendly textile dyes
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The company is also looking at how stores can be made more environmentally friendly.20
- All coffee and tea sold in M&S stores is now Fairtrade, in addition the company offers clothing lines made from Fairtrade Cotton in selected departments. This is a very important factor to many consumers who enjoy buying ethically.
-
M&S has a net profit of 520.6 million as of April 2006 which is an increase of 32% from their previous year’s net profit figure of 355 million21.
- M&S’s share price has increased since 1-Sep-06 when it was 605 pence and on the start of the project it was (2-Apr-07) 694 pence and judging from M&S’s sales annual figures (please review the graphs on the next page) and share price trend I expect it to keep increasing. (The share price is currently 726.50 pence as of 14-May-07.
19 en.wikipedia.org/wiki/Marks_and_Spencer
20 en.wikipedia.org/wiki/Marks_and_Spencer
21 en.wikipedia.org/wiki/Marks_and_Spencer
Graph 1 Graph 2
3.4c Performance of Shares
Share Charts for Marks & Spencer (MKS)
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On the 23rd April M&S share price fell to 709 pence from 712.50 pence (20th April) this is because the company changed care labels on almost three-quarters of its clothing ranges in a bid to encourage customers to lower washing temperatures to 30°C.22
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On the 1st May M&S share price boosted to 746 pence which is a huge increase from 30th April when it was 742 pence this is because the icon the company has used for their promotion is a pop sensation Bryan Ferry and there were rumours of the icon and M&S splitting up but on the 1st of may it was established that this was not the case. 23
22 http://www.just-style.com/article.aspx?id=97096
23 http://en.wikipedia.org/wiki/Bryan_Ferry
3.5 Tesco Plc (TSCO.L)
3.5a Brief Background
Tesco plc is a UK-based international grocery and general merchandising retail chain. It is the largest British retailer by both global sales and domestic market share, is the world's third-largest grocery retailer,[2] and is the fourth-largest retailer behind Wal-Mart of the United States, Carrefour of France, and The Home Depot of the United States. Tesco's revenue for the 52 weeks to 24 February 2007 was £46.6 billion. Group profit before tax was £2.653 billion for the 52 week period and £2.648 billion after tax. Across all categories, over £1 in every £8 of UK retail sales is spent at Tesco. The company has a total market value of about £36,761.71m (April 2007).24
3.5b Shares Selection Motive
I chose to buy 2,306 (units) shares of Tesco because of the following reasons:
-
Tesco's share of the UK grocery market in the 12 weeks to 25 February 2007 was 31.25%. 25
- Tesco has made a very public commitment to corporate social responsibility, in the form of contributions of 1.87% in 2006 of its pre-tax profits to charities/local community organisations. This compares favourably with Marks & Spencer's 1.51%
- Tesco has a P/E ratio 23.4 and
- Tesco has a dividend yield 2.1% which is much higher than J Sainsbury which holds 1.4 the industry currently holds 1.15 therefore Tesco is very well off
-
The grocery market is expanding at record rates, the latest data from TNS Worldpanel has revealed, with the UK's top three supermarkets increasing their market share. 26
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The overall market has expanded by 6%, with the top three supermarket chains posting strong growth and lifting their combined share by 1.5% in the 12-weeks to 22 April. Tesco, the market leader, increased its share by 0.6% to 31.4%. Asda's share was up of 0.5% to 16.8% while Sainsbury's share grew 0.4% to 16.4%. This was the main reason why I chose to invest in Tesco.27
24 en.wikipedia.org/wiki/Tesco
25 en.wikipedia.org/wiki/Tesco
26 www.just-food.com/articlerelated.aspx?id=98353&lk=nap
27 newsweaver.ie/trinityenews/e_article000808715.cfm
3.5c Performance of Shares
Share Charts for Tesco (TSCO)
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On the 1st May Tesco’s share price fell to 457 pence from 462.50 pence because on that date Tesco remained tight-lipped on fresh reports coming out of Australia that it has formally joined the race to buy local retailer Coles Group.28
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The second black dot marked on the graph shows that Tesco’s share price increased heavily to 473.75 pence on the 4th May from 463.75 pence (3rd May) this is because the UK’s grocery industry is booming The overall market has expanded by 6%, Tesco, the market leader, increased its share by 0.6% to 31.4%.29
28 www.just-food.com/article.aspx?ID=98314
29 newsweaver.ie/trinityenews/e_article000808715.cfm
4. Risk & Return Analysis
Anyone who wishes to go into investment to buy and sell shares they must be aware of the risk that is involved. It is important to understand the level of risk before investing. There are three types of people when talking about risks as Atrill states there is the ‘Risk-seeking investor’ who enjoy a bit of gambling and will select the project with the most risks. There is also the ‘Risk-neutral investor’ who don’t really care much for high or low risk, given two projects with the same expected return this investor wouldn’t have any sort of preference. Finally there is the ‘Risk-averse investor’ who will avoid a project with any sort of risk as they prefer to be on the risk free zone all the time. I see my self as a an investor who cares for some proportions of risk to make the project exciting and rest risk free and this comes closest to the ‘Risk-neutral investor’ 30. Risk is generally equated with the potential of an investment to generate financial loss. Return is the usual measure of performance. As investments that offer higher potential for total return generally carry a higher potential for risk, informed investors don’t simply seek to maximize returns.31
4.1 Risk Grades – Investment portfolio analysis
I have used RiskGrades’s website to help measure the risk involved in my investment portfolio. A RiskGrade measure is an open and transparent benchmark to measure the risk of the world's financial assets it also allows for a comparison of investment risk across all asset classes, regions, and currencies32. It also varies over time to reflect asset specific information (e.g., the price of a stock reacting to an earnings release) and general market conditions. RiskGrade operates differently from traditional risk measures, such as beta, standard deviation, and average shortfall. RiskGrade helps calculate how much variation there is in the asset's price, making the most recent history more important than outdated observations. They also compare the asset's volatility to the volatility of a basket of global equities. The ratio of these volatilities results is a RiskGrade measure33. The RiskGrade measure can vary from 0, for cash, to values well in excess of 1000 for highly speculative investments.34
30 Financial Management for Non-specialists
31 financialservicesinc.ubs.com
32 www.riskgrades.com
33 www.riskgrades.com
34 www.riskgrades.com
Below I have pasted my risk portfolio as shown by RiskGrades near the starting of my project:
Table 1
As you can see from table 1 (above) my portfolio has been given a risk grade of 65 which means that the five company’s shares I have bought are stable.
The RiskGrade Suitability Scale aligns concrete, numerical data with subjective investment terminology - such as short-term, conservative, balanced, growth, aggressive and speculative - to paint a clearer picture of risk exposure. I have used this Risk Suitability
Scale to establish precisely the appropriate level of risk for an account at initiation manage the portfolio to be consistent with chosen risk level/investment strategy fluent in relative terms equivalent risk (Investor portfolio vs. S&P500, Nasdaq, FTSE). From the scale my risk grade of 65 falls under the Balanced Plan investment approach35 and the diversification benefits made my portfolio 28% less risky. Finally my portfolio is 1.13 times as volatile as the FTSE - Ftse 100 Index. As the graph shows on the left, my portfolio has a risk rank of 10% which means that 90% of the stocks in the S&P 500 (in the USA) are riskier so in regards to that my portfolio is up to a good and safe standard.
My portfolio from 2nd April 2007 to 11th May 2007 has been exciting and an overall satisfactory experience; below I have pasted a chart showing the movements in regards to the risk grades and performances indices of my investment portfolio.
As you can see performance indices (blue line) started off well at of 65 and ended at 105, whereas the risk grade started at 85/86 and ended around 101.
The two lines only met once and that is shown on the graph on the left, the two lines met at a risk grade of 76 which was at the time a performance index of 105.
4.2 Return analysis
I used risk grades website to help me analyse and evaluate the return my portfolio made against the risk that is had. John White (2003) the author of 'Investing in Stocks and Shares' states that investors shouldn’t think that higher risk will equal to greater return because the risk/return concept informs us that the higher risk gives investors the probability of higher returns this is because there aren’t any assurance nor guarantee just as risk means higher potential returns it also means higher potential losses35a. Below is my portfolio’s return analysis table:
From this table you can tell that the highest risk grade is given to British Airways with a huge 143 whereas Lloyds TSB with 63. The Risk Vs Return graph below shows plotted points of my chosen company shares in comparison with the risk grades and returns.
35a White, J, Investing in Stocks and Shares
The overall evaluation of this graph seems to show that the majority of my shares are doing well because as long as my plotted shares are above the red line this means that return is being made. As you can see Tesco’s shares are doing the best with a return of 15.5% with a risk grade of a mere 78 (12 months analysis). Experian seems to be unclassified as it doesn’t have a risk grade but as you can see I am making a loss by having shares in that company. Although Llyods TSB name overshadows my portfolios on the graph it is still possible to make out that the return my portfolio is currently making is 7% which is a very good figure compared to the risk grade given on the graph which is 87. In analysis my portfolio has given a higher return than the FTSE 100 index, this is because the FTSE has received a return of 1.3% at a risk grade of 60.
In an article New York Life stated that some investments are certainly more "risky" than others, but no investment is risk free. Trying to avoid risk by not investing at all can be the riskiest move of all. Risk can never be eliminated, but it can be managed36. This statement is very true and it is difficult to avoid risk as it is unpredictable at times and this is why I went with my instincts and invested in Experian and it turned out to be a risky choice as I had lost funds in it.
36 www.newyorklife.com/cda/0,3254,10361,00.html
5. Portfolio performance measurement
There are two tables below. The table 1 shows the overall summary of my portfolios performance from its start date (2nd April 2007) to its end (11th May 2007). Table 2 is more detailed of my investment portfolio as it clearly shows gains and losses.
Table 1
As you can see I invested £99,998.94 into shares and put in £1.06 under cash which made the overall investment exactly £100,000. On the 11th May 2007 I had made a profit of
£3, 353,85 which is an increase of 3.35%, which was over all a total of £103,353.85. in my original planning I estimated to get a total of at least 2% in return and with this result I am very satisfied with the results as it was a very short period of time that this project had undertaken. With these results I will now compare them to the FTSE 100 Index.
Table 2
The start date of my portfolio was 2nd April 2007 and since this was the first day of my project the figure 100 will be used as the base index value, the base index value is the initial (first), arbitrarily defined value of an exchange index. I will have to calculate the index value of my investment portfolio on he last day of trading (11th May 2007), the index divisor will have to be as evaluated as shown below:
Index divisor = Total share value = 100,000 = 1,000
Base index value 100
Therefore the index value on the 11th May 2007 will be:
Index value = Total share value = 103,353.85 = 103.35
Index divisor 1,000
FTSE 100 index had a value of 6315.5 on the starting of my project 2nd April 2007 and on the 11th May 2007 the value was 6565.7. Assuming the FTSE 100 had a base index value of 100 on the 2nd April 2007 then the index divisor is calculated as:
Index divisor = Total FTSE 100 value = 6315.5 = 63.155
Base index value 100
Therefore the value of the FTSE 100on the 11th May 2007 is:
Index value = Total FTSE 100 value = 6565.7= 103.9
Index divisor 63.155
Overall the statistical calculation show that my portfolio index starting value was 100 and the index end value was 103.35. Then the FTSE 100 index starting value was 100 and the FTSE 100 index end value was 102.5. The figures above shows that my portfolio hasn’t outperformed the FTSE this was only by a small fraction (103.9 - 103.35 = 0.55).
- Conclusion
Mott (1997) states that in most investments situations there is no certainty that the eventual outcome will be exactly as predicted at the time of appraisal37 and this is very true as I estimated I would get back 2% whereas my return was 3.35%, if I hadn't done my research and reviewed the risk grades involved I would have probably made a loss so the prediction is always unpredictable, the best thing to do is research before investing. Although investing in shares has many benefits including a high level of liquidity which unlike property, gives you ready access to your money. There are more than 1200 companies on the stock market in which shares can be bought 38. out of the 1200 I picked M&S, British Airways, Lloyds TSB because of their steady performance since the start of 2007 and Experian was chosen because apart of me in an ‘risk-seeker’.
Table 1
For Experian there was little research done and on the day of the project I picked the company because at the time their share price was paying off its current investors very well as you can see from the table on the left.
Although I knew that selecting bonds would be a risk free option as Robinson & Thomas (1991), bonds gives a fixed return with a possible but the risk seeker in me decided to invest the full £100,000 in company shares. My portfolio from the 2nd April 2007 to the 11th May 2007 gave a return of 3.35% making the total sum of £103,353.85. As I have stated the majority of companies in my investment project returned a decent amount except Experian because
if you look at table 2 you can see the outcome at the end of my project for Experian, as it has dropped 5.00 whereas it started at plus 19.00!
Atril (2003) did mention that the most riskiest of investors are those who seek risks but he also mentioned that those investors also have a chance to gain a huge return only if their risk is just as big40 so I thought I would take the risk but unfortunately I lost out, but fortunately I invested the least amount in this company as the risk averse side of me reacted in. My future plan is to sell Experian’s shares of immediately and hold on to Tesco and Lloyds TSB shares.
37 Mott, G, Investment Appraisal 3rd Ed, 1997, Pitman Publishing
38 moneymanager.com.au/investing/guides/shares_guide.html
39 moneymanager.com.au/investing/guides/shares_guide.html
40 Atril, P, Financial Management
This is because Tesco is the biggest retailer in the UK and it will take a lot of crashes to bring this company’s share value down. Lloyds TSB’s announcement of its employees sharing in its £252m windfall payout from the company's shares and bonus schemes will make the company more productive because of greater motivation as well as higher employment rate and lower staff turnover. Although I am currently happy with British Airways shares I feel that because of the increase in price due to oil prices increasing will mean less consumers taking BA and switching to an alternative airline and when that happens I will be there to invest in that particular airline. Another problem is although BA has made a deal with Rolls-Royce which consist of the airline using their high power engines in their airline I feel that although the engine is more powerful, wouldn’t that also mean more fuel consuming thus increase of even a higher price than the one now? I think so.
In final conclusion since the FTSE 100 is on the rise (yahoo finance)the future looks good for the UK as states White (2003) states that the UK industry is now more of a financial and services industry41 rather than production e.g. China. And It is because of this I have decided to invest only in the UK and not too many of the foreign markets unless I know that they are stable. Currently analysts compiled a sector analysis from the highest performing sectors to the lowest and you can see this in the appendix 1.1 and form this table I have decided in the future to invest in oil & gas, telecommunications and beverages industries as they are right at the top of the list and I believe that they will stay there for a long time. With the help of I have also decided that after selling Experian shares I will purchase shares in Sanctuary Group (The) PLC 44.44%. This is because if you review the table 1.2 in the appendix you will see that it is up 44.44% which is a huge figure and its past success has been steady and on the rise.
41 White, J, Investing in Stocks and Shares
- Bibliography & References
Article
Stepek J, Is China's crash just a blip...or the start of something bigger?,28.02.2007
Text Books Used
Atril, P, Financial Management for Non-specialists 3rd Ed, 2003, Prentice Hall FT
Mott, G, Investment Appraisal 3rd Ed, 1997, Pitman Publishing
Robinson & Thomas, Financial Engineering,1991, Basil Blackwell
White, J, Investing in Stocks and Shares: A Step-by-step Guide to Making Money on the Stock Market (Paperback), 2003, How To Books Ltd; 6Rev Ed edition
Websites Used
(past news 2nd April 2007)
=
Appendix
1.1
1.2
