Investors Clinic Asset Balancing through Diversification - "Putting your eggs in different baskets From FBN Capital Asset Management Ltd

Transcription

1 Investors Clinic Asset Balancing through Diversification - "Putting your eggs in different baskets From FBN Capital Asset Management Ltd

2 Introduction Asset Balancing & Investment Choices Diversification & Asset Allocation Connection between Asset Allocation & Diversification How to achieve Diversification

3 Introduction The example below will give us a great start into understanding Asset Balancing and diversification. Have you ever noticed that street vendors often sell seemingly unrelated products, e.g. umbrellas and sunglasses? Initially, that may seem odd. After all, why would a person buy both items at the same time? Probably never, and that s the point. However street vendors know that when it s raining, its easier to sell umbrellas but harder to sell sunglasses. And when its sunny, the reverse is true, By selling both items; in order words by diversifying the product line, the vendor can reduce the risk of losing money on any given day. This presentations aims to help us understand asset balancing through diversification and their importance.

4 Asset Balancing & Investment Choices

5 Asset Balancing & Investment Choices Asset balancing is better known as asset allocation. Asset Allocation involves dividing an investment portfolio among different asset categories, such as stock, bonds, real estate, cash, etc. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Risk Vs Reward When it comes to investing, risk and reward are closely related to each other. The phrase no pain no gain come close to summing up the relationship between risk and reward. All investments involves some degree of risk. Investment Choices There are a vast array of investment products/instruments to choose from, some of which include : Stocks, Bonds, Treasury Bills, Real Estate, Cash, structured products, mutual funds, ETF s, etc

6 Asset Balancing & Investment Choices Characteristics of the three major asset categories 1. Cash and cash equivalents Savings deposits, certificates of deposit, treasury bills, money market deposit accounts and money market funds are the safest investment. They offer the lowest return of the three major categories. Chances of losing money in this asset category is extremely low. The Federal Government guarantees many investments in this category. The principal concern for investors in this category is inflation risk. Risk that inflation will outpace and erode investments over time. 2. Bonds Bonds are generally less volatile than stocks but offer more modest returns. They offer lower potential for growth. Certain categories of bonds such as high yield or junk bonds offer high returns similar to stocks; they also carry higher risk. 3. Stocks Stocks have historically had the greatest risk and highest returns among the three major asset categories. Stocks offer the greatest potential for growth. The volatility of stocks makes them a very risky investment in the short term.

7 Asset Balancing & Investment Choices Characteristics of other asset categories 4. Real Estate It produces relatively consistent total return i.e rental yield and capital appreciation It is immobile and not divisible It is illiquid Tend to have high transaction costs and management fees. 5. Mutual Funds Investors purchase shares from the fund itself The price that investors pay is the funds approximate Net Asset Value per share The shares are redeemable i.e unit holders can sell their shares back to the fund Less expensive compared to buying the instrument/stock individually 6. Exchange Traded Fund Sales are made in the market rather than the fund itself. ETF s are most often invested to match a particular index. That way, with a minimum contribution of N100 or N1,000, an individual owns a fraction of a basket of stock They can be sold short and purchased on a margin They can be traded intra day as opposed to Mutual Funds which are traded daily based on the NAV per share calculated with closing asset prices. Transaction costs are less compared to purchasing individual stocks

8 Diversification & Asset Allocation

9 Diversification and Asset Allocation What is Diversification? Diversification is a strategy that can be summed up by the adage Don t pull all your eggs in one basket. The strategy involves spreading your money among various investments such that if one investment loses money, the other investments will more than make up for those losses. An investor can protect his/her investment against significant losses by including asset categories with returns that move up and down under different market conditions. Historically, the returns of the three major asset categories have not moved up and down at the same time. Market conditions that cause one asset category to do well often cause another asset category to have average or poor returns i.e. inflation, interest rates etc By investing in more than one asset and/or one asset category, you ll reduce the risk that you ll lose money and your portfolio s overall investment returns will have a smoother ride.

10 Diversification and Asset Allocation Below is a one year graph of the Nigeria Stock Exchange All-Share Index, 91day Treasury Bill and a Federal Government Bond showing the performance of these 3 major asset categories. *Source: Bloomberg

11 Connection between Asset Allocation & Diversification

12 Connection between Asset Allocation & Diversification Asset Allocation is a medium investors use to diversify their investments among asset categories. Cash Cash Instruments Capital Protected A diversified portfolio should be diversified between asset categories i.e. stocks, bonds and cash & cash equivalent Real Estate Commercial Residential Others Building your investment portfolio Fixed Interest Treasuries Bonds and within asset categories i.e. between banking, building materials, petroleum marketing sector for stocks and same for other asset categories. Equity Large Cap, Medium Cap, Small Cap, Sectors, Country In addition to allocating your investments among stocks, bonds, cash equivalents and possibly other asset categories; there is need to spread out your investments in segments of each asset category that may perform differently under different market conditions. However, never diversify for the sake of diversification

13 How to achieve Diversification

14 How to achieve Diversification Achieving diversification can be challenging. By investing in more than one asset category i.e. cash, bonds, property, shares etc an investor can diversifying his/her portfolio. Also investing in more than one sector within an asset category i.e. buying a government, state or corporate bond or buying stocks within the banking, building material, food & beverage etc sectors can also lead to diversification. However some investors find it easier to diversify within each asset category through ownership of Mutual Funds rather than through individual investments from each asset category. What is a Mutual Fund? Mutual Fund is an investment vehicle that pools money from many investors and invest the money in stocks, bonds and other financial instruments as allowed by the fund asset allocation. For example, the FBN Heritage Mutual Fund is a mutual fund that is allowed to invest in Stocks, Bonds, Money Market Instruments and Real Estate. A unit holder of the Fund will have successfully diversified his/her investment. Mutual Funds make it easy for investors to own a small portion of many investments.

15 How to achieve Diversification Mutual funds have been a popular investment vehicle for investors. Their simplicity along with other attributes provide great benefit to investors with limited knowledge, time and money. Advantages of investing in a mutual fund: Diversification: For an individual to achieve a truly diversified portfolio, he/she may have to buy stocks from different capitalizations from different industries and bonds with varying maturities from different users. For an individual this can be quite costly. However, by purchasing mutual funds, the individual is provided the benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. Economies of Scale: The easiest way to understand economies of scale is by thinking about volume discount. If only one security is bought at a time, the transaction fee will be relatively high. On the other hand Mutual funds are able to take advantage of their buying and selling size to reduce transaction cost.

16 How to achieve Diversification Divisibility: Many investors don t have the exact sums of money to buy round lots of securities especially after deducting commission. Investors can purchase mutual funds in smaller denominations, ranging from N100 to N1000 minimum etc Smaller denominations of mutual fund provide mutual fund investors the ability to make periodic investments through monthly purchase plan. So, rather than having to wait until you have enough money to buy higher cost investments, you can get it right away with mutual funds Liquidity: Another advantage of mutual funds is the ability to get in and out with relative ease. Professional Management: When you buy a mutual fund, you are also choosing a professional manager. The manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund manager handling that for you.

17 FBN Money Market Fund FBN Fixed Income Fund FBN Heritage Fund "Low r Rated Aa(f) Asset Classes Investment Limits Bank Placements 10-75% T-Bills and other short term Government Securities Other Money Market Instruments 25-80% 10-75% Asset Classes Investment Limits Corporate Bonds 10 60% Euro Bonds 0 15% Federal Government Bonds 5 15% State Government Bonds 20 80% Money Markets & Cash 5-35% Asset Classes Investment Limits Equities 20 65% Bonds 10 25% Money Market Instruments 10 75% Real Estate & Other 0-10% Investments

18 Our mutual funds in a flash Product Description Investment Objective Portfolio Risk Profile Minimum Investment Additional Investment Divident Payment Redemption FBN Money Market Fund The FBN Money Market Fund is an open ended mutual fund which invests strictly in short term money market instruments including Treasury Bills, high quality commercial papers/notes, bankers acceptance and fixed deposits. FBN Fixed Income Fund The FBN Fixed Income is an open ended fixed income Fund backed by a collection of investment grade, low risk and high quality government and corporate bonds. The instruments also include money market investments to provide liquidity for the Fund. The primary objective of the Fund is to provide investors with an The Investment objective of the Fund is to provide investors with opportunity to earn an above average current income stream over a above average income streams over a medium term period as well short term period consistent with preservation of capital and liquidity. as capital preservation. N5, N5, Quarterly 3-5 Working Days Conservative (Low Risk) Rated Aa(f) "Low risk of investment loss " Conservative (Low Risk) FBN Heritage Fund The FBN Heritage Fund is an open-ended Mutual Fund, a collective investment scheme that pools money from individual investors, companies, and other organizations. The pooled fund is invested by the fund manager in stocks, bonds, short-term money market The primary objective of the Fund is to achieve long-term capital appreciation of its assets by investing in a diversified investment portfolio comprising of high quality equity securities quoted on the Nigerian Stock Exchange as well as fixed income and money market Balanced (Medium Risk) FBN Money Market Fund Fund Bid Price (N) , , , , , , Fund Yield 10.83% 10.52% 10.59% 8.44% 9.21% *10.12% *10.74% NIL NIL NIL NIL NIL NIL N10, N10, Half Yearly 3-5 Working Days Fund Price Change 2.44% 0.89% 1.18% 2.05% 0.68% % 20.55% 0.92% 0.33% 27.58% Fund Performance since inception** 2.44% 3.35% 4.57% 6.72% 7.44% % % -9.90% -9.60% 15.33% N50, N10, Annually 3-5 Working Days **Since inception: 24 September 2012 **Since inception: 24 September 2012 *Forcast Yield **Year-On-Year: 31-March every year

19 FBN Capital Mutual Funds Asset Allocation FBN Money Market Fund FBN Fixed Income Fund FBN Heritage Fund Liquidity, 0.26% Liquidity, % FGN Bonds, 5.33% Treasury Bills 79% Bank Placement 21% Money Market Instruments, 47.70% FGN Bonds, 20.30% State Government Bond, 31.73% Equity, 33.36% State Government Bonds, 17.97% Bank Placements, 12.70% Corporate Bonds, 1.06% Treasury Bills, 29.90% Fund Maturity Profile Time Period Average Yield % 0-30 Days 12.81% 20.77% Days 11.50% 79.23% No. of holdings: 16 Fund Size: N2.5bn No. of holdings: 22 Fund Size: N3.4bn No. of holdings: 36 Fund Size: N5.0bn Building Materials 29% Equity Asset Allocation Beverages - Brewers/Distiller s 11% Food Products-- Diversified 17% Days Real Estate Development 1% Insurance 4% Banking 38% 0-30 Days 0% 20% 40% 60% 80% 100%

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22 Credits Images and information sources: Google.com Bloomberg.com FBN Capital Research canajunfinances.com planningfinancials.com

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