CONSTRUCTING AN INVESTMENT PORTFOLIO

Constructing an investment portfolio



1 Policy Statement

a) Investment objective

The objective of the fund is total return. The fund aims to combine a regular income returns and potentially increase the value of your capital over the long term (Colonial First State Investment). The fund also seeks to match the performance of the Market Index (S&P/ASX200 Share Index).

Who is this fund for

For investors who are at middle-aged (30-50 years old), more risk-tolerant and have a relatively lower need for liquidity.

Suggested timeframe

7 - 10 years

b) Target return

Expected Fund Performance

 

 

 

Fund and index returns

Weekly

Weekly (%)

Annual Effective return (%)

Expected Fund return

0.269-0.351

15 - 20

Expected Inflation

0.07

3.75

Nominal Risk free rate

0.00105

0.105

5.46

Market index (S&P/ASX200 Share Index - benchmark)

0.0008233

0.08

4.3724

c) Level of risk

Medium risk

Risks involved

As an investor, it is important to realise that there is an uncertainty on the expected return. The actual return may be different from what is expected (Gitman, p.123). Moreover, there is a risk-return tradeoff in the investment, which means that investments with more risk should provide higher returns, and vice versa (Gitman, p.123). There are two sources of total risk, systematic risk and non-systematic risk.

Market risk

Market risk is the risk that investment returns will decrease due to the market factors such as political, economic, changes in investor tastes and preferences (Gitman, p.126). Market risk is also called systematic risk, which cannot be diversified away.

Management risk

Management risk involves the risk that the fund manager, who manages your investment on your behalf, fails to perform as expectation (Colonial First State Investments, 2009). However, Europa Investments use the indexing investment strategy, which is regarded as a passive strategy. This strategy can drastically reduce the risk of short-term underperformance relative to those target indexes when comparing with the active investment strategy relative to their own benchmark (Vanguard Australia, 2009).

Interest rate risk

The change in the interest rate may have a negative impact on the investment values of all types of assets (BT). Normally, the fixed-income securities (bonds and preference shares) will be affected most by the interest rate movement (Gitman, 2004). In general, the higher the interest rate, the lower the value, and vice versa (Investment, 2006).

Liquidity risk

Liquidity risk is the risk that an investment may not easily converted into cash with little loss of capital and minimum delay (BT, 2009). Generally speaking, shares in the large listed companies are regarded as liquid asset while direct property and infrastructure are considered as illiquid (Colonial First State Investments, 2009). Under difficult circumstances, some liquid assets may become illiquid (Colonial First State Investments, 2009) As a result, investors may encounter the difficulty of selling such assets for cash without a potentially significant delay.

Credit risk

Credit risk is the risk that a party fails to meet their payment obligation when they fall due (Colonial First State Investments, 2009). Fixed interest security usually incurs credit risk (Vanguard Australia, 2009). This is the risk that an issuer may not able to meet the payment obligation to the fund. In order to minimise the risk, Europa Investment will diversify the ...