RUNNING HEAD: MUTUAL FUNDS

MUTUAL FUNDS

NAME

INSTITUTION
MUTUAL FUNDS

Mutual funds refer to the trusts that allow investors sharing a common financial goal to

pool their savings. The fund manager collects and invests the money in different types of

securities. These securities could range from debentures, shares and other money market

instruments. Mutual funds offer an opportunity to spend in the professionally managed

diversified portfolio at a little cost. The mutual funds have different strategy and objective that

are well defined. A total of 10 mutual fund scheme will be included in my investment portfolio

for easy tracking of changes and detect underperforming projects. It will be comfortable and less

time to consume to manage (Bogle 2016, p.13)

Several parameters have been employed in shortlisting the mutual fund schemes portfolio

(Benz mutual fund). They include the following; progressing weighting for the last three years,

mean rolling returns done daily for the past three years, outperformance: This is determined

using the Jensen’s alpha in the past three years. It will indicate risk-adjusted return generated by

the mutual fund scheme selected compared to the expected market return as forecasted by

CAPM. A higher alpha will suggest that the portfolio performance has overperformed compared

to predicted market returns.

Average return= Risk-free beta + Beta of the mutual fund x (the index average return –

risk-free rate)

My ideal portfolio (Benz mutual fund) will consist of 10 mutual funds spread across

various asset classes and different market capitalizations. The returns on the scheme below are

annualized.

Scheme name Amount ($) 1 month 3 month 1 year 3 year 5 year

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return (%) return (%) return return return

(%) (%) (%)
Sallie Mae 3200 79 61 78 19 7
Barclays bank 4500 62 74 74 21 9
CMBS ETF 1500 64 78 68 19 7
Teva 3600 54 65 69 17 8
Pharmaceutical
Industry Ltd
Alibaba Ltd 4300 47 74 71 13 5
(BABA)
Lithium Motors, 2200 65 58 75 17 9
Inc. (LAD
The Brink’s 4700 95 59 69 22 8
company (BCO)
Mallinckrodt PLC 2800 58 74 67 25 6
Endo international 1400 57 35 72 24 5
PLC
Hanebrand Inc. 2800 58 85 75 23 8
TOTAL 30000

I will consider a moderate portfolio that has moderate volatility with the possibility of

getting returns that outperforms the inflation with a significant margin. My moderate portfolio

shall consist of the 30% bond, 65% stock and 5% money market and cash. This can be broken

down into the following

5% money market/ cash

I will invest 5% in liquid instruments such as treasury bills and CDs. T-bills is an

investment that is safe for moderate investors. One year online/brick and mortar banks such as

Sallie Mae (1.9%), CIT Bank, Ally and Barclays bank have an interest of about 1.7% to 1.9% on

its certificate of deposit which varies depending on the amount saved. It has fewer penalties. I

will gain higher interest on the savings account without the certificate of deposit restrictions.

You can break the CD (Certificate of Deposit) whenever you need your money. The government
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protects these accounts through the Federal deposit insurance corporation to a maximum of

$250000.

30% intermediate bond

Comprises of investment in other investment grade and corporate. They have durations of

between 3- 10 years. They are less volatile and less sensitive to interest rates compared to a

portfolio with longer durations. They include CMBS ETF with an expense ratio of 0.25, total

assets of $306.62m and annual return of -0.42% ranked as the best performing common bond in

the market. The fund classifies under the ERISA index, Commercial mortgage-backed securities

index (CMBS) representing some commercial mortgages. The 90% of its assets are invested in

the assets that consist of the component securities of the underlying index. It may invest more

than 10% of its assets in swap contracts, certain futures, and options. Others include ishares

government credit bond ETF, SPDR Portfolio Aggregate Bond ETF and ishare core Total USD

Bond Market ETF, Vanguard Total Bond market ETF (Grinblatt and Knüpfer 2015, p.926).

15% foreign stock

Comprises of investment in popular foreign companies that are trading in the U.S

exchanges. These companies comprise among the vast operations in the foreign countries with

significant volumes of trade globally and hence provide a better way of diversifying the

investment portfolio. These securities cover a large span regarding industries and geographical

locations. Stocks should be diversified from emerging and developed markets throughout the

world. For example, Teva Pharmaceutical Industry Ltd (TEVA) is an Israel based

pharmaceutical company that manufactures genetic drugs and other specialty medicines sold in

global markets. Other include Alibaba Ltd (BABA) that offers online-based mobile commerce in
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services and products sold in China and internationally. Other include Vale SA a Brazil-based

producer of nickel, base metals, coal fertilizers, iron ore pellets and iron ore used in the

production of end products (Haslem 2015.p.25).

10% small cap stock

Comprises of stocks of publicly traded companies with a market capitalization that ranges

between $300m-$2 billion. They are considered riskier compared to large caps stocks hence they

have a higher potential of making large profits for investors. Stocks that offer the possibility for

growth in future and what affect their prices. The top small cap stock includes the Lithium

Motors, Inc. (LAD). It’s an automobile company involved in selling used cars, new cars,

insurance, warranties, parts and other maintenance services. The company has an upward

moving stock with a market capitalization of $2.467 billion. In January 2018, the stock reached

$128 after which it decreased to the current level of $98.89. The company has an attractive

valuation and return on equity making Lithia a strong small cap to select. P/E ratio of 10.08, EPS

of $9.81, a dividend of $1.16 and a dividend yield of 1.19%.

The second option is the Brink’s company (BCO) which is a famous armored car

company that engages in high tech task, intelligent safes, design security systems, process bill

payments and offers cash management services. Its stock has an uptrend movement after

acquiring DUNBUR Armor Inc. With proper management practices from the management and

accessibility to wider markets it better to invest in brink shares. It has an average volume of

488450, market capitalization of $4.253b, and P/E ratio of 982.9, EPS of $0.09 and dividend of

$0.06 and dividend yield of (0.71%) (Faulkner 2017 .p. 295)

40% large-cap stock index

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Refers to the company that has a market capitalization of $10 billion and above. The

large-cap stocks are less volatile compared to small-cap and mid-cap companies and therefore

preferred for investors with demand in low risk in the stock market. They have a slow and steady

return as they can withstand tough market conditions and regain quicker aftermarket selloff. In

the S&P 500 Index, stocks of Mallinckrodt PLC has a better chance of being bought since the

stock price has been gradually increasing from $53.56 to $83.3 over two years hence worth

buying. Others include Endo international PLC that increased from $15.87 to $24.0 and

Hanebrand Inc. that increased from $22.95 to $33.2

The moderate option will have time horizon more than five years and a medium risk

tolerance on the mutual funds.

TYPE Scheme Interest Expense Stock Stock Dividend Beta

rate per ratio price price
month/ 2018 2016
Dividend
yield
Money Sallie Mae 1.9% 0.21
market
Barclays bank 1.7% 0.23
Intermediate CMBS ETF -0.42% 0.25
bond
Foreign stock Teva 0.21 $23.29 $28.25 1.1
Pharmaceutica
l Industry Ltd
Alibaba Ltd 0.00 $190.32 $141.20 $0.00 1.1
(BABA)
Small cap Lithium 0.23 $128.23 $98.21 0.95
stocks Motors, Inc.
(LAD
The Brink’s 0.71% $83.05 $78.3 $0.06 0.85
company
(BCO)
Large cap Mallinckrodt 0.68% $83.35 $53.56 $0.09 0.52
stock PLC
Endo 0.95% $15.87 $15.87 $0.20 0.32
international
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PLC
Hanebrand 0.98% $33.2 $24.0 $0.32 0.65
Inc.

Annual return

The information related to the current price of the stock and the rate at which it was

purchased will be needed. In the case of splits, the amount of purchase will be adjusted

accordingly. After the determination of the costs, the simple return on percentage is calculated,

and the resultant figure will be annualized.

CAGR = [Ending value/Beginning value][1/no. of yrs.] -1

CAGR = Compound annual growth rate

The annualized return on investment shows the real gain or loss of investment, and hence

an investor can relate with difficulty involved in recouping the losses. Due to the significant size

of the difference in losses and gains, annualized returns help in better comparison of investment

results. This process is considered to be more reliable compared t simple returns since it includes

adjustments in interest being compounded. Different classes of assets are said to have different

strata on annual returns (Barber and Huang 2016, p.2636).

The Benz mutual fund as seen above is expected to have an average of the annual return

of 6.92% over the next 20 years on the S&P 500 index return. The average mutual fund return

for the next 20 years is expected to be 4.23% while other investments such as the stock market

provide an annual yield of 10%. The Benz mutual fund is supposed to have an initial investment

of about $30000. The mutual fund portfolio will be traded per day after closure of the market

(Jun and Shi 2014 p.320).

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Conclusion

Mutual funds experience both highs and lows throughout the year. Understanding the

consequences of the investment will assist investors to decide on what is wrong or right in their

investment portfolio. It’s important we consider the number of fees charged on our investment

portfolio and the expected tax to be incurred in the process. Investors should be in a position to

avail tax rebates mutual funds to reduce overall expenses. Furthermore, those mutual funds that

attract less fee should be considered. The credit opportunity funds should adopt a better accrual

strategy to increase on their return. This is undertaken with high risk to take the higher

performance.
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Reference

Barber, B.M., Huang, X. and Odean, T., 2016. Which factors matter to investors? Evidence from

mutual fund flows. The Review of Financial Studies, 29(10), pp.2600-2642.

Bogle, J.C., 2016. The index mutual fund: 40 years of growth, change, and challenge. Financial

Analysts Journal, 72(1), pp.9-13.

Bogle, J.C., 2017. The Little Book of Common Sense Investing: The Only Way to Guarantee

Your Fair Share of Stock Market Returns. John Wiley & Sons.

Faulkner, A.E., 2017. Financial literacy education in the United States: Exploring popular

personal finance literature. Journal of Librarianship and Information Science, 49(3),

pp.287-298.

Grinblatt, M., Ikäheimo, S., Keloharju, M. and Knüpfer, S., 2015. IQ and mutual fund

choice. Management Science, 62(4), pp.924-944.

Haslem, J.A., 2015. Indecent Disclosure: The Need for Normative Transparency of Mutual Fund

Disclosure.

Jun, X., Li, M. and Shi, J., 2014. Volatile market condition and investor clientele effects on

mutual fund flow performance relationship. Pacific-Basin Finance Journal, 29, pp.310-

334.

Reference