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Stock-Trak Portfolio Report

Investment Policy Statement (IPS)

Introduction

The Stock-Trak portfolio is an investment that covers various assets ranging from stocks, bonds, mutual funds, and cash investments. The portfolio has been created to accommodate a set of assets with an aim of maximizing the returns while lowering the risk exposure for the assets. The available funds for investments will be allocated to the assets at different proportions depending on the risks and returns relationships. The portfolio manager is assigned the responsibility of setting investment objectives and guidelines alongside the distribution policies.

Risk Profile

The portfolio investor is willing to assume moderate risks in the investment since the risk profile is a risk-averse. Risk-averse investors do not assume a lot of risks for fear of losing. Therefore, the asset selection will majorly include the less-risky investments.

Investment Goals and Objectives

The goal of the portfolio investment is to generate the highest possible returns with the least risk exposure. Specifically,

i. The investment will seek to preserve the purchasing power and value of the assets in the long-term

ii. The portfolio investment will be made in both growth and value assets available in the market.

Asset Allocation Policy

The strategic allocation strategy will be used in allocating the available funds across the assets. Under the strategic allocation policy, assets with varying degree of risks and returns are selected to achieve the goals and objectives. As a long-term investment, the portfolio value is given a priority (Reilly and Brown 26). It is expected that there will be variations in the stock returns and risks in the short-term due to the changing market conditions. Finally, under the strategic allocation, a balanced portfolio of the assets is maintained.

Diversification Policy

The portfolio comprises of assets of varying risks and returns, both from the US and foreign markets. Diversification is key to the achievement of the investment objectives.

Fund Allocation Strategies among Different Portfolio Assets

The following chart gives a summary of the fund's allocations among the different assets in the Stock-Trak portfolio.

The Stock-Trak portfolio utilizes the strategic asset allocation strategy in which a specific proportion of the assets are used in the portfolio. The portfolio is continuously rebalanced to achieve the target. The portfolio investment takes into consideration the relationship between the risks and returns. It is also based on the “buy and hold” strategy in which the portfolio manager speculates the asset performance and make necessary adjustments.

In the fund allocation presented in the above table, assets with least risks are allocated the highest funds. This takes into consideration of the risk profile of the investor. For example, US Treasury bonds have the highest allocation at 30% of the total funds available in the portfolio. Unlike the other assets, bonds have least risk exposure in the market although the returns are relatively lower compared to equities and fixed income investments. Cash investments will have the least allocation of $3,000, an equivalent of 3% of the total funds available for investments. Fixed-income assets have medium risk exposure and return in the portfolio; thus, the allocation of relatively lower funds. Applying the strategic asset allocation strategy, the proportion of funds will be adjusted based on the prevailing economic and market conditions under the "buy and hold" approach. The assets are held in the long-term and seek to create value.

Rationale for Selecting the Securities in the Portfolio

The portfolio comprises of US and Non-US equities, US Treasury bond funds, mutual, ETF, and international bonds funds. These securities were considered in portfolio development for a number of reasons. First, the US equities were selected in the portfolio due to the high-risk exposure and relatively high returns. Examples of US equities that can invest in the portfolio include the stocks issued by large and well-performing companies such as Google, Inc., Apple, Inc., Citibank Group, Facebook, and Amazon, Inc. among many others. These securities create value in the portfolio; thus; thus, their selection (Reilly and Brown 26). The Non-US equities are the stock securities that are issued outside US market and are available in the foreign exchange markets such as LSE. Examples of such equities include Morrison International and Toyota Corporation among others. These securities have high-risk exposure and since the risk profile of the investor is medium, their selection helps in achieving the investment goals.

The US Treasury and international bonds, unlike the equities, have low-risk exposure and low returns. Their selection in the portfolio is justified by the need to have a moderate risk exposure and high returns in the long-term. The long-term bonds will earn low returns both in the short and long-term and together with the equities, the portfolio will yield moderate returns and medium risks; thus, the achievement of investment goals. Using both the US and foreign markets diversifies the portfolio and creates value in the long –term (Reilly and Brown 26).

Considering the buy and hold strategy and the need to speculate market performance to make relevant adjustments, the asset selection includes the international and local bonds. The bond performance is largely affected by the economic conditions. Therefore, the US Treasury bonds and International bonds will neutralize the negative effects the varying economic conditions might have on the portfolio in the short-term. Cash investments involve making savings deposits in the commercial banks to earn interest over a period of 10 years.

Comparison of Portfolio Performance Relative to the Benchmark

Compared to the market index S&P 500 as a benchmark, the portfolio reported a better performance in terms of the returns although there were fluctuations in the returns and risk exposure. The portfolio had a slightly higher average returns on the investment over the duration compared to the S&P 500 index. The high average returns is an indication of a better performance and high value for the investors. The risk exposure was, however, higher compared to the market index. The high-risk exposure in the market is the cause of high returns that the portfolio generated in the long-term. The S&P 500 index captures the average market performance over time. During the investment period, the market had lower yields compared to the portfolio. This was due to the economic changes in the market that negatively affected the returns and prices.

Reflection

During the Stock-Track portfolio development, it was possible to achieve the short-term objective of low-risk exposure and high returns. The asset selection in the portfolio shows that it was possible to yield high returns in the short-term. However, speculating the market trends was the most difficult part of the simulation. Using the buy and hold strategy did not work effectively as an accurate prediction of the stock prices was impossible; thus, unable to achieve the target in the long-term. The major lesson made during portfolio investment is assuming medium risk as this resulted in low returns. From the investment, I learned to allocate a higher proportion of the funds into the highly risky assets to yield high returns over time. If I were to redo the portfolio investment using the same amount of funds, I would use the tactical asset allocation strategy to achieve the best results.

Works Cited

Reilly, Frank K., and Keith C. Brown. Investment analysis and portfolio management. Chapter 16: Equity Portfolio Management Strategies. Cengage Learning, 2011.