Investment Strategy and Portfolio Development

January 11, 2021

You are currently a senior client adviser with Paterson Securities which provides investment advice
and stockbroking and portfolio management services primarily to retail clients. You advise high networth
individual or family clients who pay advisory and investment return commission fees to your
firm in return for the provision of initial investment planning and evaluation services, ongoing
investment and related advice and the development and management of investment strategies and
portfolios on their behalf. You have just been assigned a new client who is the founder of a successful
medical research company in which they recently divested a substantial ownership share through a
partial equity listing. In light of the current COVID-19 health and burgeoning economic crisis, they
have indicated a desire to invest $5 million from these equity proceeds into an investment portfolio
which will act as a philanthropic fund to support medical research into infectious diseases. They have
approached your firm for investment advice and to act as their stockbroker and portfolio manager in
developing and managing this investment portfolio in the future. The client has provided the
following brief and guidelines associated with the desired investment strategy requirements for the
portfolio:
 Risk profile: Relatively High (Risk Assessment Score of 8 out of 10) – Willing for the available
funds to be invested in individual equity securities, listed investment companies (LICs) or
exchange-traded products (ETPs), equity market option securities or futures contracts, and cash,
but potentially with some downside protection; Open to investment exposure in both Australian
and international financial markets.
 Return focus: The investment strategy and associated portfolio is to be focused on a capital growth
perspective to fund philanthropic distributions rather than income or tax-effectiveness
perspectives.
 Investment horizon: Minimum 10-year investment (holding) period, but with active management
over the investment period to maximise portfolio value.
 Country focuses: At least 50% of the available funds are to be invested in companies in the
Australian-based S&P/ASX 200 index and/or in securities providing exposure to the Australian
Securities Exchange and at least 20% of the available funds are to be invested in companies
included in the US-based Nasdaq 100 index and/or in securities providing exposure to the Nasdaq
Stock Exchange.
 Share component and diversification: At least 65% of the total portfolio funds are to be invested
in individual company equity (share) securities. To ensure a prudent level of diversification, no
more than 10% of the total available funds are to be invested in any one individual company or
security (excluding cash or hedging components).
 Business style focus: Given the changing corporate landscape and future of work, at least 15% of
the total available funds are to be invested in companies or securities providing exposure to digital
business and/or disruptive business platforms.
 Industry focus: Given the background of the fund founder and the philanthropic focus of the
portfolio, at least 15% of the total available funds are to be invested in Australian and/or global
healthcare, pharmaceutical or biotechnology companies either through individual company
investments, LICs or ETPs.
 Indirect equity investment: Some portfolio investment in Australian or international sharemarkets
is allowable using holdings in LICs or ETPs, but this investment component is to be limited to a
maximum of 30% of the total available funds (A list and price history for preferred LIC and ETP
investment options is provided in the spreadsheet document forwarded by the client).

Investment Strategy and Portfolio Development

 Portfolio hedging: Given the philanthropic nature of the portfolio, some downside risk protection
for the portfolio against adverse equity market movements is desired through hedging using
derivative securities (such as market futures or options) of a minimum of 50% of the Australian
market-focused investment component (including direct equity, LIC and ETP investments) value.
 Short selling: Short selling of direct equity securities is permissible if it is consistent with the
proposed investment strategy, although sufficient cash reserves are required to be held to meet
position closing out (re-purchasing) requirements.
 Preferred derivative securities: Approved equity index futures contracts and option securities to
be used for any speculation or hedging positions are:
o Preferred SPI futures contract: December 2020 SPI 200 Futures Contract with a closing
price of 4,682.00 on 20/03/20 (Contract value represents A$25  SPI 200 value). Each
contract will require creation of a $10,000 settlement account to meet margin movements.
o Preferred equity market call option: SPI 200 (A$10  SPI 200 value) call expiring on
December 17th 2020 with an exercise price of 5,000 (ASX code: XJO4F9). The closing
price of this call option was $5.055 on 20/03/20.
o Preferred equity market put option: SPI 200 (A$10  SPI 200 value) put expiring on 17th
December 2020 with an exercise price of 5,000 (ASX code: XJO4G9). The closing price
of this put option was $7.300 on 20/03/20.
 Cash investment: A maximum of 20% of the total funds are to be invested in cash, which can be
invested at the 180-day Dealer bill rate of 0.715% per annum as at 20/03/20.
 The Australian dollar to US dollar exchange rate was A$1.0000 = US$0.5853 on 20/03/20.
The performance of the recommended investment portfolio proposed will be benchmarked to the
performance of the S&P/ASX 200 price index, which had a closing value of 4,816.60 on 20/03/20.
Required:
This case study requires the preparation of an investment portfolio proposal document to be
provided to the client, which should include the following information:
 A brief and informative summary of the current investment environment, both in Australia
and internationally and linking with the client’s requirements, and identification of any key
economic or financial indicators or events impacting on the near-term investment
environment.
 Presentation of the underlying investment philosophy and portfolio strategy proposed for
the client, including consistency of alignment with the indicated requirements of the client.
Explanation and justification for this strategy, individually or relative to alternatives,
should be provided, which could include backtesting or other quantitative and qualitative
analysis.
 A description, in table or similar format, of the recommended portfolio components,
indicating the selected assets / securities and the magnitudes of investment in each.
 If required, a brief explanation of how each of the recommended investment components
aligns with the overall investment strategy.
 Assume this portfolio construction is being done on Friday 18th December 2020.
This is an individual case study task and contributes 25% to the overall assessment for the
subject. The investment strategy and portfolio proposal document is due to be submitted to the
client by 5.00pm on Monday 27th April 2020, via the FIN3CSF subject LMS site. The suggested
word limit, excluding any figures, calculations and the portfolio presentation, is 1,000-1,500
words.