Building Equity Portfolios: Allocating Mutual Fund Assets for Optimal Gains - Essay Sample

Introduction

Money managers should strive to ensure that mutual fund assets are allocated appropriately, to achieve investment goals and produce an adequate capital gain. Consequently, an equity portfolio is constructed to track the indirect change of ownership of various securities. In this paper, a portfolio with a nominal capital of 100 Singapore dollars, consisting of five stocks for DBS Group Holdings Ltd and Oversea-Chinese Banking Corporation (OCBC) Limited is created. Moreover, the selection approach and the reasons why customers should invest in the fund are discussed.

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The Pitch to the Customer

A customer earns from the stock exchange market when the purchases made when the costs are low appreciated with time. DBS Group Holdings Ltd (SGX: D05) and OCBC Bank (SGX:039) are two of the largest banks in Singapore, which have shown tremendous growth rates and profitability in recent years. Based on the real-time data collected from Yahoo Finance (2019), some of the fast-growing stocks sold by the bank are Bitcoin USD (BTC-USD), S&P 500, gold, Dow Jones Industrial Index, Nasdaq, and Straits Times Index (STI). The stocks have been chosen due to their consistent high returns and the low risks associated with them. If one follows the value investing approach (buying when cheap and selling later when the product adds value), buying the stock at the current prices will result in higher profits then.

Data obtained from Yahoo Finance (2019) revealed that as of 7th August 2019, the opening price of each STI in US dollars was 3,180.38; in about seven hours, the cost had appreciated with $10.50, translating to a 0.33 percent increment. In 52 weeks, there was a range of $459.50 between the opening and closing price marks. Therefore, if an investor had purchased a single unit of the STI shares, he or she would make a profit of $459.50 at the end of a financial year. The total earnings would have been more if the investor had purchased more units. With the ongoing growth in the STI Index, investing now will have promising results at the end of the year.

Similar to STI, the S&P 500 index has experienced a significant rise in the past year; it has a 52-week range of $681.40, and from the previous close on 6th August 2019, a day's range of $36.98 (Yahoo Finance, 2019). As of 7th August 2019, the S&P 500 had an opening price at $2881.77, which increased by $37.03 eight hours later, translating to a 1.30 percent increment (Yahoo Finance, 2019). Therefore, if the trend continues, an investor can earn approximately $13,104 each year for a unit S&P 500 share.

In the previous financial year, the OCBC registered a 52-week range of $5686.15 in Dow Jones Industrial (DJI) cost per share (Yahoo Finance, 2019). As at 7th August 2019, the opening cost per share was $26,029.52, which later increased by $311.78 (a 1.21 percent rise) within eight hours. Due to the consistent increase in value during the previous and the current financial year, Dow shares are a viable option for investment, with almost guaranteed high earnings.

Although expensive, Nasdaq has also shown an excellent growth rate in the previous and the ongoing financial year. In the last year, a 52-week range of $2149.64 was recorded. As of 7th August 2019, the opening cost per share was $7,833.27; hours later, there was a 1.39 percent rise ($107.23) (Yahoo Finance, 2019). Although the price of each Nasdaq is higher than other stocks discussed above, a continuous growth by $100 a day could be profitable for any investor.

The use of cryptocurrency has increased significantly over the current decade, resulting in higher profitability of the Bitcoin in the stock market. In the previous trading year, OCBC registered a 52-week range of $10,657.23, which is triple the initial opening price of $3,169.53 from BTC-USD stocks (Yahoo Finance, 2019). As of 7th August 2019, the opening cost per stock was $11,589.95, which increased by 1.07 percent ($122.79) within three hours (Yahoo Finance, 2019). If the trend is to continue, BTC-USD will be one of the most profitable assets in the stock market. Patterns from the previous year affirm that when one invests, in the stocks discussed above, odds are they will get their expected outcomes. Therefore, they are low-risk investments.

The Intellectual Foundations of the Selection Process

Value investment strategy refers to the use of financial analysis to identify the stocks that are underestimated by the market, or trading or trading for less than their book or intrinsic value, and investing in them. Stocks go through periods of lower and higher demand, causing changes in prices even when the company's value remains constant, but the shares do not change. Therefore, since stocks do not sell at predictable times and their prices are not advertised, an investor who holds his shares until their value goes up benefits more financially. Investors use financial analysis by studying factors such as a company's revenue, performance, cash flow, profits, brand, target market, business model, and competitive advantage to determine the intrinsic value of a stock.

Other metrics used to determine the value of a company's stock are price-to-book (P/B), price-to-earnings (P/E), and free cash flow. P/B measures the value of the assets owned by a company, and compares them to the price of a stock; if the latter is higher, then the shares are undervalued. P/E shows whether or not a stock is undervalued by evaluating the company's record of earnings. On the other hand, free cash flow (what remains from the revenue generated after all the expenses have been paid for) tells whether or not there is money left to issue share buybacks, pay debts, and dividends to shareholders, and invest in the future of the business. Therefore, investors will want to spend on stocks from companies with promising revenue growth rates and high cash flow. Moreover, investors look at the margin of safety whereby if one purchases a stock when its price is low, chances are he or she will sell it later at a higher cost, and if the performance does not go as expected, the loss is minimal.

The same value investment criteria were used when choosing the stocks from OCBC. According to real-time data fetched from the Yahoo Finance (2019), OCBC has 4.10 percent forward dividend yield; its 52-week range was between 10.36 and 12.19. Therefore, the company is financially stable, and it has a good cash flow. Also, the Yahoo Finance (2019) data revealed that the company's P/E ratio is 10.22, which means that its stocks are relatively undervalued; therefore, the investors stand a minimal chance of making losses.

The specific stocks recommended for investor were selected following a financial analysis of the revenue generated from the previous fiscal year. Each of the stocks had registered significant growth in cost per share, and the trend tends to continue in the current year. Therefore, making purchases at the current prices will result in sizeable profits in the future if the investors hold their stocks. For instance, an investor who bought BTC-USD shares at the start of the previous trading period made triple the buying price at the end, if he sold them. Hence, the value investment strategy is not based on the Efficient Market Hypothesis (EMH). The EMH theory states that purchasing undervalued stocks or selling them for inflated prices is a challenge since they always trade at fair costs.

Stock Selection Process

The first criterion employed in selecting the stock market is evaluating the finances of the company. According to data obtained from Reuters (2019), for the quarter ending September 19th, OCBC is expecting average sales of 2,635.45 million Singapore dollars; its P/E ratio range for the last five years is 8.62 to 13.10, and an average dividend yield rate3.63. Currently, the company's P/E ratio is 10.22, and the forward dividend yield rate is 4.10 percent.

P/E value is obtained by calculating the ratio of price per share (P) to the earnings (E), using the formula below.

Value=PEAccording to Hayes (2019), as of 2019, the average market P/E value is between 20 to 25 times earnings; companies making losses do not have a P/E ratio. Therefore, with a P/E ratio of 10.23, OCBC is making enough profit, but in the stock market standpoint, its assets are undervalued - making the company a suitable choice for investment.

On the other hand, the dividend yield is the ratio of annual dividend for a company to its share price.

Dividend Yield=Annual DividendShare PriceAccording to Fahey and Chemi (2016), the dividend yield is not the most appropriate metric to consider when venturing into the stock trade because it does not guarantee high annual payout; however, a four to six yield value is deemed excellent. Therefore, with a dividend yield of 4.10, one can put a significant amount of confidence in the investment on OCBC stocks to be profitable.

For individual stocks, the trends in the increase of trading cost were considered; if an asset has shown consistent appreciation and its value in the market is gradually rising, the chances are it will be more expensive in the future. For instance, after the introduction of the Bitcoin cryptocurrency, it continuous popularity in the online business industry might have triggered the tripling of its trading value in a single fiscal year. The increased demand for Bitcoin is increasingly elevating the prices of the online currency(Martinez, 2019). Therefore, it is likely going to trade at a higher cost in the stock market. A similar increase in value is evident for the S&P 500, Dow Jones Industrial Index, Nasdaq, and Straits Times Index (STI) stocks. Therefore, the risk of making losses associated with the shares is minimal, as summarized in the table below. The data was collected on the 7th of August, 2019.

Stock Opening price (USD) Price rise in a day (USD) Annual Range (USD) Expected trading value outcome

Straits Times Index (STI) 3,180.38 10.50 459.50 Increase

S&P 500 2881.77 36.98 681.40 Increase

Dow Jones Industrial Index 26,029.52 311.78 5686.15 Increase

Nasdaq 7,833.27 107.23 2149.64 Increase

BTC-USD 11,589.95 122.79 10,657.23 Increase

Conclusion

Analysis of five OCBC bank stocks: S&P 500, Dow Jones Industrial Index, Nasdaq, and Straits Times Index (STI) shows that customers can invest in them with minimal risks expected. Following the value investment approach, all metrics show that the OCBC stocks are undervalued; hence, their price will increase in the future.

References

Fahey, M. & Chemi, E. (2016, August 22). Do Not Be Tricked by High Dividend Yields. CNBC. Retrieved from https://www.cnbc.com/2016/08/22/dont-be-tricked-by-high-dividend-yields.html

Hayes, A. (2019, June 25). Price-to-Earnings Ratio - P/E Ratio. Retrieved from https://www.investopedia.com/terms/p/price-earningsratio.asp

Martinez, A. (2019, June 5). Demand From China Could Be Pushing The Price of Bitcoin. Retrieved from https://cryptoslate.com/chinas-influence-over-price-bitcoin/

Yahoo Finance. (2019). OCBC Bank (O39.SI) Stock Price, Quote, History & News. Retrieved August 7, 2019, from https://sg.finance.yahoo.com/quote/O39.SI/