GRAPHS
BNB vs. ALL ORDS
BNB performed quite solidly, though it was tested at times with big drops. Above is a graph of the performance of BNB over the time the shares were yours. Also above is a graph of the All Ords over the same time period. The All Ords are a combination of the 300 top companies by market capitalisation – usually amounting to about 95% of the value of the share market. Their performance is usually a sign of how the share market is faring overall. As you can see from the following graphs, BNB’s price very closely mirrored the performance of the All Ords, meaning their price followed the market very closely and was not susceptible to any variations.
Detail of share performance
(Corresponds to the B&B graph)
#1
This was the point where B&B shares hit a 52 week low. It was for this reason that initial purchase was made in these shares. The share dropped to $14.99 due to a collective sell off, which is usually a cause for a drop in price.
#2
On this day the share price of Babcock & Brown rose 20.82%. This was due to an announcement that B&B had signed a contract to sell its European property portfolio.
#3
21 February was the day that B&B announced that its second-half profits had beaten estimates and risen by 61%. Most had thought that the sub-prime crisis in the US would have damaged B&B, but it posted good returns on its investments.
OVERALL
Overall, the share traveled through the month quite well, though there were shaky times throughout, with seven drops of over 4%. However, the share managed to rebound each time, and I believe it was sold at a time where maximum profit could be achieved. Also, the fact that B&B shares were bought at a 52 week low were a promising sign for the investment.
Flight Centre
Flight Centre
Flight Centre is Australia's largest listed travel agent with operations throughout Australia, New Zealand, South Africa, Hong Kong, Canada, the USA and the UK – 1500 stores all up. Flight Centre offers a full travel service focusing on holidays, tour products, car hire, accommodation and travel insurance. They claim to offer the cheapest possible flights and accommodation, all by experienced, highly trained experts, dedicated to finding the best travel deal for any destination and any budget.
This share was selected as it was expected to be a stable share, especially compared to the other three shares selected in your investment portfolio. As it was deemed a stable share, it was used in your portfolio as a type of anchor – a share that can be counted on to hold its price or record a small profit, compared to the expected erratic performances of the other shares. In this case, FLT made more than a small profit, due to unforeseen circumstances that thankfully worked in favour, rather than against, your portfolio.
TABLE
GRAPHS
FLT vs. All Ords
In contrast to BNB, FLT traveled through the month with relative ease – that is, no large drops and no large rises. It was a solid share, maintaining a mainly straight line throughout the month the share was held. During this time there were no major decisions, and the graph shows little resemblance to the All Ords graph. This may be because of the fact that FLT doesn’t really fall into its own industry sector because of the isolation of its market, and the lack of companies within the same sector when compared with, say, the mining sector. Therefore, the way the market – the All Ords - goes is not necessarily the way that FLT will go.
Detail of share performance
(Corresponds to the FLT graph)
#1
Today, 1st of February, Flight Centre upgraded its pre-tax profit guidance from $80-$85 million to somewhere in the vicinity of $92-93 million, making the shares jump up 6.29%.
#2
On the 12th of February, Flight Centre shares dropped 3.65% after it pulled out of an $80 million lawsuit suing six airlines for not including fuel surcharges in commissions. This may have resulted in potential losses for the company, or missing out on profit, that caused the price to drop.
OVERALL
In comparison to the other shares in your investment portfolio, FLT remained a very steady share throughout the month the shares were yours. The few major announcements throughout the month had an impact on the share price, but it generally moved up and down in small percentages. As it is relatively isolated in its industry, it didn’t follow the path of the All Ords very closely.
Woodside Petroleum
Woodside Petroleum
Woodside Petroleum is an Australian based oil and gas company. Woodside Petroleum sells liquefied natural gas, natural gas, crude oil, condensate and liquid petroleum gas to various large customers. Woodside is one of Australia's largest companies. It currently employs more than 3000 people at various locations around the world. Woodside Petroleum is 34% owned by Shell Australia. They have a market capitalisation of more than $30 billion.
I decided to invest more of your money in Woodside Petroleum and Fortescue Metals Group than in Flight Centre and Babcock and Brown due to the current resource boom, and the relative bad performance of the other industry sectors. At the moment of purchase Woodside was at its lowest point since last April, almost a year ago. This was a strong factor in deciding on this share, as was the resource boom of late that has seen shares in several companies jump. Also, petrol prices have been performing strongly, and are still expected to go up, boosting Woodside profits, driven by increasing demand from developing countries, e.g. China.
TABLE
GRAPHS
WPL vs. All Ords
Over the course of a month, WPL managed to climb 27.5% to be sold at a price of $57.27 per share, as opposed to the purchase price of $40.97 on 22nd January. Throughout the first half of the month, the performance of WPL very closely mirrored that of the All Ords. However, in the second half of the month, the All Ords were quite erratic in their performance, while the WPL price moved only one way – up, reaching a peak of $57.27 at the very end of the month, a difference of $16.30. Most of the announcements and factors affecting WPL during the month were positive, which is a reason for such good performance over the month.
Detail of share performance
(Corresponds to the WPL graph)
#1
On 7th Feb, Origin Energy bought Woodside Petroleum interests in offshore gas fields. Woodside sold its 62.5 per cent interest in two gas fields off the coast of Victoria to NSW-based Origin Energy for $13.6 million, an area which contains the significant fields of Black Watch and Halladale. This caused the share to drop 1.21%, or $0.56.
#2
The 12th of Feb saw Woodside Petroleum adding to its interests in a number of North West Shelf oil fields in Western Australia for almost $US400 million – purchasing the interest in Cossack, Wanaea, Lambert and Hermes oil fields, the Cossack Pioneer production facility and the Egret oil discovery as well as some other exploration areas near Cossack Pioneer off Shell, which owns a large part of Woodside. This acquisition helped the share price of WPL to climb 5.42%.
OVERALL
With a rise of 27.5%, WPL was the second-best performing share, and also rose the highest amount of points. Though the first two weeks were shaky, after that Woodside rose 30% from the 11th February, due to a string of positive announcements and acquisitions of other companies.
Fortescue
Fortescue Metals Group
Fortescue Metals Group Ltd (formerly Allied Mining & Processing Limited) is an iron ore development company with the assets located in Western Australia. Fortescue are currently focused on the development of the Pilbara Iron Ore and Infrastructure Projects. Fortescue Metals is led by entrepreneur of previous Anaconda Nickel fame. Fortescue had a market capitalisation of $17.1 billion as of 15 November 2007.
Fortescue, along with Woodside Petroleum, was invested in more strongly in than the other two shares, Flight Centre and Babcock & Brown. Rather than buying a total worth of shares of $20 000, as had been done with these two shares, $30 000 was used to buy shares in Fortescue, as was done in the purchase of Woodside shares. Fortescue was a risky share to put money into, though profit was eventually made.
TABLE
GRAPHS
FMG vs. All Ords
Like FLT, Fortescue was very different to the All Ords in terms of performance throughout the month. Though it does not fall into a isolated industry sector like Flight Centre, Fortescue, being a high risk share, usually has very distinct ups and downs, whereas the All Ords usually has a more measured performance. Also, there were several announcements and other company actions that helped Fortescue record such strong profits.
Detail of share performance
(Corresponds to the FMG graph)
#1
A few days before this rise of over 11%, Fortescue announced that it was attempting to open Pilbara rail networks, owned by Rio Tinto, to third parties. This would open up a new access point for Fortescue to reach some isolated iron ore deposits. Many doubted this would eventuate, however, on the 25th January that they were in fact expecting the first shipment to arrive in May, and that the project was 82% complete, prompting the rise n the share price. The initial announcement was a factor in purchase of this share, as the price did not rise until the day after.
#2
Today marked the day Fortescue won another battle in its legal brawl with mining giants Rio and BHP Billiton. A High Court ruled that Fortescue was granted access to the Pilbara rail networks in W.A., an important source for iron ore owned by BHP and Rio. Because of this decision, experts predicted a benefit for Fortescue, therefore raising the share price.
OVERALL
Fortescue Metals group was easily the best performing of all the shares, rising 64.4% over the month – from $5 to $8.22. It was an extremely high risk share, shown both through the fact that a third of the price changes were over 5% either up or down, and through the company’s actions, which included high profile legal battles and high risk-taking.
Betty Billingsdale
Dear Mrs. Billingsdale,
I am writing to confirm the details of your investment portfolio. I have included an evaluation of 5 different types of investment that are available to you, along with their advantages and disadvantages. Also included is an explanation of the relationship between risk and return, and a projected 5 year outcome of your returns.
Firstly, what is investment, and how does it differ from savings? Investment is a driving factor in economies worldwide. Investment can be a multi-billion dollar company making an acquisition, or your Average Joe putting some money on the share market. Individuals invest for many different reasons. Some people invest to gain some money to purchase an item they want, or it could be a long-term investment meant to generate a retirement fund or to pay for their children’s education. Another common reason for investment is simply the aim of becoming rich!
Investment and savings are often confused. Saving is safely storing something for later use. Investing is putting in something in the hope of gaining more. However, while investing, you may lose everything, especially if you have not invested wisely.
There are five different investment options that could be selected in your investment portfolio. Below is an outline of each investment option, advantages and disadvantages.
BONDS
Bonds are written documents issued by companies or governments to an investor that means the investor gives the company a sum of money but entitles the investor to all of the repayments plus interest.
The advantages of bonds are that they are essentially risk-free, especially government bonds. Government bonds and sub-government bonds are covered by an Act of Parliament that requires them to be paid. Therefore, no risk is involved in investing in bonds.
The disadvantages of bonds are that the investor has to have a large amount of money that is debt free and the investor can live without, as some bonds can last up to ten years, as this money that has been loaned cannot be accessed freely. Also, because of their risk free nature, bonds tend to provide low returns in comparison with other investment options.
BANK BILLS
Bank bills, also known as short-term debt securities, are a short-term loan to a company for a period of time no longer then 180 days. The investor buys the bank bill for a discounted price, say $900, with the knowledge that they will reap the face value of the bank bill, which may be $1000, at maturity, which is the end of the loan.
The advantage of bank bills is that there is a quick profit turnaround - only 6 months, and that they are very secure and safe, with almost guaranteed payment by the company through which the loan has been acquired. The only situation in which payments may not be made is if a company goes bankrupt, but they are still liable to pay the investor the money.
A disadvantage of bank bills is that the investor cannot benefit from interest rate rises, as the interest rate at which the repayments are being paid at is a fixed one, and therefore cannot change. Apart from this, however, there are limited disadvantages.
PROPERTY INVESTMENT
A second type of investment is property investment. Property investment involves buying a property and then either leasing it out or holding on to it to sell later for a profit.
An advantage of property investment is that is can be a long term investment to secure your future financially. Also, if the investor comes into trouble, they can always just sell the property and make some quick money.
A disadvantage of property investment is that a large loan is usually needed to finance the purchase of such property, and therefore there may be large repayments needed to be made. Also, if the property is rented then there is the chance that the tenants could damage the property and the owner may have to pay.
SHARES
Shares are another type of investment, one of the most common. Shares involve buying a share of a company on the sharemarket. These shares can be bought or sold. A shares price changes depending on how a company is going. For example, if a company makes an acquisition or delivers some good news, e.g. higher than expected returns on investments, then their shares will go up in demand. There are several types of shares, including high-risk shares – those that are very hard to read and can suffer big losses or big gains without warning, or blue-chip shares, which are shares that are usually very steady in price- most commonly shares in the big companies.
The advantages of shares are their relatively low price. Almost anyone can afford to enter the share market, and make a profit. Also, though confusing at first, the share market gradually becomes easier to understand, and seasoned veterans will be able to read the performance of shares and make an analysis of how they perform in the future.
One problem of the share market as an investment is the fact that it is extremely confusing when first entering, and, although it becomes easier the longer you are involved in it, there is the possibility of losing everything just after you have invested. An example of this is people who have invested in the Allco shares, which, at the moment, are plummeting in price, down almost 60%, or ABC Learning, which was temporarily suspended from trading whilst their directors had to respond to concerns raised by regulators and their shareholders. Also, large sums of money can’t be transferred quickly around the sharemarket, as there is a complicated process involved.
TERM DEPOSIT
A term deposit is a deposit into a bank account for a fixed amount of time that is paid at a fixed rate. A term deposit is a very safe and risk-free investment option.
The fact that this is a relatively risk-free investment is obviously an advantage. Also, term deposits, if enough money is deposited, can provide enough profit to basically live off. The problem is that this amount of money must first be raised to benefit.
The disadvantage of term deposits is that they provide a low return when compared with other investments. This is because of their risk free nature, especially compared with other forms of investments, such as property investments. Also, the money in a term deposit cannot be touched otherwise all of the interest gained will be lost.
MANAGED FUNDS
Fund management accounts are an option for a group of investors to combine funds so as to purchase cash investments, bonds, property or shares so that larger returns are achieved. Returns are given back to the investors based on how much they invested.
The advantage of managed funds is that, because the funds are pooled, there is greater purchasing power, hence the chance for bigger returns than if the investor had gone it alone. Another advantage is that a professional is in charge of the fund, meaning less paperwork and more time for investors, and also there is more chance for money to be made with a professional choosing where and where not to invest.
A disadvantage of managed funds, however, is that the investors have limited control over how their money is invested, which could frustrate some people who believe they could invest the money better themselves. Also, there may be arguments between members of the managed fund who don’t like a certain type of investment.
Risk and Return
Risk and return refers to two separate concepts. Risk is the uncertainty of not knowing how much money an investment is going to make or lose. Risk can be influenced by investor uncertainty, unexpected financial changes, or other factors. Return refers to on an investment through income and capital gain. Usually, the higher the risk, the higher the return on that investment, as show by the graph below.
1 = savings account 2 = cash 3 = bonds
4 = managed fund 5 = property 6 = shares
Usually, the Risk/ Return graph is portrayed as a straight line, but this is not the case, as an investor cannot gain unlimited returns, but can lose all of the money invested; therefore the line must start to flatten as the risk increases.
Investment Portfolio
Below is an outline of the four different investment types that your money has been invested in.
At the moment you are quite comfortably financially, with no debts to be paid off on your house – 100% equity – and an extra $500k. $250 000 will be injected into various investments, with the other $250 000 to support you during the time of investment. Diversification will be use to minimize the risk of your investment portfolio – if one investment fails, then the rest of the investments can still support you.
Managed Fund
There are several managed funds available on the market that offers qualified professionals and low fees. These are sometimes large companies looking to make the most amount of money for you so as to attract investors and raise the company’s reputation. A managed fund is a good option for a person in retirement, as it is very hands-off when compared with other investment options. Also, the money is in the hands of a professional, offering a retiree the peace of mind when it comes to their financial situation. Also, managed funds are more likely to provide better returns the longer they are active. For this reason, 35% of your $250 000 will be invested in a managed fund.
Blue-Chip Shares
Blue-chip shares are easily the most stable shares in the sharemarket. They are shares in the biggest companies on the stock exchange, usually ranked in the top 20. Generally, these types of shares have been trading for a long time and have a history of returning solid profits – which means regular dividends for their shareholders. An advantage of these is that this investment has the potential, and is more likely than smaller shares, to grow when the sharemarket becomes volatile or is dropping. However, so as not to put all of ones eggs in one basket, once again diversification is an important factor. Also, shares are the highest risk investment, and therefore should make up a smaller part of your investment portfolio than other investments – only $50 000 of the $250 000 will be put into shares.
Term Deposit
Only 10% of your money will be put into a term deposit, merely as extra money to be accessed in a five years time. There are several big banks and minor banks that offer 5 year term deposits, but Arab Bank offers the highest interest rate – 7.50%, and are therefore the best choice, as long as there are no withdrawals, which should not be a problem as, apart from the $250 000 not being invested, all of the other three investments offer a steady income. At the end of the term deposit, a capital gain should be made of $10 890.72, which is quite a large sum of money.
Bank Bills
Bank bills, along with the managed fund, will be the largest part of your investment – that is, the most money will be put into it, as it provides a quick turnaround of profit, with little to no risk. Bank bills usually provide a profit of around 10%, so, on an investment of $87 500, a profit of at least $5 000 should be made, in only six months. If this is to be repeated, then a good profit could be made on this altogether over the next few years.
Below is a pie graph of how your money will be spread among various investments.
Following is a table summarizing projected returns over the next five years. Unfortunately, due to the volatility of the sharemarket, and the fact that a managed fund is not controlled, there is no way to estimate the returns on these two investments.
BIBLIOGRAPHY
(and all websites used by this website)
- this was an extremely helpful resource for finding out the reasons for the rise and fall of a share
Commerce.Dot.Com resource book
- used to find out about different investment options for Betty
- used to research various aspects of the assignments
- used to research various aspects of the assignments
Various other websites of banks, forums, etc. that helped me with this assignment, that I cannot remember.
