Advanced Financial Management 9 Aug 2019

Due: 9 August 2019

Assume you have recently been recruited to manage an equity fund. Your line manager has allocated you a fund that has a nominal sum of Singapore dollars 100,000,000 and your task is to construct an equity portfolio consisting of no more than 10 stocks using a fundamental approach to stock selection. The stocks must be selected from the FTSE ST ALL Share Index.

You are required to prepare a report to your manager for approval which provides the philosophy behind your selection process and explains why customers should invest in your fund. The report is aimed at household investors.

General tips:

• Although you are free to choose your fundamental-based approach to stock selection, given we have spent some time discussing value strategy, it might be wise to choose a value approach.

• Remember the Buffett quote: “No matter how great the talent or efforts, some things take time. You can’t produce a baby in one month by getting nine women pregnant.” Don’t worry that you will not know how they perform over the holding period. Remember, the holding period for value strategies tend to be quite long – longer than the time you have to hand in this assignment.

• Another useful Buffett quote: “It is not necessary to do extraordinary things to get extraordinary results.” In other words, don’t allow yourself to feel swamped by this assignment. The basics of value investing are straightforward.

The structure of your report should be as follows:

1) The pitch to the customer (20 marks)

This should be a fairly brief and concise account of the philosophy behind the selection process. It should be non-technical (no graphs or tables) and written in such a way that non-specialists can understand.

Tips for pitch to the customer:

• Remember who your audience is. You should assume they have not received an education in finance.

• You should communicate the philosophy underpinning the management of the fund in a way that is accessible to an intelligent non-specialist. For example, is it an active or passive fund? Have the stocks been chosen because of a risk-return profile or because you have a system for identifying mispriced stocks?

• Your clients are going to want to know whether this is a high or low risk fund.

2) The intellectual foundations of the selection process (40 marks)

In this section, you should provide a more robust justification for your approach. In doing so, you are expected to refer to the theoretical and empirical literature which underpins your approach taking care to reference relevant research in the area.

Tips:

• It is crucial that you are clear whether your approach is premised on a belief in the EMH or in exploiting deviations from the EMH.

• Explain why you adopt your chosen approach citing literature as appropriate.

3) A description of the stock selection process (40 marks)

In this section you should provide a clear written description with appropriate equations (use equation editor in Word) to describe your method.

Use historical and live market data from 20 May 2019 (Monday) to 8 August 2019 (Thursday). You will have approximately 2 weeks to finalize and to submit the report by 21 August 2019, but you should progressively do parts of the report as you trade during this period.

In addition, you should provide appropriate tables with descriptive statistics, including the risk of the portfolio.

Tips:

• Provide summary stats for any metrics that you use to guide your stock selection.

• Be careful to present information in a clear manner which is easy on the eye. This especially applies to tables and any equations you use.

• In preparing tables, think about what information is useful to justify your stock selection.

• Try to avoid providing pages and pages of tables and graphs. If you’re wise about how you construct tables, you can present a lot of information in each table.

• You are not allowed to use derivatives, such as options or any short selling.

• As the fundamental approach is used, you are not allowed to trade in and out of any given stock more than once.

* The word count should not exceed 2000 words excluding reference list, appendices, the cover page, abstract, glossary and list of tables, figures, charts and abbreviation.

*The main sources of data are Capital IQ, Bloomberg, Yahoo Finance, and others.  (Will provide log in details of Capital IQ once homework has been accepted).

*References should comply with APA 6th ed. style.

*Turnitin report required. Must not be more than 20% similarity index and plagiarism.