Question

You have just been appointed as the NEW Portfolio Manager at NAPSA, and you are given the responsibility to set up an investment fund amounting to K100 Million, using the given amount, construct a diversified portfolio of FIVE (5) asst classes, and explain the rationale for picking them and where possible indicate annual return on each class of asset. Notably compare the return with the prevailing inflation rate in Zambia and ignore the tax implication (WHT) on your returns.

Answer 1

Since no information about the risk appetite of the investors and the holding period have been given, we will assume the holding period to be 1 year and ignore the risk part (but we try to diversify the portfolio as much as possible). Since our aim is to diversify, we should go with varying types of assets.

The 5 types of assets will be - Equity, Commercial Bonds (Money Market and Long Term), Gold, Commodities, Treasury Bonds

We have chosen these asset classes because they provide a good diversification of returns. Equity is slightly riskier among all the asset classes. But we have seen that gold has a negative correlation with equity i.e. when gold goes up equity goes down and vice versa. The same holds true between equity and commodities. Treasury bonds are the safest among all the asset classes and keeps the returns coming. Commercial bonds of shorter duration i.e. money market instruments are also very safe as they are renewed in short intervals of time. Long term commercial bonds have higher yields and therefore will be good in providing higher returns.

Over the past 30 years, the compounded annual growth rate (CAGR) i.e. the annual return for gold has been 9.26%. For Equities (US), it has been about 7%. For commercial bonds it has been about 6.5% and for commodities about 15%. The Treasury returns have been 4-5%. The historical inflation rate in Zambia is 7.49%