Portfolio management is crucial for investors who want to earn a return when investing in publicly traded equities/securities. The selection of securities in a portfolio depends on the level of risk that investors find acceptable. Through effective portfolio management and diversification, investors can manage the systematic risk associated with a particular security. Moreover, it is essential to understand the trade-off between risk and return, meaning that an investor who aims to achieve a high return on an investment must accept a higher level of risk associated with specific investment decisions. In this report, an investor’s active and passive portfolios were created by selecting securities presently trading in a capital market in the Middle East.
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Managing an active portfolio involves active trading of stocks with an aim to outperform a specific index as chosen in this report. In contrast, managing a passive portfolio does not involve active securities trading. The purpose of this portfolio management exercise was to create active and passive portfolios comprising securities traded on the Abu Dhabi Stock Exchange (ADX) and the Standard and Poor’s (S&P) 500 and evaluate their performance over a period of eight weeks from May 1, 2018 to June 30, 2018. The decisions assumed for developing and managing these portfolios were based on the investor’s objective and constraints. Furthermore, the performance of these portfolios was evaluated on the basis of the comparison of the return achieved from each. The investment decisions were based on the stock analysis carried out in this report.
The investor’s objective assumed in this report was the desire for a high return on investment and willingness to accept the high risks associated with decisions to invest in different securities. It was decided that 100% of the investment would be made in equity, considering the high level of risk tolerance, rather than specific allocation of funds to fixed income securities. The investor wanted to achieve capital gain from an increase in prices of selected securities rather than receiving income in the form of dividends. He selected securities listed on both the ADX and the S&P 500 in managing the active portfolio. In comparison, the investor chose securities listed on the ADX only for the passive portfolio.
The total investment fund available to the investor was AED 2 million. This implies that the total purchase value for each week could not exceed this amount in both portfolios. Therefore, AED 1 million was allocated to each portfolio. Both portfolios contained only five stocks selected on the basis of the abovementioned objective. Furthermore, a time constraint was involved as both portfolios were only managed for eight weeks. No tax implications were considered in this report.
Portfolio Selection and Performance
For the active portfolio, the investment strategy was to invest in high-tech stocks listed on the S&P 500. The reason for choosing this strategy was that high-tech stocks could be expected to generate returns that would outperform the benchmark index. The reason for selecting specific stocks was recent high performance that contributed significantly to the value of the NASDAQ. Major companies including Microsoft, Google, Amazon, and others had high share price gains during the first three months of the current year (Randewich). The investor wanted to replicate this growth trend and achieve a high return by investing in high-tech stocks. The allocated weight of each stock varied during the eight-week period. Table 1 summarizes the performance of shares selected in each week.
Table 1. Active Portfolio.
|Week 1||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|3||Amazon.com, Inc.||AMZN||Consumer Cyclical||1-May-18||1,563.22||50||78,161||0.29|
|Week 2||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|3||Cisco Systems, Inc.||CSCO||Technology||8-May-18||45.82||400||18,328||0.07|
|Week 3||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|2||Netflix, Inc.||NFLX||Consumer Cyclical||15-May-18||325.94||50||16,297||0.06|
|3||Tesla, Inc.||TSLA||Consumer Cyclical||15-May-18||285.01||50||14,251||0.05|
|Week 4||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|2||Netflix, Inc.||NFLX||Consumer Cyclical||22-May-18||334.05||275||91,864||0.34|
|3||Shutterfly, Inc.||SFLY||Consumer Cyclical||22-May-18||95.37||500||47,685||0.18|
|Week 5||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|2||Netflix, Inc.||NFLX||Consumer Cyclical||29-May-18||351.50||275||96,663||0.35|
|3||International Business Machines Corporation||IBM||Technology||29-May-18||142.53||100||14,253||0.05|
|4||Micron Technology Inc.||MU||Technology||29-May-18||61.36||567||34,791||0.13|
|Week 6||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|2||Netflix, Inc.||NFLX||Consumer Cyclical||5-Jun-18||363.32||250||90,830||0.33|
|3||International Business Machines Corporation||IBM||Technology||5-Jun-18||143.05||100||14,305||0.05|
|4||Micron Technology Inc.||MU||Technology||5-Jun-18||59.8||431||25,774||0.09|
|5||Amazon.com, Inc.||AMZN||Consumer Cyclical||5-Jun-18||1,672.99||50||83,650||0.31|
|Week 7||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|1||Intelsat S. A.||I||Communication Services||11-Jun-18||15.39||5423||83,460||0.31|
|3||International Business Machines Corporation||IBM||Technology||11-Jun-18||146.62||50||7,331||0.03|
|4||Micron Technology Inc.||MU||Technology||11-Jun-18||61.71||200||12,342||0.05|
|5||Amazon.com, Inc.||AMZN||Consumer Cyclical||11-Jun-18||1,681.51||100||168,151||0.62|
|Week 8||Stock Name||Sector||Date Purchased||Price per Share||Number of Shares Purchased||Value of Shares Purchased||Portfolio Weight for Each Stock|
|1||Intelsat S. A.||I||Communication Services||18-Jun-18||17.52||1000||17,520||0.06|
|4||Shutterfly, Inc.||SFLY||Consumer Cyclical||18-Jun-18||93.48||100||9,348||0.03|
|5||Amazon.com, Inc.||AMZN||Consumer Cyclical||18-Jun-18||1,709.04||50||85,452||0.31|
The investor selected shares of companies in five different sectors listed on the ADX: banking, industrial, telecommunications, energy, and consumer. In this way, the passive portfolio was structured as a diversified portfolio with equal weight assigned to all five stocks. No active trading was carried out for this portfolio during the eight-week period. In this case, the ADI was considered as the benchmark index for comparison of overall performance. These shares were purchased on May 1, 2018 and were still held in the portfolio on June 30, 2018. The return on each stock is calculated as the percentage change in the stock’s price. Table 2 summarizes investment decisions made by the investor to purchase shares included in the passive portfolio.
Table 2. Passive Portfolio.
|Stock Name||Sector||Symbol||Date Purchased||Price per Share (AED)||Number of Shares Purchased||Value of Shares Purchased (AED)||Portfolio Weight for Each Stock|
|Abu Dhabi Islamic Bank||Banking||ADIB||1-May-18||3.86||51,813||200,000||0.20|
|Abu Dhabi National Energy Co.||Energy||TAQA||1-May-18||1.40||142,857||200,000||0.20|
|Abu Dhabi National Co. For Building Materials||Industrial||BILDCO||1-May-18||0.58||344,828||200,000||0.20|
|Emirates Telecommunication Corp.||Telecom||ETISALAT||1-May-18||17.2||11,628||200,000||0.20|
|Emirates FoodStuff & Mineral Water Co.||Consumer||AGTHIA||1-May-18||4.4||45,455||200,000||0.20|
The high-tech stocks performed well over the eight-week period. Their selection was based on news related to the businesses involved. In the first week, major companies including Apple, Amazon, Google, Facebook, and Microsoft were selected as recent reports indicated these companies to be high performers.
In the second week, all shares other than those of Apple were replaced by stocks of companies that included Intel, Cisco Systems, Oracle Corporation, and Qualcomm. Apple shares were purchased as that company announced a dividend payout (Sparks). The reason for selecting Intel was its announcement of a business deal with Volvo to develop a vehicle infotainment system using Android technology (Intel). Oracle was selected due to its announcements related to the development of its cloud-based systems (Shores). Qualcomm was selected because of its authorization to repurchase $10 billion worth of shares from shareholders, which was expected to have a positive impact on its share price (Sinnott).
In the third week, shares of Facebook, Netflix, and Tesla were purchased. Netflix was selected on the basis of a report that indicated investment in the company’s stocks could generate a high return for equity holders as the company far exceeded market expectations in terms of annual subscriptions (Zacks Equity Research). Despite growing competition in online streaming, Netflix has shown the capability to overrun competitors by investing in new productions and technologies. Although Tesla reported a decline in sales and profitability, the outlook remains positive as the company has continued to develop better models and technology than its competitors (Sherman). Facebook was selected because of its commitment to address issues raised during the recent Senate hearing, which means that its subscriptions could improve (Rosen).
In the fourth week, Google was added back to the portfolio because of eight announcements made in the keynote session. The company announced significant plans for using artificial intelligence and exploring new areas of development likely to generate positive outcomes for the company (Escher and Lynley). Additionally, two new stocks, Shutterfly and Momo, were purchased. Shutterfly’s share price increased by 63.1% on a YoY basis; Momo achieved sales growth of 38.1%, and its Earnings per Share (EPS) was up by 29.4% (Saraf). The portfolio retained shares of Netflix and Qualcomm because of the high return achieved in Week 3.
In week 5, stocks of Netflix and Qualcomm were purchased again, along with three other stocks. Apple Inc. was selected because of its announcements in the keynote delivered to shareholders. These included the launch of new software for all Apple products and improvement in the Siri technology to be installed in new products (Haselton, “Apple”). IBM was included in the portfolio as it continues to strengthen its position in artificial intelligence and the cloud system, which will allow it to partner with its clients on new projects (IBM). Micron Technology’s shares were also purchased based on recent reports that its stocks outperformed the market.
In the sixth week, Qualcomm was replaced by Amazon as the latter company announced the launch of its new service, Fire TV, which could increase its subscription revenue (Haselton, “Amazon’s new Fire TV”). Intelsat was selected in the seventh week because of its high performance and a significant increase in the share price (MT Newswires). Moreover, shares of HP were purchased as the company announced a restructuring plan to cut 5,000 jobs by 2019 to help the company reduce operating costs and improve profitability in the coming period (Pollack).
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In the final week, Facebook, Oracle, and Shutterfly were added back to the portfolio. Their selection was based on the rise in their share prices as the companies announced new technologies and compliance updates. Overall, the technology industry and online consumer market have generated strong results that have contributed to the growth of the Nasdaq in the last few months.
The reason for selecting Abu Dhabi Islamic Bank (ADIB) was that the bank’s profitability increased by 18% in 2017 and is expected to further increase in 2018 (Diaa). The bank has a strong deposit base, and all its business functions have reported improvement. Moreover, its effective control and risk management policies and practices have ensured that it fulfilled compliance requirements, added to a low risk of any major financial loss. It is reported that the global Islamic banking industry is flourishing, and such banks operating in different countries including the UAE could experience high growth in the coming years. The Islamic banking industry grew by 10.5% during 2014–2017, compared to the growth rate of 3% achieved by conventional banks (Rizvi). Therefore, ADIB was considered a good choice to achieve a high return.
The next stock included in the passive portfolio was Abu Dhabi National Energy Co., a government-controlled energy supplier in the UAE. The company has had to cut back spending on M&As due to low profitability over the last three years. However, its revenue increased by 5% and net income by 42% as management carried out several strategic changes to control costs and improve output (Habboush and Alloway). The UAE is the fifth largest producer of oil in OPEC, and the demand for oil is not likely to decrease (“Energy”). Furthermore, the increasing price of oil could have a positive impact on the company’s profitability in the coming quarter. The third stock included in the portfolio was Abu Dhabi National Co. for Building Materials.
The construction industry in the UAE has been a major contributor to the economy’s growth over the last two decades, which has allowed support industries to increase their output and enjoy higher profitability. These companies are not only doing business in the UAE but also benefiting from the growth in regional markets such as Oman, Bahrain, and Saudi Arabia. However, the cost of producing construction materials is also increasing, and this could affect the profitability of companies like Abu Dhabi National Co. for Building Materials (Khatib). For this reason, the selected company’s share price fell in the eight-week period under consideration. The fourth company included in the portfolio was Emirates Telecommunication Corp. The company has the largest share of the telecom sector, and it has made a significant investment in other countries, as well. It has declared an investment of AED 3.6 billion to upgrade its systems and improve its partnerships with other companies (Rasheed). Shares are expected to hold their value despite the challenges the company faces (Rasheed).
The last company’s shares included in the portfolio were Emirates FoodStuff & Mineral Water Co. The company reported a 19% decrease in profitability in 2017 due to a subsidy imposed by the government on flour sales (The National, “Agthia’s 2017 Profit”). The company specializes in bottled water, flour, and animal feed. However, the major revenue is generated through sales of bottled water. The UAE industry is expected to grow at a CAGR of 6.7% until 2022 due to increasing population and a subsequent rise in water consumption (Mordor Intelligence). Moreover, the company has announced an AED 500 million investment to acquire businesses in Saudi Arabia (The National, “Agthia Plans”). This decision is aimed at diversifying the company’s revenue sources and ensuring that profitability is not affected substantially by economic changes in a single market of the UAE. The investor expects that the company will recover its profitability position by increasing sales of bottled water in the UAE and other countries.
Overall Portfolio Performance
The absolute performance of the active portfolio is summarized in Table 3. The figures indicate return, value at the end of the week, and portfolio return.
Table 3. Absolute Performance of Active Portfolio.
|Week 1||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|Week 2||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|3||Cisco Systems, Inc.||-0.26%||18,280||-0.02%|
|Week 3||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|Week 4||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|Week 5||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|3||International Business Machines Corporation||0.82%||14,370||0.04%|
|4||Micron Technology Inc.||-3.68%||33,510||-0.47%|
|Week 6||Stock Name||Return||Value at the End of the Period||Portfolio Return|
|3||International Business Machines Corporation||2.16%||14,614||0.11%|
|4||Micron Technology Inc.||2.66%||26,459||0.25%|
|Week 7||Stock Name||Return||Value at the End of the Period||Average Return|
|1||Intelsat S. A.||14.29%||95,391||4.38%|
|3||International Business Machines Corporation||-0.84%||7,270||-0.02%|
|4||Micron Technology Inc.||-5.64%||11,646||-0.26%|
|Week 8||Stock Name||Return||Value at the End of the Period||Average Return|
|1||Intelsat S. A.||-2.97%||17,000||-0.19%|
The relative performance of the active portfolio is assessed by comparing its weekly returns with the market return (S&P 500) (see Table 4). It is noted that the portfolio outperformed the market during Weeks 1, 2, 3, 4, and 7. However, the market return was higher in other weeks. The portfolio beta value remained close to or above 1, which means that the choices made by the investor had a high trading risk. The portfolio beta is less than the sum of the stock betas, which shows that portfolio diversification reduced the overall risk of holding high-tech equities.
Table 4. Relative Performance of Active Portfolio. Source: (“S&P 500 (^GSPC)”).
|Week||Investment||End of Week Value||Gain/(Loss)||Portfolio Beta||Portfolio Return||S&P 500 Return|
The absolute performance of the passive portfolio is summarized in Table 5. It indicates that the ending price of four of the five stocks was less than their purchase price.
Table 5. Absolute Performance of Passive Portfolio.
|Stock Name||Price per Share||End of Period Price||Return||Value at the End of the Period||Beta||Portfolio Beta||Portfolio Return|
|Abu Dhabi Islamic Bank||3.86||3.85||-0.26%||199,482||0.57||0.11||-0.05%|
|Abu Dhabi National Energy Co.||1.40||1.15||-17.86%||164,286||0.75||0.15||-3.57%|
|Abu Dhabi National Co. For Building Materials||0.58||0.52||-10.34%||179,310||0.59||0.12||-2.07%|
|Emirates Telecommunication Corp.||17.2||16.15||-6.10%||187,791||0.79||0.16||-1.22%|
|Emirates FoodStuff & Mineral Water Co.||4.4||4.80||9.09%||218,182||0.56||0.11||1.82%|
The relative performance of the passive portfolio is assessed by determining the difference between the return on the market and this portfolio. The reason for selecting the Abu Dhabi Index (ADI) is that all chosen companies’ shares are listed on the ADX. The values of ADI on May 1, 2018 and June 30, 2018, given in Table 6, indicate that the percentage change (return) was 2.48%. However, the passive portfolio earned a negative return of -5.09% and showed a capital loss of AED 50,950, demonstrating a difference between returns on the benchmark and passive portfolio of -7.58%. This result implies that the passive portfolio did not outperform the benchmark index chosen for comparison. In fact, it generated a low beta value and a low return, meaning that the investor’s strategy to achieve a high return on investment was not successful.
Table 6. Relative Performance of Passive Portfolio. Source: (“ADI”).
|Abu Dhabi Index|
|Difference in Return||-7.58%|
The comparison of both active and passive portfolios confirms a trade-off between risk and return. The active portfolio had a higher return of 15.63% compared to the passive portfolio, but at the same time, it could be noted that the beta of the active portfolio is higher than that of the passive portfolio, which means that the latter had a higher risk of investment. As indicated earlier, investors seeking a high return on their investment in equities must accept a higher level of risk. The active portfolio management shows that this portfolio outperformed the market in five out of eight weeks. However, it displayed a return that was less than the market return in three of the weeks due to the stock choices made. Therefore, it is possible to conclude that the active portfolio meets the requirements of the selected investor in this report.
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