Coursework Assignment 2022/23

Module Name: Investment Management (AFE-7-IVM)

Student ID: 4102045

Deadline Date: 17th March 2023 (2:00 PM)

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Table of Contents

Sr No. Particulars Page

Number
1. Introduction 3
2. Investor Profile 3
3. Macroeconomic Context 3
4. Portfolio Construction 4
5. Portfolio Performance Analysis 8
6. Portfolio Rebalancing 9
7. Conclusion 10

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 1. Introduction

This report's goal is to suggest a diversified portfolio of financial assets for a £500,000
investor while taking into account the investor's risk appetite, time horizon for investing, and
market outlook. The report will analyze the performance of the portfolio and make
modifications based on the state of the market for the period from 1 September 2020 to 28
February 2023. At least four assets will be included in the portfolio, each of which was
chosen for the portfolio based on its predicted risk-adjusted returns, correlation with other
assets, liquidity, and transaction costs.

For building the portfolio, the top-down approach of investing has been followed. This
involves scanning the macroeconomic factors of the economy like GDP, employment,
interest rates etc. before diving into specific factors of sectors.

2. Investor Profile

The investor is a 30-year-old interior designer who has recently received an inheritance of
£500,000. She is looking to invest this money into the stock market. The aim of this
investment is to build her own office space in the future. Currently she is operating from a
rented office. Once, the office is constructed, the remaining fund shall be used to generate an
additional source of income. In the next 5 years, the investor doesn’t plan to have any
additional expenses. Therefore, all the returns from this portfolio shall be reinvested to reach
the aim of the portfolio.

In the first year, the investor aims a return of around 8-10%. The risk tolerance profile of the
investor is moderately aggressive. She wishes to take risks and aims to earn high returns from
this investment. Once the goal is reached, she wishes to withdraw this money from the
market and put it to use for the construction of her new office space.

3. Macroeconomic Context

The stock market is affected by several macroeconomic factors such as GDP growth,
inflation, interest rates, unemployment rates, government policies, and global events. In
general, the stock market benefits from a strong economy with low unemployment, rapid
GDP growth, and low inflation. In contrast, a poor economy with high unemployment, low
GDP growth, and high inflation tends to be negative for the stock market.

It is crucial to keep in mind, nevertheless, that the connection between macroeconomic issues
and the stock market is not always clear-cut or predictable. Other factors that can affect the
stock market include market sentiment, company-specific news, and earnings reports.
Investor sentiments also play an important role in portfolio construction and return of
investments.

The major events affecting the stock market in the past few years are- Coronavirus, Brexit,
the trade war, US presidential elections and many more. (MarketWatch, 2022) (Gewecke Jr.,
2019)

In December 2019, the fast-spreading coronavirus forced the world into a public health
emergency and all economies were thrown into a rumble. Each industry and sector were

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affected negatively. The markets are expected to recover once the effect of covid mellows
down.

Another pertinent event that had implications on the EU and UK was Brexit. It was
responsible for shaping the economies of many countries. The worst hit industry due to
Brexit was the manufacturing industry. Our findings imply that initial stock price fluctuations
were influenced by concerns about a cyclical slump and by the depreciation of the pound
sterling after the referendum. We also find tentative evidence that market reactions to two
subsequent speeches by Theresa May were more closely correlated with potential changes to
tariffs and non-tariff barriers on UK-EU trade, indicating that investors may have updated
their expectations considering the possibility of a 'hard Brexit'. (Breinlich et al., 2018)

4. Portfolio Construction

The top-down approach to portfolio construction involves first examining macroeconomic

and market trends, then choosing assets that are thought to profit from those trends. Investors
can diversify their portfolio in accordance with the top-down approach's recommendations by
identifying the sectors and asset classes that are expected to do well in various economic
scenarios. (Silberstein, 2022)

The first stage in creating an investing portfolio is figuring out the investor's risk tolerance,
which shows their ability and willingness to accept changes in the value of their assets. To
determine the mix of investments in the portfolio, the investor took a risk tolerance
assessment questionnaire. According to the results, the asset allocation for this portfolio can
be done in the following manner: 60% equities, 20% bonds, and 20% ETFs. This ratio will
guarantee gradual moderate development through stocks while reducing potential volatility
on the bond and ETF side.

The evaluation of the market outlook, which takes into account macroeconomic variables,
industry trends, and consumer attitude, comes next. By September 2020, financial markets
were being supported by monetary and fiscal stimulus measures as the world economy was
recovering from the COVID-19 epidemic. Geopolitical concerns, trade disagreements, and
the possibility of a second wave of infections all contributed to the continued high level of
uncertainty. In this situation, we take a cautious stance, concentrating on industries that are
anticipated to gain from structural trends and have lower cyclical risk exposure.

The portfolio is further diversified by industry to reduce volatility.

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Table 1: Stock Allocation

Type Ticker Name Sector Weight

Equity EYE Eagle Eye Solutions Group PLC Technology 20%
Equity XOM Exxon Mobil Corporation Energy 20%
Equity TRI Thomson Reuters Corporation Industrials 20%
Corporate Bond JSIAX JPMorgan Unconstrained Debt - 20%
A
ETF XMMO Invesco S&P MidCap Value - 10%
with Momentum ETF
ETF VHT Vanguard Health Care Index Healthcare 10%
Fund
Total 100%

The portfolio consists of equities, bonds and ETFs. According to the Capital Assets Pricing
Model (CAPM), the portfolio has an expected return of 8.05%. The equation of CAPM is as
follows:

ℜ=Rf + B (Rm−Rf )

Table 2: Assets expected return and volatility

Average Asset
Risk Free Market Expected
Ticker Weight Rate Return Asset Beta Return
EYE 20% 0.40% 8.70% 1.27 10.94%
XOM 20% 1.88% 10.40% 1.08 11.08%
TRI 20% 1.88% 10.40% 0.28 4.27%
JSIAX 20% 1.88% 10.40% 0.38 5.12%
XMMO 10% 1.88% 10.40% 0.95 9.97%
VHT 10% 1.88% 10.40% 0.68 7.67%
Total 8.05%

For all stocks in the US, the risk-free rate used is the 3 month US Treasury bill rate and the
Average market return is the return of the S&P500 Index. For Eagle Eye Solutions Group
PLC, the risk-free rate used is the UK government treasury bond rate and the average market
return is the return of the FTSE100 Index.

Using the Excel function SUMPRODUCT, the overall beta and total return of the portfolio
were calculated by multiplying each asset's beta by its predicted return given its weight in the
portfolio.

Equities

Eagle Eye Solutions Group PLC (EYE)

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A UK-based provider of software and services, Eagle Eye Solutions Group plc offers
retailers, hospitality and leisure companies, and other enterprises digital marketing and
consumer interaction solutions. The Eagle Eye AIR platform, the company's main
technological foundation, enables companies to build and manage digital promotions, loyalty
programmes, and gift cards across a variety of channels, including the web, mobile, email,
and social media. The company's solutions are made to assist organisations in better
comprehending and interacting with their customers, which increases revenue and client
loyalty.

There were significant fluctuations in the stock price of the company from 2014 to 2020.
There were many instances of downfall, but then the stock recovered gradually every time
after a crash. The stock was hit hard due to the Covid-19 pandemic and therefore, the prices
during September 2020 were low. The stock is undervalued at the moment and therefore, is
added to the portfolio at a low price. The stock shows growth potential once the world
recovers from Covid. Digital marketing seems promising in the coming years. Therefore, this
company’s stock has a lot of potential for growth.

Exxon Mobil Corporation (XOM)

One of the biggest international oil and gas corporations in the world is Exxon Mobil
Corporation. The three main business divisions of ExxonMobil are chemical, upstream, and
downstream operations. Exploration, production, and sales of crude oil and natural gas are all
part of the upstream segment. Gasoline, diesel fuel, and lubricants are just a few examples of
the petroleum products that are refined, marketed, and transported in the downstream
segment. Olefins, aromatics, polyethylene, and polypropylene are just a few of the chemical
goods that are produced and sold in the chemical market. The business has a long history of
technological advancement and research, and it makes significant investments in R&D to
boost productivity and lessen its environmental effect. The company aims to reduce its
greenhouse gas emissions by 15-20% by 2025.

This stock is added to the portfolio for multiple reasons. The company has a strong dividend
history. These dividends can be reinvested, and the portfolio can grow. The oil and gas
industry has faced some challenges recently, but since this company is one of the largest
players in its field, it has the potential to grow and increase its profitability over the long
term. The company’s aim towards sustainability is also appealing.

Thomson Reuters Corporation (TRI)

Thomson Reuters Corporation is a Canada based provider of business information services.

The business is divided into five segments: Legal Professionals provides research and
workflow products to law firms and governments, with an emphasis on legal research that is
supported by technology and workflow solutions that integrate information, tools, and
analytics. Corporates provides a range of content-enabled technology solutions for internal
legal, tax, regulatory, compliance, and IT professionals to company customers. With a focus
on tax offerings and tax workflow automation, Tax & Accounting Professionals provides
research and workflow tools to tax, accounting, and audit professionals in accounting
companies. Through Reuters News Agency, Reuters.com, Reuters Events, Thomson Reuters
products, and the Refinitiv business of LSEG, Reuters News provides business, financial, and
international news to media outlets, professionals, and news consumers. Global Print offers
legal and tax information primarily in print format.

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The company has reported consistent revenue growth in the recent years. They have a strong
market position and a large customer base. The diverse revenue streams and commitment to
innovation make this investment a safe choice.

Bonds

JPMorgan Unconstrained Debt A

This is a non-traditional bond fund from the JPMorgan Fund family which invests in small
cap value bonds. It has a holdings turnover of 103%, which makes it a very prominent
investment.

ETFs

Invesco S&P MidCap Value with Momentum ETF

This ETF is benchmarked on the S&P Midcap 400 Momentum Index. 90% of the assets of
this fund are invested in the component securities of the benchmark index which include 80
securities of the benchmark having the highest momentum scores. The momentum scores are
calculated by comparing each security's upward price movements to those of other qualifying
equities in the S&P Midcap 400 Index. (Invesco, 2023)

XMMO Holdings Breakdown

Industrials
2% 1% 0% Financials
Healthcare
5% Materials
6% Consumer Discre-
26% tionary
6% Energy
Information
Technology
Consumer Staples
9%
Communication
Services
Utilities
13% Real Estate
9%
Investment Com-
panies
Cash
11%
12%

The expense ratio for this ETF is 0.33%. It is a very low expense cost for the investor.

Vanguard Health Care Index Fund

This is a low-cost index fund managed by the Vanguard Equity Index Group which provides
exposure to the Healthcare stocks of the US equity market. This fund includes stocks of
companies involved in providing Since this fund only focuses on healthcare and
supplementary goods and services, investment in this fund might pose a volatility risk.
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However, since the breakout of Coronavirus, healthcare industry is growing constantly. So,
investing in this fund seems like a good option. The volatility risk is also reduced due to
portfolio diversification. The amount invested in this fund is 10% of the total value of the
portfolio. (Vanguard, 2023)

VHT Holdings Breakdown

2%
3% 2%

5%
Healthcare
Industrials
Consumer Services
Unclassified
Technology

88%

The expense ratio for this ETF is 0.10%. It is a very low expense cost for the investor.

5. Portfolio Performance Analysis

By the end of February 2023, the return of the portfolio reached a whooping 101%. This is
much greater than the expected return of the portfolio. The prices of all the components of the
portfolio went up more than expected.

The highest performing stock was Exxon Mobil Corporation. Since the COVID-19 pandemic
started to fade in some areas, its demand and price have rebounded. The business has also
taken steps to cut expenses, such as lowering capital expenditures and selling non-core assets,
which improved its financial performance. ExxonMobil enjoys a solid reputation as a well-
run and financially secure business, which may have helped it weather the recent economic
turbulence and preserve investor confidence. (Norton, 2023)

Another stock that outperformed our expectations was Eagle Eye Solutions Group PLC. The
rising need for digital marketing solutions, especially those that provide individualised and
targeted advertising, has accelerated the growth of the company. The COVID-19 epidemic
has also expedited the shift to online buying, and Eagle Eye Solutions Group plc's digital
marketing platform has assisted merchants in catching up with this trend and finding new
ways to interact with customers. Last but not least, Eagle Eye Solutions Group plc's solid
financial results and management team have contributed to its ability to keep investors
confident and draw in new ones.

Table 5: Portfolio constitution as on 1st September 2020

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 Investment Price Price (GBP) Shares
Ticker Value Weight (USD) USD/GBP=0.74 Purchased
EYE 100,000 20% - 266 376
XOM 100,000 20% 34.62 25.6188 3,903
TRI 100,000 20% 74.59 55.1966 1,812
JSIAX 100,000 20% 9.27 6.8598 14,578
XMMO 50,000 10% 65.74 48.6476 1,028
VHT 50,000 10% 198.95 147.223 340

Table 5: Portfolio constitution as on 28th February 2023

Numbe Investment Adjusted
r of Price Price (GBP) Value Dividend Expense Value of
Ticker shares (USD) USD/GBP=0.83 (GBP) s Ratio Investment Return
EYE 376 - 532.5 200187.97 - - 200187.97 100%
XOM 3903 109.91 91.2253 356087.33 3.55% - 368728.43 269%
TRI 1812 121.03 100.4549 181994.72 1.56% - 184833.84 85%
JSIAX 14578 9.44 7.8352 114219.07 3.10% - 117759.86 18%
XMMO 1028 77.34 64.1922 65976.74 1.38% 0.33% 66669.49 33%
VHT 340 236.39 196.2037 66634.87 1.40% 0.10% 67501.12 35%
Total 1005680.72 101%

6. Portfolio Rebalancing

Portfolio as on 1st September 2020

VHT
10% EYE
XMMO 20%
10%

JSIAX XOM
20% 20%

TRI
20%

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 Portfolio as on 28th February 2023
VHT
XMMO 7% EYE
7% 20%

JSIAX
12%

TRI
18% XOM
37%

7. Conclusion

The overall performance of the portfolio was groundbreaking as the investor earned a return
of 101%. h

References

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Breinlich, H., Leromain, E., Novy, D., Sampson, T. and Usman, A. (2018) The economic effects of brexit:
Evidence from the stock market, The Journal of Applied Public Economics, 39 (4), pp. 581-623.
Gewecke Jr., R. L. (2019) 2010–2019: The Decade in Review. Available
from: https://www.cliffordswan.com/blog/2010-2019-the-decade-in-review [Accessed Mar 13, 2023].
Invesco (2023) Invesco S&P MidCap Momentum ETF. Available
from: https://www.invesco.com/us/financial-products/etfs/product-detail?
audienceType=Investor&ticker=XMMO [Accessed mar 12, 2023].
MarketWatch (2022) The top 25 market events of the last 25 years. Available
from: https://www.marketwatch.com/story/the-top-25-market-events-of-the-last-25-years-11665839614 [A
ccessed Mar 14, 2023].
Norton, K. (2023) Exxon Mobil Stock, Fueled By 'Favorable Market,' Sees Record 2022 Profits, White
House Responds. [Accessed Mar 15, 2023].
Silberstein, S. (2022) Top-Down vs. Bottom-Up: What's the Difference? Available
from: https://www.investopedia.com/articles/investing/030116/topdown-vs-bottomup.asp [Accessed Mar
14, 2023].
Vanguard (2023) VHT-Vanguard Health Care ETF. Available
from: https://investor.vanguard.com/search#q=vht [Accessed Mar 13, 2023].

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