Investment Objectives
Investment objectives can be defined as monetary issues related to the targeted goals of a portfolio investment. The objectives are generally divided into risk and return considerations (Borad, 2019). Investment objectives are critical in developing an organizational or individual final investment portfolio, as the investment decisions are derived from the investment objectives checklist (Borad, 2019).
The Northwest Foundation is a private Canadian-based foundation whose mission is to support the Lido Health Center. The Foundation has disclosed over 90% of its operating budget within the past eight months. The report addresses the company’s risk objectives, the return on investment, and the constraints to the Foundation’s investment efforts. Detailed information on the investment objectives is based on the investor’s income, the growth of the payment, asset allocation, and the investor’s desire to take risks against constraints such as the time horizon and prevailing financial and taxation issues.
Risk Objectives
The Foundation’s Management can undertake three major steps to determine the return objective of any of its investors. The first step is for portfolio management to specify the measures of risks (Naveed et al., 2019). Portfolio management requires constant risk measurement. The measurement can be done in relative and absolute terms, where the relative measure of risks entails tracking specific risks. In contrast, absolute risk measurement includes tracking variations such as the standard deviation of all returns (Borad, 2019).
The Foundation’s Management can also determine the investment return objective by assessing the investors’ ability. The investors’ willingness to invest in a corporation is highly dependent on factors such as the prevailing economic conditions and the corporation’s financial status (Borad, 2019). Finally, the return on investment is determined by analyzing the required return and the specific return objectives.
Risk Objectives for Northwest Foundation
There are risk objectives for the Northwest Foundation, considering its abilities as well as the Foundation’s ability to take risks in its investment activities. Risk objectives for any business or company refer to hazards to be targeted by the risk management teams to mitigate risks of incurring losses from any investment activity. In the scenario of the Northwest Foundation, the risk objectives can be classified under the subcategories used in measurable business benefits such as risk exposure, cost of risk, maximum exposure risk, risk probability, risk impact, and company compliance (Aksar et al., 2022).
The company aims to engage in various investment activities this year. It has recorded its estimated budget for the Healthcare center to be $11 million, and the management’s expenses range at an average of 0.40%. Apart from the existing budget for basic costs, the Foundation has to fund a newly set up facility within the health center, estimated to cost $6 million within the first six months.
Developing the risk objectives also requires an analysis of the current rising costs of healthcare, which have been recorded to have increased by 1%, slightly above the annual inflation rates. Other considerations include gifts from Sky Pharmaceuticals, the parent company, and the yearly mandatory corporate tax.
The risk objectives for the Foundations shall be as follows;1
- Reduce revenue risks for the new facility and reduce the forecasted cost by 30%.
- Reduce future operational costs by 10% to withstand inflation and rising costs of medical care.
- Aim at the lowest portfolio loss of $ 10,000, which has 90% confidence and yearly returns of 3% of the total index due to inflation.
The Return Objectives of Investment for the Northwest Foundation
Return objectives for the Northwest Foundation exist on a relative and absolute basis. Absolute return objectives may be described as vivid in their description of the projected returns in their precise terms. The comparable return objectives of a company would always consider the performance of an asset compared to its peer (Barauskaite & Streimikiene, 2019). There is a need for every return objective to be identified as being pre- or post-taxation or whether it is documented after fee payment.
ROI is a mathematical model that investors and business owners can use to assess the profitability of their investments and determine how one project has performed compared to certain other assets (Khan, 2019). An ROI estimate may occasionally be combined with different strategies to create a value proposition for a specific offer. How well a firm is handled is measured using the overall ROI for the organization.
The calculation of the value in return on the investment;
- Expenses on Healthcare =$11 million
- Management’s expenses =0.040% of assets
- Investment in a new facility=$6 million
- Sky =$ 2 million contribution
- Computer consulting business =$1.25 million annual profit (pre-tax)
Using the formula;
[(Ending Value / Beginning Value) ^ (1 / # of Years)] – 1
Where: # of years = (Ending date – Starting Date) / 365.
The absolute return objective of the Northwest Foundation is to reduce the losses that may be related to the damage of the construction materials by $100,000 in a month through contingency measures, and this would lead to a reduction in the 6 -months minor losses related to the investment by 20%. The general Northwest Foundation’s return on investment would be 70%.
This ROI value is based on the accuracy of the investor’s information. In most cases, the investment objectives of various investing companies or individuals include plans to increase their net worth, grow the company’s annual income, or even reduce the portfolio’s value (Naveed et al., 2019). Other overlooked factors may act as constraints towards an investment choice, for instance, the information on capital gains, payments for managed portfolios, and overall assets.
There needs to be more precise information on the total number of assets owned by the Northwest Foundation. The knowledge of such details would determine the final calculation of the projected returns on the investment objective as there shall be an inclusion of the assets like social security and pension benefits.
Constraints of Investment for Northwest Foundation
Liquidity
Liquidity is the first constraint that will affect the investment efforts of the Foundation. This refers to Northwest Foundation’s ability to convert its assets into cash as quickly as possible without the price discounting challenges whenever there is a need to do the liquidation (Ali et al., 2019). The Foundation’s desire to dispose of the consulting computer business is challenging as Sky, a partner in the common equity, needs to consider the opinions. The Foundation’s board is also faced with a dilemma since the computer consulting business, as part of its portfolio, has a market value of approximately $200 million.
Unique Circumstances
The changing economic times and inflation have led to the board members of the Northwest Foundation needing more clarity on the amount of money necessary to sustain operations because of the volatility of the dollar value (Mayer, 2021). The volatility issue is a constraint in investment decisions because of currency fluctuations. Members of the boards have always set apart a share of the Foundation’s portfolio to cover at least 15% of the overall expenditure of the health center as an emergency fund to ensure that the annual expenditure goals are fulfilled.
Time Horizon
Another constraint facing the company is the time horizon, referring to the desired investment period. The investors will choose more illiquid financial assets for the longer timeframe (Roychowdhury et al., 2019). For instance, investors with a one-year time frame would favor investing in short-term liquid assets like depository certificates. Investing in an income and development portfolio supports economic stability, and consistent returns will always be faster than inflation.
Legal and Regulatory
Depending on different investing companies’ tolerance to risks and balanced investment goals, some investors avoid volatility issues and may opt to minimize their expansion plans. The age of the investing company or an organization is critical in assessing risk tolerance and determining how assets may be allocated (Ahmad, 2020). The Northwest Foundation was founded five years ago and likely has a longer time horizon than other peers in the healthcare industry. However, exposure to different equities is more critical than the time horizon in developing investment portfolios (Giese et al., 2019). There is evidence that equity exposure varies with the changing time horizons; hence, the growth of asset allocations tends to decrease with the increasing age of an investor. This explains the financial issues, such as an increase in capital expenditure at Sky.
Taxation
The company faces the constraint of taxation because different forms of investment security accounts need unique and separate tax requirements. The special tax requirements and debt recovery policies affect how investors develop an investment portfolio (Sunardi et al., 2020). The Foundation has no account sheltered from taxation; hence, the tariff will directly affect the investment. According to the provided report, the contribution income is taxed before the money enters the Foundation’s accounts.
However, the affiliate computer consulting business is projected to produce $1.25 million of revenue before taxation. The corporate tax rate of 18% on Northwest Foundation shall affect the amount of money deposited in the recipient’s accounts. Finally, the individual and the institutional issues act as constraints to the investment of Northwest Foundation. In most cases, circumstances dictate how an organization develops frameworks adopted when choosing the assets to hold or dispose of.
Sky initially gave the Northwest Foundation an annual $2 million gift to support its operation but has ceased its contributions because of the prevailing high expenditure conditions. The cost of living has also affected capital expenditure within the Foundation. For instance, the cost of healthcare services has increased by 1% above the global inflation rates. These costs have made the board of the Northwest Foundation adopt a lean and diversified portfolio that causes the common equity held by Sky to be a small portion of the overall portfolio.
Conclusion
Establishing investment objectives is essential for shaping an individual or organizational final investment portfolio since investment decisions are based on the investment objectives checklist. Furthermore, an investment portfolio requires a continuous risk measurement exercise. Risk objectives for any organization or company refer to dangers that the risk management teams should target to reduce the likelihood that any investment would result in liabilities. There are two ways to evaluate risks: relative and absolute evaluation. Relative risk measuring involves tracking particular dangers, whereas absolute risk measurement involves tracking fluctuations like the standard deviation of all outcomes. By evaluating the capabilities of the investors, the Foundation’s leadership can also decide the return objective for the investments.
The Northwest Foundation has risk objectives that consider its capabilities and capacity to assume risks in investing activities. The term “risk objectives” refers to the risks that the risk management teams should address to reduce the likelihood that any investment activity would result in costs. One restriction that will impact the Foundation’s investing initiatives is liquidity. This refers to Northwest Foundation’s capacity to promptly convert its assets into cash as quickly as feasible without facing difficulties with changing prices when there is a need to dispose of assets. Taxes and timelines are some additional restrictions.
For the extended period, investors will favor more illiquid capital assets. Depository securities are an excellent example of a short-term liquid asset in which investors with a one-year time horizon would choose to invest. Investments that support economic expansion, as well as stability, would always generate returns that are quicker than inflation. Some financiers avoid instability problems and may scale back their expansion ambitions according to various investing businesses’ tolerance for risks and appropriate investment goals. The different tax laws and debt recovery procedures impact how investors build their investment portfolios. The Foundation does not have a tax-exempt account, so taxes will directly impact the investment.
References
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Aksar, M., Hassan, S., Kayani, M., Khan, S., & Ahmed, T. (2022). Cash holding and investment efficiency nexus for financially distressed firms: The moderating role of corporate governance. Management Science Letters, 12(1), 67-74. Web.
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(2015). Investment Objectives and Constraints. EFinanceManagement.com. Web.
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Mayer, C. (2021). The future of the corporation and the economics of purpose. Journal of Management Studies, 58(3), 887–901. Web.
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Footnotes
- The three risk objectives have been determined after assessing the organization’s risks and how the risks can be mitigated, managing risks effectively, and achieving its strategic goals and objectives. The Foundation is at risk of spending more money, especially in the construction of the new facility, since the cost of building and repair materials may change over a period of time.Given the rising inflation, the Foundation should consider reducing The ROI model used to determine the profitability of the Foundation’s investments. It factors in The costs used in the management of its staff, etc. Where new numbers introduced represent either an increase or reduction of costs based on the new objectives. Using the formula: [(Ending Value / Beginning Value) ^ (1 / # of Years)] – 1. The investment in the new facility is not sustainable as the immediate expenses exceed 50% of the total allocated budget. It should consider reducing costs on damages to reduce further loss from the project.
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