Chapter 9 - The Investment Advice Process

Question 1

Ethical investments

Monitoring the portfolio -

Answer 1

Positive screening - investing in companies that have responsible approach to business practices, products or services.

Negative screening or avoidance - not investing in companies that do not meet ethical criteria.

Under MiFID2 - min frequency of portfolio reporting is three months. Must also communicate to clients if their portfolio drops more than 10% in one reporting period.

Question 2

Risk classes -

Answer 2

No risk - not prepared to accept any fall in value of investment and invest in cash-based and short dated bonds.

Low risk - prepared to accept to some fluctuations but mainly invest in secure investments.

Medium risk - some in cash or bond investment but fair proportion in asset based investments and may have a small amount in higher risk funds.

Med-High risk - cash allocation kept to minimum. Invests outside UK and in high risk funds. Take long term view and may sacrifice diversification for more focused and volatile portfolio.

High risk - client prepared to have direct holdings in listed and unlisted shares, high risk funds and highly geared structured products.

Question 3

Investors return objectives -

Answer 3

Capital preservation - risk averse investors who want to minimise risk of loss. This means they want to achieve return equal or above inflation.

Capital appreciation - longer term investors where growth is priority and usually in the form of capital gains.

Current income - focusing on income rather than gains e.g paying living exp

Total return - long term investors who are looking for growth via gains and reinvestment of income.

Question 4

Asset allocation for different risk profiles

Answer 4

Cautious - cash deposits 15%, bonds 40%, property 15% and equities 30%

Cautious growth - cash 15%, bonds 35%, property 10% and equities 40%

Balanced income - cash 10%, bonds 30%, property 15% and equities 45%

Balanced growth - cash 10%, bonds 30%, property 10% and equities 50%

Income & growth - cash 5%, bonds 25%, property 15% and equities 55%

Growth - cash 5%, bonds 15%, property 15% and equities 65%

Adventurous - cash 5%, bonds 10%, property 15% and equities 75%

Private investor indices are set of calcs that indicate t he returns that investors might expect from their portfolios. Used as a benchmark for assessing and comparing performance of DFM and compare similar funds

Question 5

Strategic and tactical asset allocation -

Answer 5

Strategic asset allocation - use of risk profile to determine

Tactical asset allocation - counterbalance defensive tendencies of of asset allocation through this and includes two different meanings;

1. • proportions invested in one asset class capped e.g 10-20%
     - more capital can be allocated to top of band whilst another one lowered to take advantage of short term movements rather than have mid market pricing.
2. • allocations within asset classes eg 50% in US equities

Significant variations to asset allocation tend only to be applied to growth portfolios as large scale changes would cause interruptions in flow of income and would be unwelcome for income orientated investors.