Provide a critique of one investment single factor model

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Reference no: EM133794802

Assignment: Investment & Portfolio Management

Background

Kniphofia RH Poker Ltd operates in the Gardening industry and the company sponsors the Kniphofia RH Poker Corporate Superannuation Fund. Kniphofia is a medium company, with a proportion of its revenues generated within Australia and a portion exported to the European market, in particular the Netherlands. Product demand has been strong in the past few years, although it is highly cyclical. The company has rising earnings and a strong (low debt) balance sheet. Kniphofia is a relatively young company, and as such its Defined Benefits superannuation plan has no retired employees. This essentially active-lives plan has $50 million in assets and $5 million surplus in relation to the projected superannuation payments obligation. Because of excellent recent investment results, Kniphofia has not been required to make a contribution to the superannuation fund in the four most recent years. The company considers it very important to maintain a plan surplus and according to the company's Financial and Investment officer, Dr Samantha Lonicera, she is concerned the surplus may not be a large enough buffer as plan liabilities increase.

Information the team has uncovered

A. The duration of the fund's liabilities is approximately twenty to twenty five years.

B. The discount rate applied to these liabilities is five percent (5%).

C. The current return on the ASX for the previous five years is 32% (Arithmetic) and 38% (geometric) calculated by Loman Brothers dated 1st August 2022.

D. The average age of Kniphofia's workforce is forty one years with an even split of male and female employees.

E. The previous five year's return on the fund was determined to be 15.5%. The Risk free rate is currently at 5%. The top three Security performers are CBA (12%), NAB (13.5% and WPAC (11.5%) within the Banking Sector. The beta of each stock is as follows - CBA 0.95, NAB 0.92 and WPAC 0.93.

Objective

Dr Lonicera directs you and your fund management team to incorporate an appropriate return objective. Because the plan is fully funded, Samantha is proposing a return objective of ten percent for the superannuation fund. She is also interested in any potential constraints that might be applicable in seeking to achieve a consistent return over the required time horizon.

Any possible regulatory implications are to be considered as well as the recognition of unusual situations that may significantly affect the fund (natural disaster, another global downturn with long periods of unexpected volatility).

Finally the superannuation fund committee must always be aware of the long term liability commitments, so Dr Lonicera is seeking to model the fund to forecast future performance. She would like to begin with 4 high performing stocks and assess the fund as a whole.

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Task

In your analysis, you are to specify:

A. Your fund management team's expert opinion on risk tolerance stating any assumptions and reasons why the team holds this view. Also state an appropriate type of risk objective for the company.

B. In your own words, provide a critique of one Investment Single factor model and one multifactor model that you think will be appropriate for consideration.

C. In your own words, explain the Superannuation Fund types that are available and outline a Cost-Benefit Analysis of a Defined Contribution or Accumulated fund that is specific to the industry the company should consider.

D. Even though it is an Australian company, a significant proportion of the primary goods are exported to the Netherlands. Does the recent economic situation in Australia and Europe have any influence on the Risk/Return analysis by you and your team? Why or why not?

Reference no: EM133794802

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