Question

Can someone answer these questions in their own words and not copy and paste or reword the previous answer to this online? They don't answer the questions...

Imagine you are the manager of a pension fund that invests large amounts of money in companies, most of which are listed on the London Stock Exchange. Returns on your investments provide the funds to pay the pension beneficiaries. State the proportions of fixed interest securities (i.e. debentures, preference shares, etc.) and ordinary shares you would choose with a view to minimising the risk to funds and maximising returns. State briefly the reasons for your investment strategy.

(ii) State a source from which you would get information on which to base your investment strategy.

(iii) State a possible consequence of other fund managers thinking in a similar vein to yourself.

(iv) Select 5 listed London Stock Market companies from different sectors (such as Banking, Information Technology, Media, Chemicals, Construction, Retailers, Transport, Mining, Oil & Gas, Pharmaceuticals, Property, etc.) in which you intend to invest substantial amounts of capital with a view to seeking a return on your investment. Briefly give reasons for your selections.

Answer 1

1.Generally speaking, such funds as stated in the question keep 45% of investments in ordinary shares and 55% in debt and other such investment instruments. This ratio and balance is aimed towards balancing the exposure with slight tilt towards more safety over returns.

The ratios can be changed depending on the tolerance of the entity to different kinds of risks. Every investment involves some level of risk. Understanding the type of risk, or the combination of types of risk, is essential in reducing those risks. Two factors that can help you determine your risk tolerance are your net worth and your risk capital. Your net worth is your assets minus liabilities. Your risk capital is money that, if you lose on an investment, won't impact your lifestyle. If you have a high net worth and substantial risk capital, you can afford to have a higher risk tolerance I.e. more investment can be done in ordinary shares to increase the rewards from the investment. But if your net worth is little or nothing and you don't have much risk capital, you probably will be better off with conservative, low-risk investments i.e. more investments in fixed interest securities that provide safety towards the investment with reasonable rewards.

2. To formulate your investment strategy, you should do you own Due Diligence i.e. research your investment before making them. Check out the investment's history, earnings growth, management team and debt load. Compare the results with other similar investment products as well as to other assets in your investment portfolio. One metric you should keep an eye on is a stock's price-to-earnings ratio, or P/E ratio. It measures the relationship between a company's stock price and its annual after-tax earnings. A company with a significantly higher P/E ratio than other comparable companies in the same industry typically involves a higher risk. You can reduce your investment risk by weeding out stocks with high P/E ratios, unstable management and inconsistent earnings and sales growth. For investors, equity investments offer relatively higher returns than fixed income instruments. However, the higher returns are accompanied by higher risks. Fixed income securities typically have lower risks, which results in lower returns. They generally involve default risk, i.e. the risk that the issuer will not meet the cash flow obligations. You should use caution when making investing decisions based on concerns about short-term gains or losses. You should review your asset allocation and diversification strategies to ensure your risk and reward levels align with your long-term investment goals and reallocate your resources as necessary. Dollar-cost averaging may help smooth out the effect of market volatility over time and because it’s done systematically, can help remove the emotion from your financial decisions.

3. The possible consequence of other fund managers thinking on these lines will not be much significant. The only effect it can have is to have improved liquidity in the debt instruments market. Liquidity enables you to raise cash quickly at a reasonable price in order to purchase what you want and need.

4. Now coming to selecting 5 stocks. From Banking, I would prefer BARCLAYS.
From Information Technology, I would prefer TELIT COMMUNICATIONS PLC
From Media I would prefer BRITISH SKY BROADCASTING GROUP
From Construction I would prefer KELLER GROUP PLC
From Pharmaceuticals, I would prefer GLAXOSMITHKLINE PLC

The reasons for selecting these stocks run common. First, good and structurally stable on technical charts and fundamentally having stable growth and profitability prospects in future.