The actual instruction given to Duff and Menzies was that the trust should be managed in order to produce returns that will support the Museum in perpetuity. In order to fulfill this objective, the funds of the Museum were invested in the equity shares of large, long-established, and high reputed companies. They have also chosen a diversified portfolio of companies from different sectors so that the risk could be reduced. They have also avoided investing in small and other start-up companies which are high-risk-bearing. In order to analyze whether the investment decisions made by the managers are correct or not, the returns of each of the companies are analyzed separately and also compared with the FTSE index. (Educated Investor: How to Evaluate Investment Portfolio Performance. 2000).
That means that an absolute and a relative comparison are made. In the absolute comparison, the absolute return of the portfolio is considered. Looking at the returns of each of the companies in which the investment is made, L & G in which 1000 shares is being held is showing a declining trend from the year 2002 to 2006, and only in the year 2007, it is showing an increasing trend, which may continue in the next year also. Thus investment in the insurance sector will not cause any risk to the investor. In the case of the DSG, which is the durable consumer industry, provided a steady increase in the dividend up to the year 2006, and in the next year, it declined to a great extent, and in the later years, it will also show a declining trend in the coming years. There are 800 shares held in this company, which should be reduced since the returns provided by the company will be low in the coming years. So the portfolio should be rearranged in such a manner that investment should be increased in those companies which will be offering higher returns in the coming years. They are holding 400 shares of the BP oil company, whose dividend share is increasing over the years, so it is better to hold more shares of this company, and its share in the total portfolio should be increased. Similarly, in the case of HSBC also the dividend is showing an increasing trend, and so the share of this can also be increased in the later years. But the dividend share of the EMI is decreasing, and its share in the portfolio can be decreased so that the total returns of the Museum can be increased. The same case is with S & N, in which the dividend share has decreased, and there are more or fewer fluctuations in the dividend, so it is better to reduce their share in the total investment portfolio. This will help the management to reduce the risk. In the case of ITV, the share of the dividend is fluctuating in some years, but it has shown a high dividend percentage in the last year. It will definitely show an increase in the dividend percentage in the later years, so it is better to increase the investment in the ITV so that the overall returns will be more in the entire portfolio investment. Overall in the entire portfolio should be rearranged in such a way that the equity investments should be made more on those companies which will yield high returns and which will show less fluctuation in the returns. (Damodaran).
But the portfolio adopted by the present management is worthy since they have invested in all the established and publicly owned companies. It has also avoided the company, which is bearing huge risks. They have adopted the right investment policy. The only thing is to change the proportion of the portfolio according to the past year’s performance index and also based on the dividend yield. This will help the management in yielding more returns from the existing equity investments, and they will get more amount to acquire more paintings in the Museum. It could also be noted that over the past five years, the dividend earned on each fund has exceeded the dividend yield on the FTSE Index, and also the annual amount of the dividends has grown faster than the rate of inflation. The relevant risk of each individual portfolio is represented by the Beta coefficient. It can also be defined as the amount or percentage of risk that the stock contributes to the total portfolio. The beta coefficient of the L&G is high compared to other stocks, and the next risky share is that of the ITV. The risk and returns are generally related terms. An increase in the risk will definitely increase the returns, and similarly, lowering the risks will decrease the returns. (Investment Portfolio Management Part 2. 2008).
But in the case of this firm, they are trying to avoid the risk inherent in the stocks. It could also be seen that the risk percentage is highest in the EMI, which is showing a decline in the dividend percentage also. So it is better to reduce EMIs share in the total portfolio and to invest in the securities of L& G, HSBC, and BP where the specific risk percentage is low compared to other securities. Adopting the policy of rearranging the existing portfolio will increase the returns of the Museum and also will help the management in receiving more returns for purchasing paintings. The returns of the whole portfolio have been calculated to look at the returns of the entire portfolio over the years. The return of the whole portfolio is calculated using the formula:
Return of the whole portfolio = portfolio value at the end – portfolio value at the beginning + Dividends on portfolio/ portfolio value at the beginning.
Looking at the returns of the whole portfolio, it could be seen that the returns were negative in the initial years but have later shown an increasing trend over the years. However, in the last year, the returns declined to a tremendous extent. It could be assessed that even though the investment is made on safe and risk-free securities, the returns for each of the security will be varying during the years. There is a positive relationship between returns and the risk of the portfolio. So in the last year, the returns were less since the risk of the portfolio was low. The expected returns of the whole portfolio, even though it is showing an increasing trend in the early years, is showing a declining trend in the later years and will continue to be so in the coming years also. Comparing the expected returns with the returns index, the expected returns of the portfolio were found higher than the returns index. Thus it could be concluded that even though the expected returns of the portfolio is decreasing, it will be higher than the returns index. Therefore there is no need to shift from the existing shares held in the portfolio. The risk of the portfolio is also calculated since there is a relationship between risk and returns. There are mainly two types of risk, systematic risk, and unsystematic risk. The systematic risk is market-related risk and is non-diversifiable, whereas unsystematic risk is diversifiable. The risk associated with the unsystematic risk can be detached by investing in a wide range of diversified portfolios of securities. By analyzing the returns along with the risk of the portfolio, both the risk and returns of the portfolio will vary depending upon the effects of the economic and market factors. Looking into the nondiversifiable unsystematic risk, EMI is showing the highest percentage of risk, and so its share in the total portfolio should be decreased. Beta is the measure of the systematic risk and is the amount of risk contributed by particular security to the total market portfolio. The beta of the total portfolio over the years is calculated and is showing a reduced percentage during the last year. But the proportion of total risk in the entire portfolio has significantly increased during the last year. So the portfolio of the securities should be rearranged in such a way that the number of shares held of those securities should be increased, which is providing greater returns. Thus, it stresses an increasing need for rearrangement of the whole portfolio. By evaluating the investment policy of the Duff and Menzies, it could be noted that they are following a good investment policy and the only thing that could be suggested is the rearrangement of the investment portfolio, which could be adopted for better management of the funds and also for increasing the returns of the entire portfolio. Duff and Menzies could be replaced as the managers of the funds since they had made well-organized decisions for the selection and management of the funds.
Bibliography
DAMODARAN, Aswath. Investment Philosophies: Introduction. [online]. 2008. Web.
Educated Investor: How to Evaluate Investment Portfolio Performance. (2000). [online]. AIMR: Association for Investment Management and Research. 2008. Web.
Investment Portfolio Management Part 2. (2008). [online]. Web.