International Portfolio Management by gauravjindal


Submitted By: Team Jack Welch

                          Group 9:
Brinda Balachander, Debnarayan Bannerjee, Gagan Singh, Ira ,
       Priyanshu Mishra, Ranjini Ballal, Sulabh Sharma
Case Study: International Portfolio Management

The Alliance Finance Global Fund has just raised 200 crores through an NFO with a three
year lock-in period. While 40% of the investors opted for annual returns, the remaining 60%
have gone for the growth option. The mandatory requirements point to 10% of the fund to be
held as liquid assets, 15% exposure to short-term money market, 20% in bond-market, and
25% in commodities. The remaining 30% has to be invested in equity in select sectors like
infrastructure, power, banking, insurance, capital goods, automobiles, and FMCG. However,
the cap for each sector is 8% while the cap for each company in that sector is 2.5%. In
commodities there is a 20% weightage for precious metals, and the rest is allocated to core
metals, oil, and others. Since, it is a global fund it cannot have a weightage of more than 15%
for any country and 20% for India. The underlying policy of the fund management is that
15% of that can be short-term, 25% can be medium-term, and 60% can be long-term.

The current yields in bond markets are at 6.5% in India whereas it is between 5.3-5.8% in the
West. You are given the following additional information about economic and other data for
the period June, July, and August.

                                   International Portfolio

Taking into consideration the given case we have distributed our investments in every
possible asset class all over the world. By diversifying the portfolio, we have tried to
diversify the risk as well. The portfolio looks as shown below.

              Asset Class                          % allocation          Amount (in Rs Cr)
Liquid Assets                                         10%                      20
Short Term Money Market                               15%                      30
Bond Market                                           20%                      40
Commodities                                           25%                      50
Equity                                                30%                      60
                 Total                                                        200

                                               liquid assets

                          Equity                                        short term money
                           30%                                               market

                                                               bond market

As mentioned in the case, 40% of investors opt for Annual returns and 60% for Growth
option. So we have accordingly invested in the Asset classes in order to satisfy the

For 40% annual returns, we include 5% of Liquid assets, 15% of Short term money
market and 20% of Bond market.

For 60% Growth Option, we consider those Asset classes which have fluctuating returns
like 5% of Liquid assets, 25% of commodities and 30% of equity.
The break-up of investment is shown below:

   1. Liquid Assets: 10% (20 Cr)

As per the views of the legendary investor Jim Rogers, Brazil is a suitable destination to
invest in Liquid Assets due to its rich economy with natural resources. More over from
past one year Brazil’s Liquid Assets market is at its peak.

We have chosen 2 bonds; one with fixed rate of return and the other with variable
return. The return from Brazilian Govt Bond would go to the 40% of the investors who
opted for annual returns and for the remaining 60% investors who have gone for the
growth option would be paid from Brazil mutual funds - Mercatto R2 FID, which gives
variable returns.

Country    Investments               Rate       Invested amount(Cr)       Returns (Cr)
Brazil  Brazilian Govt Bond         9.70%                10                  10.97
        Brazil mutual funds        115.38%               10                  21.538
        - Mercatto R2 FID

   2. Short Term Money Market: 15% (30 Cr)

By analysing the Short Term Money Market of the world, we found that USA leads the
market followed by the Singapore money market in terms of returns. So we have
invested in one of leading company, the Lending Club through Certificate of Deposit and
Treasury Bills in Singapore. In spite of the high return, we have invested only 5% in US
keeping the current downturn scenario of US market. But it is also true that once the
market starts recovering, then it will generate higher returns.

The returns from Short Term instruments are fixed in nature which directly account to
the investors who have opted for annual returns.

Country        Investments              Rate     Invested amount (Cr)      Returns (Cr)
US        Certificate of Deposit -     9.60%              15                  16.44
          Lending club
Singapore T-bills                      3.80%                  15               15.57
   3. Bond Market: 20% (40 Cr)

India is known to generate the higher returns on bonds as compared to rest of the world
and this fact is substantiated by Global Economic Report- 2008-09. This is the reason we
have chosen only India to invest in Bonds. The return from bonds is fixed in nature
which directly accounts to the investors who have opted for annual returns.

Country   Investments                 Rate       Invested amount (Cr)      Returns (Cr)
India   Corporate bond               6.50%                40                   42.6

   4. Commodities: 25% (50 Cr)

Today one needs to be in the commodities market. That’s the place to be for the next 10-
15years. So we break the commodities investment into 2 parts; the precious metals and
core metals.

   -   Precious metals: 20% (10 Cr)

London stock exchange has constantly been giving decent returns on precious metals
and therefore we have invested in Silver and Platinum from to get sufficient returns.
Dubai is always considered as a potential market for Gold investment. Since prices this
year have risen up by 25% which ultimately decreased the volume of sales by 75%, we
have shifted our focus to Peru market which is an emerging economy having good trade
relations with developed nations.

 Country       Commodities           Rate      Invested amount (Cr)        Returns (Cr)
London         Silver               6.86%                2                    2.1372
               Platinum             11.36%               3                    3.3408
Peru           Gold                  50%                 5                      7.5

   -   Core metals and others: 80% (40 Cr)

One can say that inefficiencies in China are promoting demand. However as China
becomes more efficient there will be an increase in demand and the commodities supply
will not be there. So commodities will be the market to be in. Therefore we have
invested in Zinc, Lead and Wheat as their future prospects looks bright.
We have chosen Cuba for Sugar because of its high production which has tripled in the
last 3 years but is still 80% less than its all time high. So there is also scope for growth.

 Country        Commodities              Rate           Invested amt (Cr)       Returns (Cr)
China         Metals : Zinc             46.67%                  5                  7.3335
              Lead                      70.76%                 21                  35.86
              Cereals : Wheat            45%                    4                    5.8
Cuba          Sugar                      29%                   10                   12.9

   5. Equity holdings: 30% (60 Cr)

In every sector we have invested 5% of capital except Automobiles(2%) and FMCG(3%)
keeping in mind 8% cap for each sector and maximum of 2.5% cap for each company in
every sector. For instance, in FMCG we have taken 1.5% cap for both companies.

For investment in each sector, we have picked companies on the basis of their
sustainability and past performance. These companies rank among the top 100
sustainable companies credited by Global Technical Magazine.

   -   Power: 5% (10 Cr)

  Country            Company              Rate        Amt invested (Cr)      Net worth (Cr)
Switzerland     ABB Ltd                   80%                5                     9
Indonesia       PT Perusahaan             16%                5                    5.8
                Listrik Negara

   -   Infrastructure: 5%(10 Cr)

 Country           Company                Rate        Amt invested (Cr)      Net worth (Cr)
Sweden        Volvo                     122.50%              5                   11.125
France        Airfrance KLM             85.21%               5                   9.2605

   -   Banking

  Country           Company                Rate          Amt invested        Net worth (Cr)
Canada          Royal bank of           121.87%                5                  11.094
Canada          Toronto Dominion        107.40%                 5                  10.37
   -     Insurance

   Country               Company           Rate         Amt invested        Net worth
                                                            (Cr)              (Cr)
Switzerland          Swiss Reinsurance     350%               5               22.5
Canada               Manulife Financial   103.20%              5               10.16

   -     Capital Goods

   Country               Company           Rate         Amt invested        Net worth
                                                            (Cr)              (Cr)
Canada               Churchill Corp       289.21%             5              19.461
Japan                Honda Motor           80.57%             5              9.0285
                     Company Ltd

   -     Automobiles

  Country              Company             Rate         Amt invested        Net worth
                                                            (Cr)              (Cr)
Japan           Fuji Heavy Industries     61.88%              4              6.4752

   -     FMCG

  Country              Company             Rate           Amount            Net worth
                                                        invested (Cr)          (Cr)
France          L'oreal S A               48.10%              3               4.443
Finland         KESKO (Food & drug        51.81%              3              4.5543

Looking at this portfolio, it is evident that we have diversified the investment structure
by investing in as many as 15 countries. The percentage of investments looks as shown
                             Canada       5%
                              10%                       Brazil
                     Paris                                                    7%
                      4%                                10%
          Sweden                                                                     Singapore
   Indonesia 3%                                                                         7%

     Switzerland                                                             India
         5%                                                                   20%
              Cuba                     15%

                                                 Peru       London
                                                  2%          2%

The Investment – Return relationship is shown below:

      Country                   Amount invested                  Returns (Cr)           % Return
Brazil                               20                             32.508                62.54
US                                   15                             16.44                   9.6
Singapore                            15                             15.57                   3.8
India                                40                              42.6                   6.5
London                                5                             5.478                  9.56
Peru                                  5                               7.5                   50
China                                30                             48.99                  63.3
Cuba                                 10                              12.9                   29
Switzerland                          10                              31.5                  215
Indonesia                             5                               5.8                   16
Sweden                                5                             11.125                122.5
France                                8                            13.7035              71.29375
Canada                               20                             51.085               155.425
Japan                                 9                            15.5037            72.26333333
Finland                               3                             4.5543                51.81



     20                                                                      Return



Our total return of one year is 315.2575 Cr; approximately 57% return on an
investment of 200 Cr and if the market conditions are less volatile in the coming year,
returns will be same. Looking at the graph, in generating returns Switzerland, Canada,
China and Brazil are leading followed by Japan, France, Sweden, India and Cuba. Rest of
the countries generate minimal returns. So if market conditions are favourable, then we
can think about investing more in China and Switzerland.

Therefore this is our projected international portfolio for Alliance Finance Global Fund.

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