Yasser Al Mimar-Money Management and Stocks Analysis Document Transcript
Page 1 Money Management Yasser Al Mimar 10 December 2011 Executive Summary Most businesses rely on capital and investments to initiate and grow their businesses. These businesses rely on different sources of capital income in undertaking their business needs. Some of the common forms of investment include bonds, stocks, certificates and Exchange Traded Funds. During the 1990’s several stock exchanges faced financial problems causing major losses to investors. The bubble burst as the bear run that affected the stock markets such as the NYSE (New York State Exchange) and other major stock exchanges. As a result, many investors shied away from the market and opted for low risk investments with good returns. Most of these investors turned to government bonds, certificates and private or corporate bonds from reputable firms (Madura, 2008, p.13). This trend led to the emergence of special funds which allowed small investors to pool funds and investment in a number of securities or stocks. These funds are managed by fund managers which became popular with huge companies like insurance firms and banks. However the costs of managing these funds were high and some investors looked for other options to invest. This led to the emergence of Exchange Traded Funds (ETFs), which allowed investors to put their money on investment funds to be traded on stock exchanges (Abner, 2010). ETF investment funds incorporate an array of assets such as stocks, commodities or bonds and trades at a price close to the net value of these combined investments. For the many years it has been in existence, EFT’s have been successful with current stock markets due to its flexibility and low risk.
Page 2 Introduction The art of investing is very difficult and challenging and many a times, people find it difficult to invest. Several investment options are available to potential investors interested in making profits. Investing is a risky venture and many people prefer to invest in low risk investments. As a result, many investment banks and firms have opted to create investment options for different investors in the market. Investment decisions are based on the type of investment, time horizon and risk tolerance. These factors are widely considered by novice and experts in the process of making investment decisions. During the early 1990’s several investment options were availed to investors who were interested in low risk investments. Professional financial analysts and advisers devised ways of accommodating these low risk investors. Therefore, funds were created to allow small investors interested to pool their resources into investment options that were flexible and less risky to invest. Hedge funds, unit trusts and ETF’s were introduced alongside traditional stock trading markets and other investment options. This essay is going to analyze the different types of investments funds available to a potential investor. Individual Analysis Everybody needs and desires change in every stage of his/her lives and we should know where we’ve invested our money and is it worth or not. Furthermore, we have to make sure that our current financial investments are geared to all our future needs and objectives; consequently, we will be able to manage our own situation. I would say, if you do not care about where your money is going to be invested, no one else will. In the contrast, all investors have differing attitudes towards risk. When it comes to start investing, we should consider our risk profile or tolerance carefully, including how comfortable we are with the possibility of losing money, or that returns on our investments could vary widely from year to year. Analyse your own situation and risk profile Most people invest for capital growth to build their wealth over time and protect themselves against inflation. Furthermore, many retired people live off the income from their investments (e.g. dividends from shares and rent from property).
Page 3 Fixed interest products such as bonds and hybrids offer a potentially regular income stream. As result, in 2009 I have made up my mind and planned to invest in properties in Dubai. Actually, I was looking to know which investments might be appropriate for my save for a down payment and build my wealth, and may generate more profits for the average investor than investing in the stock market. Therefore I made my decision and bought 2BDR apartment at $140,000.00 in Dubai and the apartment has been rent at $1350 per month as step to have more income resource. The task of investing involves the tasks of analysing the individual portfolio and risks associated with a specific person. In the analysis of the individual portfolio includes analysing the character, lifestyle, time horizon and the objectives of the investor. These factors depend on the type of investment in which an individual chooses. The task of choosing the best class of investment in terms of ETFs or investment funds to choose from is very challenging. Below are some of the important factors to consider Character: I weary of investing in the stock market due to the fluctuations that the stock market that could easily wipe out my investments. I used to invest in savings accounts but due to the poor economic conditions globally and inflation money saved in the bank account depreciated. However, as I mentioned above I have been for the idea of buying property in Dubai, UAE (saving for the long‐term (Kristof, 2010). The first characteristic of a good investment in properties would be the intrinsic value of the property. Actually, the investment property is bought at a price that is lower than the real intrinsic value so that upon purchase, a profit has already been made. On the other hand, we should ask ourselves how long we plan to keep the property. If the intention is long term, we will need to consider expenses relative to the investment property such as repairs, maintenance and taxes. Therefore we should choose properties that offer income greater than the expense needed for maintenance. So for this reason I have bought in Dubai due to tax‐free living (no property tax) and I am paying just for maintenance which cost around $6000 per year.
Page 4 I have chosen Dubai as place because the location of the property is the primary characteristic that will determine its feasibility and profitability as an investment property. I would to strongly go with steadily increasing income and a positive outcome. Lifestyle: As an employed person, I live a good lifestyle within my means and this ensures that I spend most of my earnings with good savings to spare. Most of my savings are utilized in buying stocks in 2007 and I have an apartment mortgage with a 4 year repayment period. This makes it difficult to save and make investment plans since there is little disposable income to contemplate saving. Time Horizon: we know the investing in property is an ideal way to preserve an asset base, grow wealth and hedge against inflation, consequently, the higher our share in the property, the higher our income and expenses. BUT, it’s important to understand not only our investment goals, but exactly what the investment goal time horizon is, since each investment property will generate revenue at a different rate of return and cycle. I tend to invest for the long term because it takes long for me save a colossal amount of money to invest. Time horizon is usually very crucial in selecting the type of investment product suited for a particular individual. According to successful investors like Warren Buffet and Jim Rogers recommend people to invest for the long term. I believe, the longer the time horizon, the more inevitable, the success of the investment. Statistics from different fund managers and stockbrokers show that investments from different sectors require at least 3 years for the investments to reap benefits (Greenwood, 2006, p.32). Nowadays, the current investment is very challenging and thus it is important to invest in emerging markets. The emerging markets of Asia and Africa are good investment grounds for any astute or upcoming investor. Objectives: Analysis of the best investment to undertake is very challenging, an investor has to analyse his/her objectives. In the analysis of personal objectives, an individual has to be realistic and come up with a mix of investment options that suit him/her. In my case, I tend to invest for the moderate term since my main goal is to secure the apartment that has a mortgage and build an investment portfolio for the moderate ‐ long term purpose (Laffie, 2005, p.115). Also, I am planning to enrol with
Page 5 short term investing which have a low amount of risk and are of a high quality. Such investments can come in many forms including cash, stocks and gold Investment Options Analysis As I have pointed out, we should carefully consider investment objectives, risks factors and charges and expenses before engage with any investment. All investments contain risk, including loss of principal, so diversification does not eliminate the risk of experiencing investment losses. Furthermore, we need to create a budget that fit with our live, and from my perspective, everyone needs a budget, regardless of age, life stage, or whether we think weve "made it" or not. I would say, making investment decisions is a difficult and challenging task for most of us and investors especially novice investors. Consequently, it is prudent for one to analyse all the investment options and products available in the market. Through analysis of the different products and options, the investor has the opportunity to choose the best investment option to choose from. Diversity in income is considered as a major factor to enhance our resources as fairly straight forward of backup our investment inside our retirement plans. Below is the analysis of different investment options from which a potential can invest in Portfolio of Funds and ETF Both Mutual Funds and ETF’s are investment products made up of a basket of underlying stocks. The notion since the beginning of mutual funds over 80 years ago was that investors needed a simple way to invest in a diverse basket of stocks in one easy step. Another way to think about this is what if instead of selecting mutual funds in our 401k, we were required to pick the individual stocks on our own? Whereas, the last few years back, exchange‐traded funds, have replaced mutual funds as the hottest packaged investment products on Wall Street. Therefore and as positive step to know what we should follow, I believe each investor and even me needs regularly to review investment portfolio once it is established, by reviewing the investments we can check if it meet our goals and act early to rectify them if they are underperforming. To reflect analyse our own situation and risk profile on new investment, I would start with ETF (exchange‐traded fund) than mutual funds because ETF allow
Page 6 me to build a low‐cost and diversified portfolio just as easily as I can buy an individual stock. Furthermore, ETFs are bought and sold during the day by professional traders. That means the value of the ETF is constantly updated every second during every trading day as the shares are bought and sold by other investors, this in turn, will help me to know where I stand and when I can move out. ETF Analysis An exchange‐traded fund is an investment company that offers investors a proportionate share in a portfolio of stocks, bonds, or other securities. In addition its offer investors, including those of moderate means, the opportunity to purchase shares in a diversified pool of securities at a competitive price. Most ETFs attempt to achieve the same investment return as that of a particular market index, such as the Dow Jones Industrial Average, Standard & Poor’s 500 Index, or the NASDAQ Composite Index. The most recent data (from Dow Jones and the U.S. investment group Blackrock) show that ETFs grew by 30% in 2010 to a staggering 1.5 trillion Swiss Francs of assets under management, and are expected to reach 2 trillion in 2012 (David Costa, The Portable Private Banker, P45) and ETFs are becoming more popular even among retail investors and have several key differences from index mutual funds. As an index investment, ETFs have grown because of low cost, ease of use and transparency and diversity, so we need to manage our plan and build a distinct and
Page 7 diversified portfolio and drive it in right way to receive best ROI, return of investment. Asset Allocation Our asset allocation is our portfolios blend of stocks, bonds and cash. So finding the best asset mix is crucial if we are planning to meet our investment goals and to ensure were achieving our desired level of diversification. Most researches and financial advisers agree that setting up the right asset mix is more important than choosing great investments. The first thing to consider is our present financial situation and how much we can afford to invest. In this regard, my plan should be depend on several factors, including: o My investment goals. o My investment time frame. (How many years to invest ) o My risk tolerance (attitude to risk and reward). Base on that, if I start looking at my asset allocation I need to include the dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, and I believe the process of determining which mix of assets to hold in my portfolio is a very essential one and is playing major role. In this regard, driving asset allocation towards best way at any given point in my life, should check the time horizon (my investment time frame) and my ability to tolerate risk (ability and willingness to lose some or all of our original investment in exchange for greater potential returns) In my own situation I have $50,000.00 in saving and I would use these moneys to manage my asset classes that I am planning to involve into as follows. TIME HORIZON: I may need the total amount invested and the investment revenue from this account within the next five ‐seven years (Moderate) RISK TOLERANCE: if the return from this account was negative over a year, thus generating paper financial losses in the short run, I would prefer to continue to support my initial investment strategy. So I am planning for Low tolerate risk. CURRENT INCOME: I will cover and support my current expenses without using this saving account.
Page 8 I would go with core‐satellite system and use it to drive my asset or investment and I believe, managers can actively trade ETFs as elements of the satellite to gain alpha returns. In fact, some managers invest exclusively in ETFs.. In order to create a suitable portfolio, it is important to determine the extent to which we are an aggressive, moderate or conservative investor. Actually I am not planning to build funds for retirement and may be willing to assume greater risk due to longer time horizon. I am planning to invest within the next five to seven years and create a mix of different asset categories that can provide the potential for satisfying returns at a level of volatility that is comfortable for me in this period of time – I believe as my life situation and market conditions change, I like making any necessary adjustments to my investment mix myself. Base on that, I need to divide my saving money among the broad asset classes is more important than choosing the specific funds within those classes. Past performance is no guarantee of future results. I believe, diversification will helps me offset the volatility (and potential losses) of a single investment and take greater advantage of the strengths of several asset classes working together. I am not saying the diversification is guarantee, because there is no guarantee against loss!! The table below shows how all of these asset classes and a portfolio I built using more efficient asset allocation which might come together in an all‐ETF and by choosing the moderate risk tolerance From my perspective, i‐Shares ETF’cover a good broad range of sectors, in a sufficiently targeted allocation to allow me or any investor to strategically allocate his or her portfolio.
Page 9 Allocation ETF Ticker YTD NAV YTD Return % Amount Invested 25% iShares Dow Jones US IYW 0.54 1.14 $10000 Technology 15% iShares Russell 2000 Index IWN 1.39 ‐0.48 $5000 10% Vanguard MSCI Europe ETF VGK 5.22 ‐14.14 $2500 10% iShares MSCI EAFE Index EFA 3.32 $2500 15% iShares Barclays 3‐7 Year IEI 8.10 7.99 $10000 Treasury Bond 15% Vanguard Short‐Term Govt Bd Idx VGSH 1.49 1.42 $10000 ETF 5% Lyxor ETF Euro Cash EuroMTS LYCSH:SW 0.71 ‐ $5000 Eonia Investable 5% iShares Gold Trust 14.39 15.64 $5000 All of these ETF’s above have been around for a while, which means that there is some history to look at, for instance IYW the fund invests at least 90% of assets in securities of the index and in depositary. I have checked the Average Annual Total returns for IYW for Five years ended 04/30/11 and found as follows:‐ NAV (Net Asset value) = 34.38% Market: 34.48% Index = 37.21% Total Return: 18.80 Price/E = 17.73 Price/B = 4.28 ROE = 11.81% Market Cap $1.32 Billion Dividend Growth Rate for 5 Years = 47.58% (TER) Total expense ratio = 0.47%
Page 10 Growth sectors like tech are traditionally associated with high price‐to‐earnings ratios (P/E). At a primary level, a basket of stocks in an ETF is worth the present value of the earnings of the companies in the fund. So, high P/E ratios signal that investors are willing to pay more for those earnings based on the belief that earnings will grow I would give a comparison below to clear the picture about my decision to select IYW ETF The Technology Select SPDR (NYSEArca: XLK), iShares Dow Jones U.S. Technology ETF (NYSEArca: IYW) have P/E ratios of 17.73 and 15.6, respectively, compared to SPY’s 13.0. The Vanguard Information Technology ETF (NYSEArca: VGT) has a slightly higher P/E of 13.7. Importantly, Microsoft, IBM, Apple and Google represent a significant chunk of each ETF’s holdings, and it’s these that are driving the overall P/E ratios on funds such as XLK and IYW and VGT IYW also shows the greatest concentration, with top 10 firms making up 63.1 percent of the fund compared to 54.8 percent for VGT. This means IWY holds more of Apple, IBM, Microsoft and Google than XLK and VGT. In the end, IYW’s tilt toward larger firms may translate to less growth and less volatility. Source: Bloomberg Another example is i‐Shares Russell 2000‐IWM that I have selected for investment. The Russell 2000 index, the most widely used benchmark for small‐cap stocks, has trounced its 2007 record highs, rising 24% over the past 12 months. It focuses on companies whose earnings are expected to grow at an above‐average rate relative to the market. Top holdings include tech companies such as TIBCO Software (TIBX) and Rackspace Hostings (RAX), as well as Decker Outdoors (DECK).
Page 11 Dividend = 1.19 Index = 37.21% Total Return 5 Years: ‐0.98% Price/E = 23.00 Price/B = 3.21 Net profit=1,446.70% Year on year, growth in dividends per share increased 18.67% while earnings per share excluding extraordinary items fell by 44.82%. The positive trend in dividend payments is noteworthy since only some companies in the Misc. Financial Services industry pay a dividend. Additionally when measured on a five year annualized basis, both dividend per share and earnings per share growth ranked in‐line with the industry average relative to its peers We can see now, the ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings. This is particularly pertinent in light of the complexity of corporate accounting and numerous recent examples of “earnings management”, including occasionally fraudulent earnings manipulation So there are many fundamental measures by which to judge the relative value of an ETF, and the portfolio Price‐to‐Earnings ratio (P/E) is one that is frequently mentioned. There are several researches that show that buying stocks at low P/E ratios will tend to generate higher returns than buying at high P/E ratios, this does not mean that you can assume that an ETF is an attractive investment because it sports a low P/E ratio. In addition, P/E found on an ETF will not be exactly the same as the P/E of the index. This discrepancy is due to the fees charged on an ETF, along with the fact that ETFs are traded on the stock market. Cost efficiency:‐ I believe, stocks bought at low price/earnings ratios afford higher earnings yields than stocks bought at higher ratios of price‐to‐earnings as well as the ETF, in the contrast, ETFs are offered through the stock market without a front‐end load. Only the normal transaction costs of securities transactions are charged compared with actively managed funds. Base on that, therefore, ETF’s will allow an investor or even me to build a cost‐effective strategically allocated portfolio which takes advantage of the diversification opportunities across asset classes and sectors I can conclude that ETFs are cost effective for investors to invest in comparison to other managed funds. This is because the fund manager does not take his time to conduct analysis as compared to other investment options such as active investment funds. For this reason I have decided to invest in the ETF instead of mutual funds due to the ability of ETF to leverage itself, thereby increasing profits (and losses consequently) when the price moves in the right direction. Furthermore, I can buy and sell options on Exchange Traded Funds, allowing me to use leverage as well. Mutual does not allowed.
Page 12 I would add also, the management fees for ETFs are low compared to other investment options with fees standing from 0.15% to 0.90 % (Shen, 2000, p.104). For instance, a look at the FTSE RAFI ETF, it has a low maintenance fee of 0.55% per annum same as the i‐shares Morningstar Large Core Fund ETF. Regular fees make ETFs less attractive as it is witnessed by the DAX 30 which was a long term investment and thus it erodes profits. As a result, various ETFs have low management fees and are cheaper for an investor to maintain an ETF compared to active investment funds such as unit trust of hedge funds (Ferri, 2011). With low management fees, a good performance and underlying index principle, and a track record of efficient management, this is a good core holding and a viable alternative to an ETF. However, being a mutual fund and not an ETF, it will not be accessible for investors outside the U.S If I would include the fees in portfolio, such as, Vanguard funds we will see the fees in the portfolio of ETF’s are lower than the fees in the portfolio of Vanguard funds—by 0.05% per year. This alone does not tell us that the ETF portfolio will be more attractive, of course. There are small differences between the ETF’s and mutual funds over time but we hope that the total portfolio will look essentially equivalent Returns: ETF portfolio has generated an average annual return that beats the mutual fund portfolio by 0.13% per year. The most important factor in undertaking an investment is based on returns on the invested funds. Different investment options do not guarantee good returns but ETFs allow good returns on invested funds. For example, the (PXH) PowerShares FTSE RAFI US 1000 and the ComStage Stoxx Europe 600 has one of the best market returns. The ComStage Stoxx Europe 600 luxury goods based ETF returned an average of 41.87% per annum. Thus it is important to conclude that ETFs and investment funds return good investment results (Shleifer, 2002). In this regard, the inherent and explicit diversification reduces risk, so I have chosen different classes’ asset to protect overall investment returns. That is, while one element of the portfolio is performing poorly, some other investment may be doing well Transparency: As we know many mutual funds are financial meatloaf: I don’t quite know what’s in them. They’re required to disclose their holdings only four times per year, and the reports are already out of date when they’re released. I have chosen ETF, because ETFs publish complete lists of their holdings on their websites, updated daily. This makes it far easier for me as investor to compare funds, track it and decide which ones suit their needs. Investment in the ETF and investment funds markets is very challenging but it is important to invest in growing markets. For instance, the Asian and Latin American markets are growing at a rapid base and as a result, an investor should target ETFs and funds which target these markets (Ryan, 2009). Based on the assessment of the factors above, it is prudent to conclude that investing in ETF or investment funds based products is the best investment decision for any investor. Moreover, other
Page 13 investment products offer little returns compared to ETFs while some of them have become risky for investment. For instance, government bonds offered by some European countries are not safe since these countries have likely chances of default. Time Factor: ‐ Time factor is one of the most crucial factors to watch out while investing. Looking at the Swiss market, we witness that the some mutual funds have been performing very well compared to some ETFs. Therefore, it not easy to conclude that mutual funds are better than ETFs or vice‐versa, the most important factor is tracking these investments over a suggested period of time (Ferri, 2011). A look at ComStage Stoxx Europe 600 ETF Household goods based product we notice that this ETF tracks household goods stocks in the Swiss market. This ETF has performed well over the past two years returning 40.2% compared to the ComStage Stoxx Europe 600 Food & beverages ETF which returned only 24.1% as witnessed by table 1 in the appendix. In comparison to the United States of America where there is a mid cap fund that has returned over 41.87%. This performance is better than the ETF based investment option in Switzerland (Wagner, 2008). This mutual fund is known as the JB holdings fund and it has invested in different segments based on a selected benchmark. A list of investments in the JB holdings fund is shown by table 2 in the appendix. Based on the analysis of the different ETFs and funds, it is difficult to choose the best investment option by solely choosing and ETF or fund based investment (Madura, 2008). The best investment decision to undertake when investing in an ETF or fund is to analyse the industry or benchmark used in implementing the fund or ETF product. Time factor is also very important since most ETFs or funds take a minimum of three years for the investment to make marginal gains Timing and analysis of good investment options is necessary in choosing the best investment market (Brennan, 2004). Timing is very important since with time new and upcoming markets are growing and playing catch up to more traditional markets of Europe and the United States For sure somebody will ask, why I focus on i‐shares family? I would say, the top twenty ETF’s from the i‐Shares family have generated annual average returns between 20% and 50% per year over the past five years. In the same time even if the expected future return is very high, we must be careful about how much risk we are carrying when we start invest. Morningstar said it wouldn’t use a star rating on ETF model portfolios. Instead, it will classify the portfolios it tracks and rank them based on disclosed historical performance and its own analysis of their investment strategies, a spokeswoman said.
Page 14 Conclusion Investing is a very crucial task that requires patience and expertise for an individual or organization. Due to the complexity in the task of investing, several experienced and professional individuals have emerged in the investments field. Numerous investment products and options are available currently compared to the past. Most of these products have been designed to make the task of investing easy and rewarding. For instance, ETF offer us the exposure to all major investment styles. Allowing us to choose the one with the best investment prospects at the time, and to change the amount we have invested in different areas whenever we want. We would say, ETFs can offer investors broad diversification through a single product choice instead of taking company specific risk with individual stocks and bonds. In order to create a solid investment base and start drive your investment plan towards right direction you need to build up the portfolio and manage the element of timing into your investment plan A portfolio is essentially the sum of all of our different investments. Building a winning portfolio is dependent on a number of factors, but it is important to remember that your portfolio should be designed according to your needs and goals. For that reason, your ideal portfolio may not be the same as another investors and you must carefully study your finances and your options and your asset allocation in order to be successful. To be a successful investor you need two main things ‐ the knowledge and the right trading platform
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