Investment Analysis and Portfolio Management Research Research Paper

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A look at the fundamentals by a portfolio manager usually involves aspects of risk, returns, and dividends valuations by a company. Investor needs a growth dividend that compensates for low yield. Dividend growth is usually fairly erratic as the case of Exxon Company between 1998-2002 indicates.

There was a dividend growth between 2003 and 2006 touted as the best years so far in the past 10 years.

A portfolio manager needs develop a combination of investments (an efficient portfolio that allows investors to maintain a return that reduces the portfolio standard deviation of a portfolio through correlation.

Shrewd portfolio manager may wish to consider a large number of portfolios each with different expected deviations between the individual securities.

Risk- return indifferences curves show the investors trade off between risk-averse the investor is. Investors must match their own risk- return indifference curve with the best investments available in the market.

There are two major types of risk associated with a stock. If the market moves up or down, a stock is assumed to change in value. This risk is referred to as a systematic risk. It may represent the temporary prices or influence of competitor’s new product, changes in raw materials. Unusual economic and government influences on the firm (Exxon).

The management has delivered on return on invested capital (ROIC) especially offer the last four years. It has typically been the mid-teens. Exxon corp. is involved in petrochemicals, oil exploration, manufacturing etc. over the last few years the prices of oil have unsteady. Other engagements include transportations and sales of crude oil and natural gas. It also participates in electric power generation. The ROIC reached 32.6% in 2006. Managers also get concerned with return on equity, which in the case of Exxon has been improving with a ten- year average ROE of 24.25. However equity rates have been erratic over the last ten years.

Fundamental analysis is the examination of the underlying forces that affect this well being of the economy, industry groups and companies. Most analysis goal is to derive a forecast and profit from future price movements. It involves financial data, management, business concept and competition (company level), at the industry level. It is the examination of supply and demand forces for products of Exxon for the national economy; fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic industry and company analysis to derive a stocks current fair value & forecast future value.

Fundamental evaluation employs a to-down approach that starts with the overall economy & then works down from industry groups to specific companies. The compound annual growth rate is a number that represents a steady level of growth from a beginning value to an ending value away to smooth out uneven returns.

Adjusted earnings per share dividend by it predict real return for stocks.

Portfolio management involves developing an investment strategy, one key element is to develop capital market expectations – forecasts of the long-term risk and return characteristics for various asset classes. That minimizes return for a given level of risk.

Portfolio and firms face a number of non-financial risks that must be identified, measured and monitored (www.debtadvisorycentre.co.uk) They include:

  • Operational risk – The loss caused by failures in and procedures or from external events.
  • Model risk – Incorrect or misspecified valuation models
  • Regulatory risks- uncertainty regarding how transactions will be regulated or how regulations may change
  • Sovereign and political risks regime changes that could affect business relationships, or the potential default of a sovereign borrower.

Considering the above explanation, the portfolio manager could want to own equity securities his EXXON Corporation in his portfolio(www.exxonmobil.com/corporate).

Should portfolio manager want to own the department of Exxon Company in its portfolio? This benchmark should have characteristics that reflect those of the desired portfolio. Important factors include market value risk, income risk and liability framework risk. Longer duration portfolios have more exposure to market value risk. It depends on how long fixed payments can be assured. Shorter duration Portfolios have more exposure to income risk. Liability framework risk is a tried approach that attempts to manage duration and other factors to the actual liabilities being managed (2007, financial & operating review).

A manager can invest in the Exxon company debt stocks. On both short & long duration Petrol chemicals, processing, manufacturing & transportation is one thing that firms the basis of energy industry activities. All companies need energy both electric and thus guaranteed returns with minimal risks.

Comparing P/E Ratio Model valuation, Exxon corp. latest 12 months financials indicate that dept./common equity ratio was 3.73% and 5 year high P/E ratio 11.7%% while the current P/E ratio is while the current P/E ratio is 11.7 @ at ( November 07). Increase in the diversification of a portfolio of superior dividend yielding stocks. As an energy stock its return on equity has been improving over past 10 years.

EPS growth rate have handily outpaced the equity growth rates. The 9 year rate is 18.51%. The 5 year rate jumps to 30.27%. Sales growth rates have been volatile from a low rate of 16.28 in 1998 to high rate of 59.77% in the next year.

Current dividend yield is 1.62% below the dividend yield of both the S & P 500 index (1.99%) and the DJIA (2.37%). The model price is $58.95 or a premium of 46.67%. All model prices concur that this stock appears over-valued, It not worth being included in superior dividend yielding.

The portfolio manager would want to own debt in this company because the fundamentals indicate that the company can ably pay interest on debt of both medium and long term nature. Also being in the energy sector the company is of the nature that its going to take time before hitting the declining stage from the maturity stage of the industry’s cycle.

  1. www.exxonmobil.com/corporate, 2007 financial and operating report.
  2. Frank Reilly, Keith c brown (2006) investment analysis and portfolio management. Australia ,mason, Ohio Thomson.
  3. Frank Reilly, Keith c brown (2003) investment analysis and portfolio management
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