Portfolio management report
Portfolio management report
Student ID: s3859343 Student name: GuanLi Lin
Executive summary
This report constructs two portfolios, a passive portfolio and an active portfolio, with different objectives. Passive portfolio build targets is as close as possible to the straits times index (2022) 1042 Sem1 BAFI benchmark. The goal of an active portfolio, on the other hand, is to beat the benchmark. The passive portfolio with a given asset of 1 million Australian dollars as the opening balance on May 9 has lost 0.9974%, which is about 5.83% different from the benchmark yield of 4.83%.
The active portfolio is constructed with only six stocks that are carefully chosen out from the
benchmark. These six stocks are only chosen after analysing their fundamental analysis.
Therefore, DBS, Singtel, SGX, ST Engineering, Venture Manufacturing, and Keppel DC REIT
have been chosen as the stocks for the active portfolio
The active portfolio consists of only six carefully selected stocks from the benchmark. The six stocks were selected after analyzing their fundamentals. As a result, Xero Ltd REA group Ltd, RIO Tinto Ltd, CSL Ltd, Newcrest Mining Ltd, Australian and New Zealand Banking Group Ltd.
2.Introduction
In this report, two portfolios are created as follows: a passive portfolio of replicating the return of the index as well as an active portfolio to achieve the investment goal of outperforming the index respectively, to see one of the options is recommended to be invested. As to the passive portfolio, the creations objective is to aim to reduplicate the benchmark, which is related to Australian Stock Exchange. On the other hand, the purpose of active portfolio is to outperform the benchmark (Australian Stock Exchange). In order to gain the objectives, the passive portfolio is referred to full replication method whereas for the active portfolio, through accessing the ten companies which is mentioned in the requirements of assessment, then select six to be concluded in the active portfolio. Hence, before choosing the stocks for portfolio, comparing recent industry (microeconomic) prospect, macroeconomic factors, as well as analytic reference.
3. Passive Portfolio Management.
The benchmark (BAFI 1042 Sem 1,2022 ) portfolio with regards to its stock selection and fund weights by full replication method, which is beneficial to its guarantee close tracking. But transaction costs have risen, especially for dividend investments. In addition, if the index has a large number of securities, some of the securities in the index are somewhat illiquid, and too few dollars are invested in each security until it becomes cheap to hold each security, this approach may not be useful. Refer to BAFI 1042 Sem 1 2022 s benchmark, full replication method has been used for 9th May to 3rd June 2022, which can be referred to at table below.
Calculating number of shares from data of equity trading logbook Sem 1 2022, That is
Weight Initial price No. of shares Total value
1 Australia and New Zealand Bank Ltd 10% $26.03 3,841 $99,981.23
2 Qantas Ltd 10% $5.38 18,587 $99,998.06
3 CSL Ltd 10% $270.40 369 $99,777,6
4Newcrest Mining Ltd 10% $26.01 3,844 $99,982.44
5. REA group Ltd 10% $107.28 932 $99,984.96
6 RIO Tinto Ltd 10% $106.80 936 $99,964.80
7 Telstra Corporation Ltd 10% $3.98 25,125 99,997.5
8 Westpac Banking Corporation 10% $24.60 4,065 99,999
9. Woodside Petroleum Ltd 10% $31.58 3,166 99,982.28
10. Xero Ltd 10% $84.34 1,185 99,942.9
100.00 $1,000,000
Company Benchmark Weight No. of shares Portfolio Value
1 Australia and New Zealand Bank Ltd 9.5748% 3,841 $95.748
2 Qantas Ltd 10.1667% 18,587 $101,667
3 CSL Ltd 9.8896% 369 $98,896
4 Newcrest Mining Ltd 9.4368% 3,844 $94,368
5 REA Group Ltd 10.4381% 932 $104,381
6 RIO Tinto Ltd 10.8205% 936 $108,205
7 Telstra Corporation Ltd 9.8128% 25,125 $98,128
8 Westpac Banking Corporation 9.7201% 4,065 $97,201
9 Woodside Petroleum Ltd 10.0308% 3,166 $100,308
10 Xero Ltd 10.1098% 1,185 $101,098
Total 100.00 $1,000,000
3 Passive portfolio summary.
Categorizing the ten companies and collating data, comparing benchmark return and relative return of passive portfolio, benchmark returns is equals to 4.83%, while relative return of passive portfolio equals to portfolio market value minuses absolute return of benchmark, The portfolio market value at closing balance is $990,026.16 AUD, with the result (-$9,973.84) dividing the amount of original portfolio ($1,000,000). Therefore, the relative return of passive portfolio is approximately -0.997%, versus benchmark = -0.9974%-4.83%=-5.83%
Due to close tracking, the tracking error of the full replication method is not close to 0, which indicates that the deviation is more than 5%. Hence, the risk is not stable to invest in passive portfolio as its absolute return is not close to the absolute return of the benchmark. Derived from the result, investors should think over on investing passive portfolio which is has a nonnegligible risk. Whats more, the market value demonstrates the portfolio leads to the result of shortage.
3a Passive Portfolio Goal
The goal of reduplicating the benchmark risk and return is satisfied. From the given asset of $1m AUD as the opening balance in 9th May to purchase the passive portfolio, there have been of loss of 0.9974% with approximately 5.83% gap with the benchmark return of 4.83%.
4 Active Portfolio Management
4a Macroeconomic analysis
GDP
Under the influence of COVID-19, in recent years, the deadly epidemic is taking a growing toll, pushing millions of people into poverty and threatening to depress economic activity for a long time. After the widely spread of COVID-19 vaccination, GDP is expected to grow by 4% and in 2022 and 2% in 2023; These forecasts are little changed from three months ago (Table 1.1). This is expected to cause Labor costs to rise faster than expected.
(RBA government Australia, 2022)
Table 1.1.
employment forecast
It is expected that Australian economy will have a strong expansion and inflation will increase further as a consequence of positive effect of COVID-19 vaccine which is commonly available in Australia.
As regards to employment, its forecast grows rapidly during 2022, which means that participation in the labor force is likely to be grow up, which is supported by increased participation among female and older Australians. The unemployment rate is projected to fall to about 3.5% by early 2023. (RBA, government Australia, 2022) Besides, A broader measure of labor underutilization, which includes underemployed workers, is also expected to decrease to its lowest level in years as companies increase employees hours that meet duration requirement. As the time goes, reopening borders could help to ease labor shortages in some industries, while increasing demand in economy.
Compared with aspect of employment, labor market also can be considered as a major factor in macroeconomic analysis, labor market condition improved in early 2022. Employment growth is expected to remain strong in 2022, followed by a slowdown in economic activity (Table 1.3) The participation rate is forecast to reach a historic high later this year, supported by strong labor demand and longer-run structural drivers, such as higher participation rates among females and older Australians. Furthermore, There is an increase in average hours worked is also considered to be a significant adjustment, responding to strong labor demand, with average hours expected to be grow up to around pre-pandemic levels by 2022, which causes broader measures of labor underutilization fell further.
4c Company outlook
Financial services:
Due to recovery from the COVID-19 pandemic, confidence of business and consumer and the outlook for global economic growth will strongly determine the performance of the financial section in the next few years.
The financial services industry in 2021 embraces many trends, challenges and opportunities. While much of the first half of the year was dominated by discussions of digital assets, the ENVIRONMENTAL, Social and governance (ESG) initiative later came to dominate the spotlight, a reminder that the interests of shareholders and stakeholders are not necessarily the same thing.
Airlines (Transportation):
The international air transport association forecast overall traveler numbers to reach 4.0 billion in 2024, exceeding pre-COVID-19 levels. The February 2022 update to the long-term forecast includes the following key points: Firstly, in 2021, overall traveler numbers were 47% of 2019 levels. This is expected to increase to 83% in 2022, 94% in 2023, 103 % in 2024 and 111% in 2025. In 2021, international traveler numbers were 27% of 2019 levels. It is forecast to rise to 69& in 2022, 82% in 2023, 92% in 2024 and 101% in 2025. This is a more optimistic near-term international recovery outlook than in November 2021, given the gradual easing or removal of travel restrictions in many markets. This has led to improvements in key markets in the North Atlantic and within Europe, strengthening the baseline of the recovery, which is expected to continue to lag behind the region's largest market, China, with no signs of easing its draconian border measures in the near future.
Health Care:
As to health care industry which is likely to be impacted as a result of global COVID-19 pandemic. About the most significant challenges that faces COVID-19 in Australia are shortages of supply, such as surgical masks and hand sanitizer. Furthermore, the federal government has provided related services in this sector, additional assistance and support to reallocation resources to manage the potential risk of COVID-19. Whats more, since most public services is considered necessary, revenue for public aspect is expected to remain relatively stable. However, private health care services suffer from COVID-19 pandemic, as the private sector services depend heavily on providing non-essential health services.
Communication (telecommunication) services:
In 2022, the telecom sector is expected to grow by 0.8%, which means the industry as a whole will be only 4% lower than the original forecast. This means that the communications industry in 2021, while not as bad as expected, will not be as bad as predicted
Energy:
As the issue of traditional energy shortages, while a numerous of providers of capital and stakeholders evolve business model for the new energy business. Hence, the price estimation in the oil and natural gas markets that will influence the energy aspect as we head into 2022.
Technology
Issues like supply chain bottlenecks and technical support for dispersed workers remain front and center for tech companies through early 2022. With the requirement of remote control and shifting market, the work environment has changed rapidly, which means that a number of organizations shift to develop of digital transformation.
4d Ratio analysis
With aspects of Ratio analysis, the function of peer analysis can be taken advantage, which can form graphs with comparison capabilities indicating various indexes.
ROE
Appendix 3.1.3
Return on equity, also known as return on equity, is a measure of financial performance calculated by dividing net income by shareholders' equity. In addition, ROE is considered an indicator of a company's profitability and efficiency in generating profits. From the chart, it can be concluded that QAN.AX has shifted dramatically in ROE, which means that the transportation industry affected by COVID-19 greatly, resulting in considerable deductions in indicator of ROE. By contrast, companies with a steady increase in ROE are the exact opposite. For instance, one of the health care companies---CSL.AX s ROE has fluctuated from 31.8%-47.74%. In addition, REA.AX also indicated that a positive growth in this aspect, as well as RIO.AX, WDS.AX, WBC.AX and NCM.AX with a gentle and positive index in ROE.
Net profit margin
Net profit margin is the bottom line of profit and loss of a company. Net profit is the amount of capital left after deducting all the expenses, including the direct and indirect expenses of the production and sale of the company's products. Net profit margin is calculated by dividing net income by net sales or revenue.
The chart removed WDS.AX and TLX.AX, with trend of overall decline and huge negative data in 2019 and 2018 respectively, demonstrating that the two companies are not taken into account in NPM analysis. From the graph, excluding RIO.AX, ANZ.AX, CSL.AX, REA.AX and WBC.AX, all of these companies have had positive net profit margins over the past few years, while the others remain declined in some financial years. The increase in NPM demonstrates the ability of these companies to survive and generate profits in the harsh economic environment in 2020. NPM decline shows that these companies may use the inadequate cost structure and pricing methods, or may be due to COVID 19.
Long term-growth
Just as its indicator implies, Long-term growth (LTG) is a kind of investment strategy, after years of time within the framework of increasing the value of the portfolio. It can be concluded that companies such as REA group Ltd, Australia and New Zealand Banking group, Woodside Energy group, Westpac banking group and CSL Ltd are relatively successful in the long run, compared with Rio Tinto Ltd and Newcrest Mining Ltd. Except for that, Xero developed rapidly over a multi-year time frame, with 85.1% rate in mean of long term growth.
P/E ratio
The price-to-earnings ratio is one of the most commonly used measures to assess whether stock prices are at a reasonable level. Investors also tend not to believe that earnings figures, which are strictly based on accounting rules, are a true reflection of a company's profitability on a going concern basis, so analysts often make their own adjustments to the company's official net income.
Due to rapid growth in the past recent years, Xero Ltd has a extremely high figures in P/E. In addition, except for TELIX Pharmaceuticals Ltd and Qantas Airways Ltd presents decline, the others are rising.
4e Stock selection analysis
Reason that chosen for Active portfolio.
Company:
Xero Ltd: Due to the COVID-19 pandemic, demand from the technology industry has greatly increased more than ever before. Its long-term growth (LGM) AND P/E ratio are much higher than other companies with positive data. On the other words, Xero Ltd can be considered as a emerging technology company with a great growth potential.
REA group Ltd: As the four ratio indicators shown, the company is expected to expand with balanced growth in ROE, NPM, LGM as well as P/E ratio.
RIO Tinto Ltd: According to the highest ROE data for RIO.AX in the latest financial year, which demonstrates the enterprise has a good momentum of development in the near future, despite its long-term growth rate is negative.
CSL Ltd: As health care industry under the background of COVID-19 outbreak, its supplies or business are required much more than before the pandemic, reflecting in all indicators with positive figures.
Newcrest Mining Ltd: Except for negative LGM, NCM.AX performs well in the other indicators, especially its NGM increment increases year by year.
Australian and New Zealand Banking Group Ltd: From the indicators of the company's proportional analysis, it can be concluded that ANZ.AX is in a state of stable development in the near future
Overweight securities and underweight securities
4. Technical Analysis
Six companies price movements over the past five years Analysis has been performed using 50 and 200day moving averages and volume indicators. Buy signals are circled in white and sell signals are circled in red, which is shown as appendix 1 & 2.
Appendix 1.
Appendix 2
5.0 Active portfolio summary
Evaluation of the portfolios performance.
6a. Portofolio weights
Company Portfolio weight No. of shares Portfolio value
1 Xero Ltd 2 REA group Ltd 3 RIO Tinto Ltd 4 CSL Ltd 5 Newcrest Mining Ltd 6 Australian and New Zealand Banking Group Ltd Total 100 $1,000,000
6b. Total return and active return
6c.Total risk and active risk