Question

You are responsible for managing a $100,000 portfolio for a local community trust. The managing committee has heard that by investing in shares and other financial instruments, the community trust could achieve a higher return than what is currently earned through an internet maximiser account. The committee has heard that you are currently studying a unit on security analysis and portfolio management. You are requested to build a portfolio of investments by the end of July 2018, track the performance of your portfolio on a weekly basis and submit a report by 23 September 2018. You may consider the following steps in your portfolio construction and management:

Part 1

Prepare an investment policy statement for the local community trust based on what you learn in Topic 1. You may specifically consider the (i) liquidity requirements; (ii) return requirements; (iii) risk tolerance; (iv) time horizon; (v) tax considerations; (vi) regulatory and legal considerations; and (vii) unique needs and circumstances. Further given the sensitivities of the members of the organisation, you are asked to avoid investments that are seen to be socially and ethically NOT responsible.

Answer 1

portfoilio of investment:

equity share capital = 30000

debentures = 15000

notes payable = 20000

bonds = 25000

stock = 10000

total = $100000

basis :

Debt equity ratio is 2:1

short term investments are also there.

investment policy statement for the local community trust

Purpose:

The purpose of this policy statement is to establish the guidelines for the fund's investment portfolio.

Role:

1. This Investment Policy Statement sets forth the investment objectives, distribution policies, and investment guidelines that govern the activities of the Committee and any other parties to whom the Committee has delegated investment management responsibility for Portfolio assets.

2.The investment policies for the Fund contained herein have been formulated consistent with the Institution’s anticipated financial needs and in consideration of the Institution’s tolerance for assuming investment and financial risk, as reflected in the majority opinion of the Committee.

3.Policies contained in this statement are intended to provide guidelines, where necessary, for ensuring that the Portfolio’s investments are managed consistent with the short-term and long- term financial goals of the Fund. At the same time, they are intended to provide for sufficient investment flexibility in the face of changes in capital market conditions and in the financial circumstances of the Institution.

4.The Committee will review this Investment Policy Statement at least once per year. Changes to this Investment Policy Statement can be made only by affirmation of a majority of the Committee, and written confirmation of the changes will be provided to all Committee members and to any other parties hired on behalf of the Portfolio as soon thereafter as is practical.

Investment objective and spending policy

The Fund is to be invested with the objective of preserving the long-term, real purchasing power of assets while providing a relatively predictable and growing stream of annual distributions in support of the Institution.

For the purpose of making distributions, the Fund shall make use of a total-return-based spending policy, meaning that it will fund distributions from net investment income, net realized capital gains, and proceeds from the sale of investments.

The distribution of Fund assets will be permitted to the extent that such distributions do not exceed a level that would erode the Fund’s real assets over time. The Committee will seek to reduce the variability of annual Fund distributions by factoring past spending and Portfolio asset values intoits current spending decisions. The Committee will review its spending assumptions annually for the purpose of deciding whether any changes therein necessitate amending the Fund’s spending policy, its target asset allocation, or both.

Periodic cash flow, either into or out of the Portfolio, will be used to better align the investment portfolio to the target asset allocation outlined in the asset allocation policy in Section IV. A. herein.

Asset allocation policy

The Committee recognizes that the strategic allocation of Portfolio assets across broadly defined financial asset and subasset categories with varying degrees of risk, return, and return correlation will be the most significant determinant of long-term investment returns and Portfolio asset value stability.

The Committee expects that actual returns and return volatility may vary from expectations and return objectives across short periods of time. While the Committee wishes to retain flexibility with respect to making periodic changes to the Portfolio’s asset allocation, it expects to do so only in the event of material changes to the Fund, to the assumptions underlying Fund spending policies, and/or to the capital markets and asset classes in which the Portfolio invests.

Fund assets will be managed as a balanced portfolio composed of two major components: an equity portion and a fixed income portion. The expected role of Fund equity investments will be to maximize the long-term real growth of Portfolio assets, while the role of fixed income invest- ments will be to generate current income, provide for more stable periodic returns, and provide some protection against a prolonged decline in the market value of Portfolio equity investments.

Cash investments will, under normal circumstances, only be considered as temporary Portfolio holdings and will be used for Fund liquidity needs or to facilitate a planned program of dollar-cost averaging into investments in either or both of the equity and fixed income asset classes.

1. Diversification policy

1. Diversification across and within asset classes is the primary means by which the Committee expects the Portfolio to avoid undue risk of large losses over long time periods. To protect the Portfolio against unfavorable outcomes within an asset class due to the assumption of large risks, the Committee will take reasonable precautions to avoid excessive investment concentrations. Specifically, the following guidelines will be in place:

1. With the exception of fixed income investments explicitly guaranteed by the U.S. govern- ment, no single investment security shall represent more than 5% of total Portfolio assets.
2. With the exception of passively managed investment vehicles seeking to match the returns on a broadly diversified market index, no single investment pool or investment company (mutual fund) shall comprise more than 20% of total Portfolio assets.
3. With respect to fixed income investments, for individual bonds, the minimum average credit quality of these investments shall be investment grade (Standard & Poor’s BBB or Moody’s Baa or higher).

Rebalancing

It is expected that the Portfolio’s actual asset allocation will vary from its target asset allocation as a result of the varying periodic returns earned on its investments in different asset and sub- asset classes. The Portfolio will be rebalanced to its target normal asset allocation under the following procedures:

The investment manager will use incoming cash flow (contributions) or outgoing money movements (disbursements) of the Portfolio to realign the current weightings closer to the target weightings for the Portfolio.

The investment manager will review the Portfolio on a weekly basis to determine the deviation from target weightings. During each semiannual review, the following parameters will be applied:

If any asset class (equity or fixed income) within the Portfolio is +/–5 percentage points from its target weighting, the Portfolio will be rebalanced.

If any fund within the Portfolio has increased or decreased by greater than 20% of its target weighting, the fund will be rebalanced.

The investment manager may provide a rebalancing recommendation at any time.

The investment manager shall act within a reasonable period of time to evaluate deviation from these ranges.

Other investment policies

Unless expressly authorized by the Committee, the Portfolio and its investment managers are prohibited from:

Purchasing securities on margin or executing short sales.

Pledging or hypothecating securities, except for loans of securities that are fully collateralized.

Purchasing or selling derivative securities for speculation or leverage.

Engaging in investment strategies that have the potential to amplify or distort the risk of loss beyond a level that is reasonably expected, given the objectives of their Portfolio.

Monitoring portfolio investments and performance

The Committee will monitor the Portfolio’s investment performance against the Portfolio’s stated investment objectives. At a frequency to be decided by the Committee, it will formally assess the Portfolio and the performance of its underlying investments as follows:

The Portfolio’s composite investment performance (net of fees) will be judged against the following standards:

The performance of professional investment managers hired on behalf of the Portfolio will be judged against the following standards:

A market-based index appropriately selected or tailored to the manager’s agreed-upon investment objective and the normal investment characteristics of the manager’s portfolio.

The performance of other investment managers having similar investment objectives.

In keeping with the Portfolio’s overall long-term financial objective, the Committee will evaluate Portfolio and manager performance over a suitably long-term investment horizon, generally across full market cycles or, at a minimum, on a rolling five-year basis.

Investment reports shall be provided by the investment manager(s) on a (calendar) quarterly basis or as more frequently requested by the Committee. Each investment manager is expected to be available to meet with the Investment Committee once per year to review portfolio structure, strategy, and investment performance. Portfolio’s absolute long-term real return objective.