International Portfolio Management 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. 1. http://indiabudget.nic.in/es2008-09/seconomy.htm 2. http://mospi.nic.in/mospi_iip.htm 3. http://www.moneycontrol.com/news/economy/cnbc-tv18-poll-sees-july-iip-lower- than-june-at-64_415111.html 4. http://storyboard.in.com/ 5. http://rbi.org.in/home.aspx 6. http://rbi.org.in/scripts/BS_ViewBulletin.aspx 7. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=439 8. http://www.sebi.gov.in/Index.jsp?contentDisp=Database 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 10% Equity short term money 30% market 15% bond market 20% Commodities 25% 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 investors. 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) (Cr) Canada Royal bank of 121.87% 5 11.094 Canada Canada Toronto Dominion 107.40% 5 10.37 bank - Insurance Country Company Rate Amt invested Net worth (Cr) (Cr) Switzerland Swiss Reinsurance 350% 5 22.5 Company Canada Manulife Financial 103.20% 5 10.16 Corporation - 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 Ltd - 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 retailing) 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 below: Finland 2% Japan Canada 5% USA 10% Brazil Paris 7% 4% 10% Sweden Singapore Indonesia 3% 7% 3% Switzerland India 5% 20% China Cuba 15% 5% Peru London 2% 2% The Investment – Return relationship is shown below: Country Amount invested Returns (Cr) % Return (Cr) 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 60 50 40 30 Investment 20 Return 10 0 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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