Financial Investment Analysis: Selection And Critically Access The Kind Of Funds

Introduction

The fund management industry currently emerging as one of the leading sector because people now do not want to depend on single income source. To complete objective of short term and long term cash flow, they like to invest money by taking help of professional find manager. Industry is growing as people now have more disposable income, technology, and growth of world economy. Present report covers the fund management strategy of two success full organization i. e. prudential financial investment and Janus Henderson. Study is based upon close fund “The City of London Investment plc of Janus Henderson and open ended mutual fund “Active 1 Class A inc from prudential financial (Fernandez-Izquierdo and Matallin-Saez, 2008). Study articulates the reputation of both fun, role of manager regarding fund management and rating given to both company by credit rating agencies. Portfolio management stargazes, charges and commission and assts allocation practice of both the company also given which will customer to know more about process of industry. Lastly recommendation will be given to fund manager to give his best performance.

Assets management industry- assets management is process of supervise and move the investment from one security to another, on behalf of individual, intuition and organization. Money management industry currently passing through metamorphosis as digital technology helped it grow rapidly. Industry enjoyed exceptional growth in 2017. Finance management sector grew with 12% rate ($79.2 trillion), which is the highest in decade. China and USA received notable growth. 2018 is witness of some significant trend in AMC industry like- firm want to strengthen themselves in digital technology for data gather and analysis, retailer investor show more interest in investment because of bull market movement and economical growth of developing countries etc. it is expected, industry will grow with average 4.2 % growth rate till 2020.

Figure 1 UK fund management industry (Sources: UK asset management industry: a global centre, 2018)

When it comes to, UK investment industry, investment association ( IA) note down the value of £7.7trn (€8.8trn) for the sector. It is seen that, major funding (£3.4trn) came out from “pension fund” and £1.2trn from insurance clients. Luxemburg and Ireland are the hot destination for cross border assets.

Figure 2 UK fund management industry performance (Sources: UK asset management industry: a global centre, 2018)

Finance Conduct Authority (FCA) is finance watch dog of UK, which makes regulation of assets mangers and company.

Selection And Critically Access The Kind Of Funds

We have chosen one open and one close ended fund, trading in UK assets management industry. The open ended fund “The City of London Investment plc” is selected from Prudential Financial Company and close ended fund is elected from “Active 1 Class A inc . in open ended fund, share are issued in unlimited number. Price of these shares is determined by Net Assets Value (NAV). On the other side, close fund are issued in limited number, and, their price is affected by demand and supply of shares in market.

Reputation of close and open ended funds –

Open ended options get more popularity among individual investors as it has the qualities which favor them. For instance- these mutual funds have high liquidity as it allows investor to redeem share at any time and obtain cash in hand any time. Systematic plan like- systematic investment plan ( SIP), systematic transfer plan ( STP )and systematic withdraw plan ( SWP) options are only available in open mutual find and lastly, customer can easily analyze these fund by themselves as track record of performance can be get effortlessly from market cycle (Haslem, 2009). They belong to high risk and high return securities. Close fund, gives sense of security as it lock the invest amount for long time and render capital benefit on it. Investor sees them more like as long term investment. Individual who do not need money for fix time horizon opt it. In short it can say “close fund are observed as low risk – high return security.

Manager-

Manager put investor’s money in diversified pool on the basis of individual objective. Generally, manager tries to combine both regular income (dividend) and capital income in open mutual funds. For instance- if a customer have objective for investment like- a customer might have objective to earn monthly cash flow as well as collect money for child marriage, in such case manager will some amount of money in short term return and some in long term gain securities. Managers who are responsible to manage close fund, invest their client’s money in security belong to real estate industry, information technology ( IT), Automobile, FMGC, infrastructure and pharmaceuticals.

Rating

Credit rating agencies examines organization on different parameters and gives rating on the basis of it, to give glimpse about firm to customer. There performance indicator includes- financial performance, possible risk, expected return, track record, Debt structure, market condition, business environment and regulations. Most popular credit rating agencies are Moody’, standard and poor’s, Fitch IBCA, and CRISIL. Credit rating Is given to both the company in below diagrams-

Figure 3 credit rating of from prudential financial (Sources: Rating, 2019)

Figure 4 long term rating of standard and poor’s for Janus Henderson

Prudential investment philosophy

Organization believes in making long lasting relationships. To achieve its core value, company render quality assured product and service. It also committed to complete its promise to with all stakeholders. Business is done on ethical manner with help of diversified professionals. Firm wants to grab superior result and top position in the industry.

Investment philosophy of Janus Henderson

This organization also gives importance to its customer by “putting customer centre to everything they do. Firm also make collaboration with different experts, to make most customers friendly solutions. Apart from it, company also emphasis on measuring the performance by client oriented key performance indicators. Organization shows its strength in form of global mindset and asset base.

Portfolio Management And Strategies –

Janus Handerson makes its portfolio customized by going through three stages, namely, portfolio deconstruction (Custom Portfolio Diagnostics), portfolio construction and portfolio knowledge exchange. In the first stage, portfolio manager seek to mitigate the risk and increase of return. Here, risk viewed dynamically and deeply, beyond the conventional way to analyze the risk. For the purpose different method are being used, such as factor return decomposition, risk budgeting, VaR, max drawdown analyses and correlation analysis. Here, managers try to minimize the volatility of invested fund.

Figure 5 Custom Portfolio Diagnostics (Sources: portfolio-construction-and-strategy, 2019)

In the second stage, which is called “portfolio construction”, assets allocation is done with having different perception. This perception is made up upon database of, number of advisor portfolios. Data base based observations are outlines in proprietary asset allocation lens. These lenses make portfolio manager’s view simplified, which eventually help in making straightforward and customer goal focused portfolios. Different lenses of Janus Henderson are Diversifying Equity, Balanced Core, Broad Asset Allocation, Traditional Equity and Traditional Fixed Income (Huang, Sialm and Zhang2011). In Portfolio Knowledge Exchange, company borders its manager perception by exploring the distinct opinion from across the globe.

Prudential investment opted some strategies and assumption for their portfolio making, on the basis of experience. Like company believe that security trading in middle market gives the maximum return. Firm put its client’s money in organizations which have at least $30-$500 million revenue and $7 million minimum EBITDA. For this purpose Prudential matured its relationship with middle market company. Firm also made network with 1000 companies at regional, national level and private equity funds. This network provides wide range of portfolio exposure. While making the portfolio its targets niche market. And, company tries to added value in product and service for particular segment. According to Prudential “Each single individual transaction provided high intensive, favorable price and terms and fine control on investment. Apart from it, transaction forces organization to develop harmonious relation with clients, which eventually help in active portfolio management.

Assets Allocation

Assets allocation is a strategic practice uses by investment Management Company, in which, manager buy security of different company and industry to minimize the overall risk. An ideal mix contain, bond, equity, real estate and other sectors. Assets allocation practice can be categorized into six classes’ like- strategic, constant- weighting, tactical, dynamic, insured and integrated asset allocation. Nowadays, assets management organization does not rely on only one practice but they use mixture of them. Both Janus Henderson and Prudential investment uses same kinds of approach which can be seen by understand more about these classes-

Strategic Asset Allocation- in the practice, managers make portfolio on the basis of expected rates, time-frame and risk.

Figure 6 Assets Allocation of Prudential financial management (Sources: LF Prudential Risk Managed Active 1 Class A Acc, 2019 )

Constant-Weighting Asset Allocation- here, manager rebalance established the portfolio on the basis of changed value. For instance- if value of one security declined in market, manager will purchase more quantity of that and vice- versa.

Tactical assets allocation- in it, portfolio manager seeks to grab favorable economical advantage prevailing for one asset in short term. Like- if there is high return of infrastructure sector, manager will sale out investment made on automobile, and purchase more of infrastructure.

Figure 7 Assets allocation of Janus Henderson (Sources: The City of London Investment Trust plc, 2019)

Dynamic Assets Allocation- in this practice, manager constantly alters the portfolio, as market raises or fall and economy gets stronger or weakens.

Insured Assets Allocation- manager, who uses insured allocation, establishes minimum portfolio value. They aim; Return on investment should not drop down at any cost. And, if return goes above this base value, than manager actively research and takes decision to purchase and sale out the security.

Integrated asset allocation – for this approach, manager consider economic expectations and investor’s risk tolerance. Both firm take these factors into consideration while design portfolio for individuals, as all have different desire of return, risk tolerance and locking period (Moreno, and Rodríguez, 2009)

Charges, Fee And Commission

These factors play important role in making mutual fund purchase decision. Although, amount of these components not heavily impact the small investment. So it is important to customer to compare these dimensions of different company and then only take decision. But, if client decided to make large investment or frequent sale- purchase of security, it would impact significantly. Generally, charges fee are quoted as some % of total managed assets. Currently, charges for commission are not quoted beyond 5.75%.

Particulars

Prudential investment

Janus Henderson

Initial charge

0.00%

5%

Base Annual Management Charge (AMC)

0.74%

0.6 % to 1.5 %

Exit Charge

None

Discretionary

Performance Charge

None

0.07% to 0.25%

Ongoing Charges

0.80%

0.25% to 2.5%.

Investment Performance

It is obvious that investor seeks for better return from the investment in a long run. In this context, performance of fund is compared from the benchmark i.e. FTSE All Share Index.

Return

1 year

3 year

5 year

FTSE All Share Index

3.84%

9.89%

6.49%

LF Prudential Risk Managed Active 1 Class A Inc

+9.24%

+16.53%

+3.95%

The City of London Investment Trust plc

+2.12%

+6.49%

+5.51%

Upon reviewing above performance, it is evident that LF Prudential Risk Managed Active 1 Class A Inc is performing well as compared to The City of London Investment Trust plc. Former has higher return in long run and short run which meets with the needs of investors. Also, fund of Prudential is meeting with the benchmark and hence been considered as more performing than that of other selected.

Possible Reasons Outperform The Benchmark.

Sometimes manager fails to meet expectation of client as well as organization. It is because of some internal and external reasons. External factor are included PESTLE factor. Internal factor like- organization’s value, experience of fund manager, investor’s behavior assets allocation strategy and management Patrice of organization, impacts the preference of portfolio. For instance- if manager went low diversification in assets allocation, there chance of huge loss. Like- manager who put 70% of money in only health care sector and rest in infrastructure than there is high chances of loss. But if manger would have 20 % consumer good industry, 20% in health care and so on. Then it will lead to heavy loss. Investment industry work upon a proverb “all eggs should not put in one basket”.

Organization value and philosophy sometimes restricts manager to take action, which might give profit but not ethically correct. Like every time managers have to take permission from customer if he made any big change in portfolio. In such case, there is chances that, customer declines manager plan because of lack of knowledge or because of their risk resistance nature. So, manager will not able to make attractive return (Higgins, 2012)

Recommendation

Though both the company are performing well in their area, but they are some important suggestion for fund manager like- they should not take undue and large risk to avoid alpha, manager should read client’s behavior well as, it also impact the investment strategy. Portfolio manager should know everything about “security and sector” in which he is going to put money because assumption and probability works less, where a good knowledge based decision will render better result. Construction of portfolio now contributes with great intensity in success of fund management. So, manager should take help of technology and make team of professionally expert people. Manager can make collaboration with company who are engage in managing marker information and inside information about different firm because accuracy and timely information also critical part of assets management industry.

References:

Books and Journals

1. Assets Allocation of Prudential financial management, 2019, [Online]. Available through < https://www.fundslibrary.co.uk/FundsLibrary.BrandedTools/PruConsumer/DataOnline/HtmlFactsheet/37adec4d-d835-4ba6-abfb-cc364e3952ab?fundType=oeicconsumer.pru#background-data>
2. Fernandez-Izquierdo, A., & Matallin-Saez, J. C. (2008). Performance of ethical mutual funds in Spain: sacrifice or premium?. Journal of Business Ethics, 81(2), 247-260.
3. Haslem, J. (2009). Mutual funds: risk and performance analysis for decision making. John Wiley & Sons.
4. Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
5. Huang, J., Sialm, C., & Zhang, H. (2011). Risk shifting and mutual fund performance. The Review of Financial Studies, 24(8), 2575-2616.
6. Moreno, D., & Rodríguez, R. (2009). The value of coskewness in mutual fund performance evaluation. Journal of Banking & Finance, 33(9), 1664-1676.
7. Portfolio construction and strategy. 2019. [Online]. Available through < https://en-us.janushenderson.com/advisor/portfolio-construction-and-strategy/>
8. Rating. 2019. [Online]. Available through < http://www.investor.prudential.com/ratings/default.aspx>
9. The City of London Investment Trust plc. 2019. [Online]. Available through < https://www.janushenderson.com/ukpi/fund/169/the-city-of-london-investment-trust-plc>
10. UK asset management industry: a global centre. 2018. [Online]. Available through < https://www.theinvestmentassociation.org/assets/files/research/2018/20180913-chapter1.pdf.pdf>.