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IP: Case Study Discussion

Discussion in 'Financial Planning Study Group' started by CJ. Wentworth, 10th Oct, 2009.

  1. CJ. Wentworth

    CJ. Wentworth Well-Known Member

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    Hi all! Hope all has been going well.

    On to Module 3 of Kaplan Diploma of Financial Services. I flew through the first half of the Assignment with ease. The case study however seems, as always, somewhat ambiguous.

    I have attached a PDF with the case study on it and it starts halfway down page one (sorry about the quality, it seems to be playing up for some reason)

    Outlined below is what I'm supposed to be answering and how I understand I should answer them.

    You are to prepare a proposed investment plan. You are required to provide:

    1. A brief but comprehensive discussion of investment returns, risk and diversification.

    Pretty straight forward here. Without specifically going into the client's personal situation, this would just be a general statement about the Risk/Return relationship. Why diversification is good, etc​

    2. Suggested non-superannuation strategies with overall asset allocation table(s).
    As the client's are nearing retirement, this would be something about the Risk Category the client's should be in. I'm leaning towards Balanced (and the associated appropriate asset allocations)​

    3. Suggested investment products that will implement the agreed asset allocations. While you will not be marked on your specific brand choices, you will be marked on the appropriateness of the strategies and types of products recommended.
    I suppose this would be extending the answer above to show particular products on the market, ie Property Trusts, Managed Funds, etc​

    4. Assumptions you make in the plan as well as justification of your assumptions. Marks will be deducted where this is not provided or the assumptions change the specifications of the assignment.
    Straight forward enough. I assume that their Superannuation being sufficient means that upon retirement there will be surplus funds available (apart from my suggested investments)​

    5. Advantages, disadvantages, justifications and risks of the strategic and product recommendations that you make.
    Again straight forward. Justification of the choices you made in part 3.​

    6. Comments on the investment ideas that Blake and Jenny have considered so far:
    a) selling all their share investments and putting the proceeds into a term deposit, or

    Possibly something about Tax treatment of this​
    b) investing the money via a margin loan in three direct equities: WOW, WES and CBA shares. While you should briefly consider the merits of the individual investments in your response, emphasis should be placed on the appropriateness of these investments ideas in the context of the couple’s overall portfolio.
    3 shares = no diversity. Possibly suggest different strategies in share ownership ie Managed Funds​

    7. A response to Jenny’s statement: ‘I am very worried about the recent downturn in the markets and am thinking that I will sell out and buy back when times are better. What do you think?’
    Something about market trends, previous experience, etc. Also pointing out that the past is no indication of the future​




    As always, I'm not looking for someone to answer the Case Study for me, just someone to bounce ideas and help me make my own answers with.

    Thank you for reading (if you got this far!)

    -CJ
     

    Attached Files:

  2. study

    study Member

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    IP assist

    I too am on this assignment.. What I will do is just go through the case studies at the end of chapter 8 and 'copy' what they have put in the two examples there. What I have learnt from Kaplan is that if you follow the lead they give in their case studies then then you are doing what they want. And in effect what they give us as an example etc, is what we should be doing when we eventually get a job.

    I am happy to bounce ideas off. just message me.

    I am having trouble with a couple of questions from the first section. Think it was question 2 or 3, about how people can lose money from a bond. I cannot work out which formula to use.
     
  3. plan

    plan Active Member

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    Hi

    Just starting the case study. Wondering how others have set out the investment plan...i.e like an SOA?

    thanks
     
  4. Sophi

    Sophi Member

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    hi CJ Wentworth,

    just a qck question re the assignment, Q1 - for me it seems that there are many categories the asset classes can fit in. For me it seems like they can fit into, international/australian OR income type/capital type OR non-growth/growth. which one did you choose?am I going totally wrong? thanks heaps,S
     
  5. CJ. Wentworth

    CJ. Wentworth Well-Known Member

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    Sophi, growth and income (or as you've put it, non-growth/growth). Debt and Equity
     
  6. L'homme

    L'homme Active Member

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    Q3, have you considered the fact that the couple holds an investment property might have added risk to your recommended portfolio and the his overall financial position?
     
  7. Sophi

    Sophi Member

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    L'homme - in the case study I have considered the investment property as it is an investment asset. - Is that what you meant?
     
  8. L'homme

    L'homme Active Member

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    Hi, thanks for replying!
    The couple states they don't want to sell their investment property, therefore in formulating for them a suitable set of strategies, I take into account of their exposure to direct property investment, which adds to higher return as well as higher risk to their overall portfolio. For example, 20% of property assets are fixed in their investment. What do you think?
     
  9. Sophi

    Sophi Member

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    no worries :)
    yes, you are right, have to take the property investment into account. as you are looking at their whole asset allocation.
     
  10. L'homme

    L'homme Active Member

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    Sophi:
    Do you recommend they pay off all of their debts( incl mortgage) before investing? If not, does your view on their direct property investment exclude mortgage, ie(only accounting for the net value)? thanks!
     
  11. L'homme

    L'homme Active Member

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    Also, the couple seem firm on the decision not to sell their investment property, which plays too much of a role in their overall portfolio( about 60%), I can't, taken everything they own in consideration,help them adjust risk with such a huge exposure to direct property unless they agree to sell and buy into listed property funds. I want to know, anyone recommends them sell their investment property? If this is one rule that can't be bent, I see no other strategy to help them diversify, really.
    And to make things more complicated, the property in question gives no details on rent, years of ownership, int rates etc. I am getting the impression this is not important in the greater scheme of things? WTF I am frustrated.
     
  12. Sophi

    Sophi Member

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    only to pay off credit cards and the non deductable loan (this the loan on their PPR). i didn't accounted for the net value, as the inv property's value is $418K.
     
  13. Sophi

    Sophi Member

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    how did you get 60%? I believe it is less than 60%. if you add all the assets up, minus (credit card + home loan), then you get how much assets they have, say "x". Then 418/x=gives you how many % the property in their portfolio. Did you determine their investor risk profile yet?
     
  14. L'homme

    L'homme Active Member

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    Hi, Sophi:
    Thanks for clearing things up. I made a mistake by saying it's 60% of overall mix, it's actually about 40%( $418000).
    Can I ask what's your recommended asset mix %? I added another 20% of growth asset(on top of the existing 40% direct property exposure, which they insisted on not selling) in the form of shares, but I did recommend them sell their direct stock investments and use the proceeds to invest in share-specific funds. So in total their growth % is around 60%, the rest are 30% of bonds in the form of balanced funds and 10% cash in trusts. That seems ok? Thanks :)
     
  15. Sophi

    Sophi Member

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    40/60 seem ok, but you have to reason (!) why did you determine that this is their risk profile.
     
  16. L'homme

    L'homme Active Member

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    My reasons being:
    That the couple are nearing retirement so it will be prudent not to take on too much risk, but their investment horizon is long( at least 10 years before retiring) so they can afford and are willing to ride out short-term market gyrations in exchange for greater returns, this is also in line with their need for maximizing return and for providing sufficient support for their kids' finances blah blah.

    That 40% of their existing portfolio is direct property, in the interest of better diversification and higher growth potential, I throw in another 20% of equities exposure which bring their overall growth assets to about 60% but not more, 10% of cash and 30% in bonds are rather arbitrageurs but are generally regarded as standard mixture of a balanced portfolio so I figure I cannot go more wrong.

    In the end, I financial advice largely hinges on the adviser's ability to justify their recommendations, the market either goes up or down, occasionally trades on the sideline. I sometimes laugh at the notion of "in-depth research and professional judgment" claimed by market analysts when most are simply parroting what have been said and done. Well, I guess that's the beauty of being in the industry, on can always be wrong but never be punished for it, as long as there's a reasonable justification.

    Having said all of that, I don't think our assignment markers will or can ridicule our reasoning so long as we write logical stuff that we believe are true and what others like to hear. right?
     
  17. CJ. Wentworth

    CJ. Wentworth Well-Known Member

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    L'homme, I'm going to answer your post here rather than in the other thread.

    I think what you said above is exactly right. My final breakdown was something like, 30-40% direct property, 30-40% shares (international and domestic) and 20-30% cash/fixed. I can't remember the exact breakdown but I remember thinking that I ended up with WAY too much growth and not enough income.

    I did however submit (what I thought) was a logical reason as to why my portfolio breakdown was as it was. I did have a note saying that had they accepted the sale of their IP I would have suggested a different strategy, but I didn't go into detail as to what the strategy would have been.

    I'm not sure if it helped me, but I did mention that if they do keep their IP, that by the time they retire both of their children will have moved out. I suggested that they could move into their IP and sell their PPoR. This made sense since their PPoR would be CGT free as well as much too large for just two people to live in.
     
  18. L'homme

    L'homme Active Member

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    CJ, thanks for replying
    I also talked about an alternative scenario where their IP is substituted for listed property funds. I also did not go into detail.
     
  19. L'homme

    L'homme Active Member

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    Guys, need help on the technical parts, aka Q3 and Q4
    Just wanna verify my answer: Q3 I got PV=$102.65. Anyone got the same?
    Q4 I am stuck, anyone cares to share a few tips? I got an NPV of 64,135 but I think it's wrong.
     
  20. L'homme

    L'homme Active Member

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    Just revised my answers:

    NPV=64518 and IRR=12%, anyone?