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Our Committee of 8 members was tasked by our company KWAM to design an Investment
Policy Statement for Mr Jack Abraham. The Committee’s fund recommends a diversification
into 20 to 30 equities across the various markets and sectors to allow him to capitalise on stock
opportunities in emerging markets. The list of equities will be constantly monitored and
macroeconomic opportunities and trends. The Committee will reserve up to 15% cash as dry
powder to offer some flexibility in seizing market opportunities. The Committee expects an
The Committee selected stocks using a multifaceted approach and hence would aptly liken our
stock selection mechanism to wine selection. From the geographical locations of vineyards to
the year a wine is produced, many different variables affect the evaluation, and thus valuation
better understanding of the value and growth potential of a stock during the competition.
We wish to liken these indicators to various underlying aspects involved in the evaluation of
wine. First, wine must be classified into the Old World1 (US market and UK market) which is
more mature and stable; and the New World2 (the emerging economies) which has higher risks
and returns. In light of diversification underpinning our stock selection mechanism, our team
selected a variety of wines to reduce the negative impacts of unforeseen events like droughts
and diseases.
1
The Old World in the wine industry refers to the Europeans wine-producing countries including France and Spain.
2
The New World in wine industry refers to the emerging wine-producing countries including Australia and Chile.
For a bottle of wine, one must consider the combination of the types of grapes (for instance, the
proportion of Sauvignon Blanc, Merlot and Cabernet Sauvignon). Likewise, for a stock, the
Committee considered its fundamentals, including the financial ratios such as P/B ratios, P/E
and P/E forward, financial statements and the business models. Last but not least, the year of
production is of great significance when assessing a bottle of wine because the same wine from
the same vineyard may taste differently from year to year. Similarly, the timing at which a stock
should be bought is pivotal as price fluctuations affect the returns. Hence, the Committee made
use of technical analysis, such as the daily trading volume and Relative Strength Index (RSI)
In order to classify which stocks maximise growth and minimise risk, we categorised the stocks
into Château Marguax, Château Mouton and Château Montrose. Château Marguax represents
well-established blue chip stocks with minimal chance of a loss, allowing for capital
preservation. Château Mouton, a First Growth wine that only gained its status in 1973, represents
stocks that have significant upside potential reflected in its high target prices, so there can
potentially be much to be gained from them. Château Montrose, a Second Growth with lower
Our initial wine selection would provide Mr Abraham with XX bottles of Château Marguax BB
bottles of Château Mouton and ZZ bottles of Château Montrose, which we will further elaborate
As shown by Pie Chart 1, 65% of the fund will be invested in the US market due to optimistic
consumer activities and healthier labour market (Fig. 1 and Fig. 2 respectively)
The Fund further diversifies into China and India, exchanging greater risk for wider exposure to
various economies. These economies provide hidden value and greater growth prospects.
(The table shows the recommended proportion of assets invested in the long run. It does not reflect the actual amount of assets invested in
the OTIS. )
The Chinese economy stabilised in 2016 and this trend will likely continue, along with a Formatted: Justified
projected GDP of around 6% (JP Morgan Analysis Report 2017, 2016). Chinese RMB
remains relatively strong (Fig. 3), which reduces currency risks. India enjoys the second
fastest GDP growth (Indiastat, 2017) and aan especially burgeoning IT Service industry.
However, the exchange rate between Rupee and USD fluctuates significantly (Fig.4). To
reduce uncertainty, the Committee will use currency options as a hedge for the Rupee and
with the Brexit. However, in the long run, the Committee will consider the opportunities
trends.
Fig. 3 Exchange Rate for 1 RMB to USD Fig.4 ExchangeFig.4 Exchange Rate for 1
Rs to USD
To evaluate equities on the Sector/Industry level, the Committee used the Porter's Five Forces
to analyse the competitive intensity within a sector and across industries, and relative values
to determine an asset's value that takes into account the value of similar assets.
(The table shows the recommended proportion of assets invested in the long run. It does not reflect the actual amount of assets invested in
the OTIS. )
As shown in Table 1, the Committee recommends Mr Jack Abraham to focus his investment
previously; elsewhere, a middle class is emerging, leading to greater retail participation. Into
specific industries, the Committee recommends the Hotel, Restaurants and Leisure Industry,
given the positive outlook and consumer sentiments.. Buyer price sensitivity is relatively low,
especially for luxury hotel brands, and consumers are largely dependent on existing methods
of distribution. These brands also tend to have differential advantages as the services
consumers enjoy are not easily substitutable and are highly unique. In terms of cost
management, these companies tend to have significant bargaining advantage, enabling them
to cut costs. On the other hand, equities from consumer staples are considered a defensive
The Committee also sought growth opportunities in other sectors like the IT sector. By cross-
referencing the debt/ equity ratio across sectors, IT sector has the third lowest ratio (as of
2017), indicating sustainable growth. Taking into consideration Mr Jack Abraham's heavy
investment in the US IT market, the Portfolio offers him an exposure to the burgeoning IT
Service Industry in India. Reaping the benefits of globalisation, firms in the IT Service
Industry are not restricted by geographical boundaries and have innumerable consumers
The Committee has also chosen to diversify across the different industries in Healthcare
Sector because, at the point of entry, many of these companies have become oversold as a
result of setbacks in later phases of trials i.e. Celgene Phase 3 drugs, leading to an
undervaluation of the stocks. The Financials Sector holds weight in our portfolio too, as
ranked as Calls will hold 3% of the assets. Stocks ranked as Conviction Calls will be allocated
with around 5% of the Fund. The Committee plans to have 5-8 Conviction calls, 15-25 calls
and 20 stocks in the hold list. The Conviction Calls are: CBOE (NYSE), McDonalds (NYSE:
MCD), Marriott International (NASDAQ: MAR), China International Travel Service (SSEC:
601888), FMC (NYSE), Lockheed Martin (NYSE: LMT) and Infosys Limited (NSE: INFY).
The Committee conducted SWOT analysis to identify the internal and external factors
affecting the performances of a firm. When considering the strengths and weaknesses of a
firm, the Committee constantly hold these questions in mind: Which area does its business
focus on? Which part of the business gains the most profit? Which part of the business is the
least profitable.profitable? Similarly, for opportunities and threats, the same logic applies:
What are the business goal? How can the new technology enhance the business? What is
going on in the industry? What are the strengths of the biggest competitors? The information
is obtained from conducting massive research through reading reliable news sources, reports
done by renown investment banks and its own annual reports. As such, an example of how
The proportion of asset to be diversified into the different market caps and equity style is
shown by Table 3.
(The table shows the recommended proportion of assets invested in the long run. It does not reflect the actual amount of assets invested in
the OTIS. )
The Committee of 8 people members feared that we might risk turning into an ineffective
bureaucracy that could not take advantage of opportunities. Thus the Committee developed
a sturdy system to allow individual team members to react quickly to market developments:
any member who wished to buy any stock would first have to announce his/ her decision on
the team’s WhatsApp Group. Of all those who saw that message in the next 1 hour the stock
needed at least more than 50% approval. For instance, if 4 people read the message, at least
3 out of the 5 people (including the original member who proposed the stock) voting need to
To ease the stock buyingAs part of the investment process, before trading started, the
Committee decided to shortlist 30 stocks and an acceptable band of entry price for those
stocks. Yet, obtaining consensus during the selection of prospective stocks was challenging,
given the large number of members. There were differing perspectives and methods: some
members preferred to use relative value ratios while others preferred to utilise both financial
In addition, the Committee of 8 split up into 4 pairs. Each pair specialised in different markets
and individual sectors. Eventually, we agreed to use both fundamental and technical analysis
to obtain a first-cut list of stocks and to have at least two other portfolio managers cross-
Comment: I suggest that you avoid sharing this own experience of rogue trading taking
place. Rather, position it as a what-if scenario if rouge trading occurs and you develop
A possible scenario is what if an equity which was not on the selected list was bought on the
first trading day, prior to a common investment rule being established. However, any
impulsive decision-making in the form of “rogue” purchases will set a poor precedent for
future investment decisions. . Before a common investment rule was established, an equity
which was not on the selected list was bought on the first trading day. Following this, Hence,
the Committee established stringent regulations control measures regarding the party that
should make a call for stocks stock trading on any particular days. For individuals in charge
of international markets, there would be greater sovereignty and flexibility after the equities
are selected by the Committee because as the buying or selling price is settled at the day-end
price. However, this did will not deter “rogue” purchases by team members who felt the
procedure stifling. As tThe other Committee is members fully aware to being sympathetic to
the need for decisive actions, we instituted a provision for such rogue purchases. In urgent
cases where few members were available to offer their views, a report of 200 words was to
be submitted the next day to explain the purchasesituation. Based on the performance of the
stock bought impulsively, the Committee would either divest itself of it at an opportune time
or hold on to it.
Through the various internal arguments in the Committee on which stocks to approve, the
Committee gained insights into the means with which to define a company with potential
growth by processing healthy financial ratios, business models and leadership. To quickly
filter stocks that might have high risk or unsustainable growth, the Committee used beta, P/E,
P/E forward and debt/equity values. However, there was no one standard value that all sectors
could be measured against considering the huge differences in average values across various
sectors. Thus a further selection is done by choosing a good business model, identified with
Porter's Five Forces. The leadership and management capabilities could be assessed through
news, media reports, historical track record and consistency checks. After the first round of
stock selection the Committee members are rotated and thus each sector is checked twice,
ensuring rigour of selection. This involved the utilisation of technical analysis tools such as
the Relative Strength Index, a momentum oscillator that measures the velocity and magnitude
In light of the short period of time accorded from the announcement of the competition to the
beginning of trading, the more specific tasks had to be divided among individuals based on
their strengths and preferences, though major decisions were made as a group. During the
early research phase, individuals who prefer Top-Down Analysis researched macro-
economic outlooks to determine the allocation of assets into each market and sector. After
which, the members who enjoy patterns and spotting discrepancies proceeded to conduct a
Subsequently, half of the Committee carried out qualitative analysis to determine the growth
potential of a stock, while the other half of the Committee conducted quantitative analysis to
decide whether a stock has momentum. Such combination helped the Committee obtain a
In order to understand the differences in price volatility and investor confidence between
markets, the Committee considered fiscal policies, monetary policies and currency exchange
rates. The Committee reviews its primary allocation of assets in line with changes in policies
made by the central banks of different markets or any major events that would have impacted
the market (such as job reports and tax cuts). However, when one considers the long-term
process we could have refined would be a clearer delegation of roles in terms of specialising
in fundamental analysis and technical analysis, preferably based on each person’s aptitude,
as they largely require different skill sets. This would make the stock selection process
streamlined and faster. Moreover, the Committee would have liked to tap onto the data
processing power of technology be able to build a composite indicator that can with a single
number reflect the overall strength of a company’s fundamentals based on relative value
ratios, as well as . The Committee could also have developed an algorithm to sort through
and screen the several thousands of stocks actually available to us in the actual US, UK, India
Section 3: Ethics
In the event that someone offered inside information for potential investment, the Committee
will unequivocally assert that it is illegal to reveal material information not in public domain
by the law of US Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 and similar
provisions under the penal code of the UK, India and China. If they persist in their recalcitrant
behaviour, the Committee would report them immediately to the nation’s Securities and
Exchange Commission (SEC), and not use the information. Admittedly, insider information
might give the Committee a temporary edge over our rivals who do not have access to the
information, known as arbitrage. Insider trading harms investor confidence in the fairness
and integrity of the securities markets, and when practiced by many big industry players leads
to speculative bubbles that end up in recessions. Furthermore, SEC and global financial
regulators takes serious action to enforce the legislation regarding insider trading and monitor
the transaction very closely. Hence, it is very unwise to engage in illegal behaviours which
cause the client to suffer from unnecessary losses, especially a loss of trust between the
In addition, it may sometimes be tempting to earn profits the easy way: using insider
information to our advantage, buying more of the stock if we know it is going to rise, or
misinformation about a company to the media to either smear a company, causing stock
prices to plunge, if we are shorting a stock, or the sparking of speculation to artificially inflate
stock prices for our gains. However, the Committee must not succumb to these temptations
because the supposed “insider information” might be a trap to mislead investors, making
investors buy an overvalued stock or sell an undervalued stock, resulting in losses either way.
On the other hand, for false rumours, the market will always “wake up” and realise the true
value of the stock. Moreover, the company itself, which may actually be fundamentally good,
yet unfortunate enough to be targeted by such false information might suffer from
unnecessary fluctuation in terms of stock prices, and even end up facing the plight of being
at risk of delisting.
As professional investors, the Committee will uphold ethics and moral values in the highest
regard. We earnestly believe that the Committee can make clean money and generate
sustainable returns with integrity and adhering to the highest ethical principles.
Section 4: Key tTakeaways and learnings
The team came into this competition as 8 individuals without much prior experience or time
to gain the requisite investing expertise. The impending deadline of trade beginning
motivated us to learn quickly and work closely together to form a coherent strategy that we
could and would implement. Tempers were tested and voices were raised as members became
personally invested in their stock choices and analysis methods. Given the short runway we
had, there was a steep learning curve as we had to prepare for this competition by
understanding a great deal about technical and fundamental analysis as well algorithms that
are generally used by professional tradersinvestors. In addition, while all of us in the team
had initially committed to staying up through the wee hours of the day to watch the U.S.
markets, this soon proved to be a challenge as we had to rise for our daily school
commitments early. Hence, we worked out a system, assigning 2 members to monitor the
markets on a weekly rotational basis. Fortified by this new information we embarked on the
tumultuous, and emotional rollercoaster of a process, of buying and selling stocks as the
negatives on the balance sheet eventually turned positive the team once again started to bond
and develop an effective coping mechanism to deal with the palpitations we came to equate
On the whole, the team definitely eventually enjoyed the competition and will take back with
them much information and several fond memories. Being in a virtual simulator, we were
able to learn and explore various stocks while having a safety net as we did not invest real
capital into these stocks. This has allowed us to be more confident in taking greater risks with
some of the stocks we bought, and taking some of the losses we have incurred in stride. For
some of us, tracking the Asian markets throughout the day or the US market at the opening
finance. While some members became more jittery and gradually develop lower risk
tolerance than others, it was exciting for all of us to go about convincing each other about
conviction calls. Apart from the occasional exuberance and pride when one's pick bears fruit,
we learnt to acknowledge that everyone has a different risk appetite, and that anxiety for our
stocks to grow and disappointment when they fall short of our expectations is rather common.
Hence, it is very rare to see a portfolio comprised fully of equities. It would be naive for
anyone of us to think that a high-growth, high-risk portfolio could succeed in the long run.
Nonetheless, this competition has allowed us to gauge our interest and ability in taking
investment one step further, as a possible career option. Our adviser, a hedge fund manager,
Ultimately, the team had the opportunity to know one another better, recognizing that getting
along means getting ahead. While most of us in the team started as mere acquaintances, we
have definitely bonded as a group through this journey. We tried, learnt and then tried again
to do better and be better. With the mutual support of everyone in the team we grew and grew
together as a team and were able to appreciate one another’s strengths more deeply. So our
defeats were softened and our victories sweetened because we did it together.