Norris Capital Investment.

Norris Capital Investment.

Introduction

Norris Capital Investment is a UK based fund that provides subsidies in educational loans through its charitable fund. The registered members make regular contributions with the sole objective of achieving a sustainable growth and progress in its operations to finance all educational needs for all pupils and university students who are eligible for the assistance. Contributors are allowed to withdraw their contributions after a minimum period of five years in regulated proportions. The fund started its operations in June 2008; therefore the initial contributors will qualify to begin withdrawing their funds sometime in June 2013 if they are in need of their funds. There are other players in the market that rival Norris Capital investments in the same category of business and fund management.

The investment environment entails all the opportunities available in the investment market that Norris Capital investments might be interested in. These opportunities are varied and they can be either for a short term period or long term depending on the nature of the investment. For instance in the financial market the short term investments include Treasury bills, commercial papers, money market, common stock, Bonds and mutual stocks. The other long term investments are for instance direct and indirect property, securities and the long term property. These investment vehicles are found in different institutions and market structures. Before investing, the following criteria should be followed when the decision to invest has been reached. The length of the investment period should be decided and the objectives and targets of the investment determined. A plan should be put in place to evaluate and analyze all the investment choices. Norris Capital Investment is a fund oriented business firm. The nature of business fund investment is mostly short term.

Norris Capital Investment has assets worth over 13.5 million pounds.

Norris Capital investment Portfolio.

These are 35% UK Equities,UK corporate bonds are 15%, overseas Equities account for 20% while UK government bonds are 20% and the balance is cash and short term investment. The financial assets like stocks and bonds contribute positively to the income of Norris Capital Investment and the transfer of funds to attractive and profitable investment opportunities should be facilitated. Financial assets are the general claims to the generated income by real assets. The real assets only produce goods and services whereas financial assets determine the allocation of income or the wealth generated among the investors. The financial markets are simultaneously created and destroyed during the operations of a business. When a loan is paid, the claims by the creditor are written off and the obligation of the debtor ceases to exist. On the contrary, real assets can only be destroyed accidentally or when they are worn out.

Analysis of future strategy asset allocation is based on the choice of investment and the nature of investment. Norris Capital Investment follows the top-down approach. Capital and asset allocation decision should be made at the highest level of the organization, with the decision to choose from specific kind of securities to hold in each asset class directed to specific portfolio managers. The decision to allocate capital is the proportion chosen of the overall portfolio to be invested in safe but low return investment in money market securities versus risky and higher income securities like stocks. The asset allocation decision defines the distribution of high risk investment across an array of asset classes like company stocks, government bonds, real estate and property market and foreign assets. The decision in selection of securities describes the choice of specific and particular securities to retain in each asset category.

The treasury bills are risk free assets. The nature of treasury bills makes their value to be insensitive to interest rates fluctuation and also because of their short term period. Inflation uncertainty over a couple of weeks or even months is immaterial compared with the uncertainty and the inflationary nature of the stock market dividends. Most investors prefer to use a wider range of market instruments to check on risk and keep it at minimum level. Literally all the major money market instruments are interest free assets because of their shorter maturities and the nature of their safeness in terms of credit risk. For instance, the bank certificates of deposits (CDs) and the commercial paper (CP).

Active management is an attempt to relate and apply the human intelligence to determine deals that are the most profitable in the financial market. Active management is mainly the model for investment strategic decision. The active managers go for attractive stocks, government bonds, mutual financial funds and they calculate when to move in or out of market sectors and also place bets on the future general direction of financial securities and money markets with alternatives and other derivatives. The main objective of Norris Capital Investment is to make profits. In pursuit to their strategic goals, active managers look for information to be informed of the very best and most valuable information they can get so that they may develop complex and advanced proprietary selection in the trading system. Active management entails going hundreds of methods some which are fundamental analysis, technical or even macroeconomic analysis to get and determine the most profitable future or later investment trend. ( Bernstein, 2009)

Passive investment management fails to determine attractive and an unattractive securities or forecasted securities, the time markets or the market sectors. Passive managers will invest in a wide range of sectors of the market but accept the average income from various asset classes. Passive investors use very little information or even none at all that active investor’s fight for. Instead passive managers allocate their assets based on the historical data analysis and completely ignore the asset’s class risks and income, they diversify widely across all networks and maintain long term asset balancing among asset classes.

Index investing is a type of passive investing where portfolios are related based on securities indexes which sample various sectors in the market and are made up by the committee. These indexes are based on benchmarks and are restituted by the committees. When there is poor performance then the poor performance are deleted while good performance are added. The benchmarks are variable and are influenced by price momentum. Dow Jones industrial index i.e. a basket of 30 largest US companies. So far only one company is listed since 1929. Indexes are needed for local and international equities and fixed income, sectors, gold, and literally all asset classes and sub assets classes and sub asset classes. Active investment management finally, is really not achievable i.e. it’s a mirage which very expensive boosts costs substantially and reduces returns compared to the well designed passive portfolios. Active management doesn’t do better in bear markets or guide investors to avoid losses.

The investment process is made up of two wide tasks. These are security and market analysis under which the risk and the expected incomes or returns attributed to the entire possible investment is analyzed. The second part involves the introduction and formation of an optimal and accurate portfolio of assets. It involves the determination of the best i.e. low risk and high return opportunities available from logical investment portfolios and the choice of the best available. The formal analysis and choice of investment is called the portfolio theory. It’s made up of three basic concepts.

a).Investors naturally avoid taking risks and demand a higher reward for engaging in higher risk investment. This risk is the premium risk i.e. the difference of expected rate of income and the alternative risk free investment available.

1. b) Investors are allowed to quantify their personal tradeoffs among the portfolios risks and the expected return.
2. c) Finally the investors cannot evaluate the risks involved in an asset which is separate from the portfolio they are a party to. The best way to measure the risk of a certain asset is to assess its effect on the volatility of all the portfolio of investment. Following these approach, the risky securities may be useful as portfolio stabilizers and low risk assets.

The capital Asset Pricing model (CAPM) is a concept that gives a definite prediction of the nature of relationship that exists between the risk of a certain asset and the expected return. They serve two primary functions. It gives a bench rate for evaluating other investments. It also gives the educated income on assets that have not been traded in the given market. Risk averse investors measure all the risk of the optimal and risky premium portfolio by its own variance. Investors expect the payment or reward or risk premium on each type of assets depending on the contribution of each asset to the risk of the portfolio. The beta of a stock measures and compares the stocks contribution to the variance of the individual market portfolio. Hence any asset or portfolio, the required or needed variance is the function of beta. (Graham, Dodd, 1996)

The following are the assumptions undertaken in this model. Investors are not affected by price i.e. they are price takers because they are not affected at all by their own trades or businesses. The investors plan and have one similar holding period. It’s a myopic behavior i.e. it ignores literally everything that might occur at the end of the stated single trading period. Investment is limited only too many public traded financial assets, such as stocks and bonds and to the risk free borrowing or any loading arrangement. No one is authorized to invest in non trade or in any other assets like education. It’s assumed that investor will pay all their taxes and no transaction cost on any trade and or lend. Also investors don’t pay taxes on their returns all their investments. It’s assumed that the investors have similar beliefs concerning taxes and may be calculated variances and maybe even others.

All the investors will definitely choose similar Market Portfolio (M) I.e. market value weighted portfolio of all the existing securities. The market portfolio will be an efficient and effective portfolio. The tangency portfolio is the optimal Capital allocation line (CAL) derived by each investor. The capital market line (CML) the line from the risk free rate through the market portfolio, M, is also the actual attainable capital allocation. All investors hold M as the risky portfolio differing only in the invested amounts.

The risk premium in the given market portfolio will be proportional to its own risks and the degree also matters of risk aversion of the representative. Also the nature of risk on individual assets or be will be proportion to the relative market portfolio. And the better coefficient of the security. Bi=Cov (RI, r m)/a2 M.

In conclusion the portfolios selected by Norris Capital Investments are not so competitive

As a fund firm has a lot of operation cost and most of their investments should be in short term investment vehicles like Treasury bills and in the money market. Commercial papers are also good in investing. After making the decision to invest then all options should be evaluated and the high risks and the high returns investments should be matched with the low risks and low risks returns investments.

References

Bernstein, W. (2009) The Intelligent Asset Allocator. Boston. McGraw-Hill,

Bogle, J. (1999). Common Sense on Mutual Funds. Wiley

Clyatt, B. (2005) Work Less, Live More, Nolo,

Dalbar (2012) Quantitative Analysis of Investor Behavior.

Graham, B., Dodd, D. (1996) Security Analysis. Boston. Mc Graw-Hill.

Gordon, M. (1962). The Investment, Financing, and Valuation of the Corporation. Homewood:  D. Irwin

Khan, M. (1993). Theory & Problems in Financial Management. Boston: McGraw Hill

Higher Education.

Vance, D. (2003). Financial analysis and decision making: tools and techniques to solve

 financial problems and make effective business decisions. New York: McGraw-Hill.

 

Murray, G. and Goldie, D.  Learn How to Manage Your Money and Protect Your Financial Future, 2010.  Excellent one hour read on active vs. passive and DFA.

Siegel, J. Stocks for the Long Run, Fourth Edition, 2008.

 

WEBSITES:

www.finpipe.com

information on equity securities

www.nasdaq.com

www.nyse.com

www.bloomberg.com

information on bond and market rates

www.inestinginbonds.com

glossaries on financial terms

www.bondsonline.com/docs/bondprofessor-glossary.html

www.investorwords.com

info on derivative securities

www.cboe.com/education

www.commoditytrader.com

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