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Portfolio Management Process of a Financial Institution

2nd Assignment

ALLAMA IQBAL OPEN UNIVERSITY


(Department of Business Administration)

Assignment # 2

Investment and Securities Management (5540)

TOPIC: PORTFOLIO MANAGEMENT


PROCESS OF A FINANCIAL INSTITUTION
Submitted to: Sir Waqar Akbar Submitted by: Ishtiaq Ahmed

AH-526270

Portfolio Management Process of a Financial Institution

2nd Assignment

ACKNOWLEDGEMENT
All praises to Almighty Allah, the most Gracious, the most Beneficent and the most Merciful, who enabled me to complete this assignment. I feel great pleasure in expressing my since gratitude to my teacher, for his guidance and support for providing me an opportunity to complete my Project. My special thanks and acknowledgment to Mr. Zeeshan, for providing me all relative information, guidance and support to compile the practical study on Arif Habib Investments Limited. I will keep my hopes alive for the success of given task to submit this report to my honorable teacher Sir Waqar Akbar, whose guidance; support and encouragement enable me to complete this assignment.

Portfolio Management Process of a Financial Institution

2nd Assignment

EXECUTIVE SUMMARY
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual. The term portfolio refers to any collection of financial assets such as stocks, bonds and cash. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. Where the portfolio management process is the process an investor takes to aid him in meeting his investment goals. Arif Habib Investments Limited is an Asset Management, Investment Advisory and Pension Fund Management Company, managing Open-end Mutual Fund and Pension Funds. It has 16 Mutual Funds, 2 Pension Funds and 9 Investments Plans in its product portfolio to meet the investment needs of its growing clientele. All investments in mutual funds and securities are subject to market risk. The NAV based price of these units and any dividends and return thereon are dependent on forces and factors affecting the capital markets. These may go up or down based on market conditions. Past performance is not necessarily indicative of future results. AHI is doing well and increasing the wealth of Fund/Stock holders but there are some weaknesses in the Portfolio management process that can be removes by acting on the recommendations.

Portfolio Management Process of a Financial Institution

2nd Assignment

Table of Contents
Contents Page No
01 02 03 04 05 09 13 14 16 17 19

1. Title page 2. Acknowledgement 3. Abstracts 4. Table of contents 5. Introduction to the topic 6. Practical study of organization 7. Data collection methods 8. SWOT analysis 9. Conclusion 10. 11. Recommendations References

Portfolio Management Process of a Financial Institution

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Introduction to the Topic


Portfolio
A group of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals. Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual. The term portfolio refers to any collection of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives.

Portfolio Manager
The person or persons responsible for investing a mutual, exchangetraded or closed-end fund's assets, implementing its investment strategy and managing the day-to-day portfolio trading.

Portfolio Management
The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance

Portfolio Management Process of a Financial Institution

2nd Assignment

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

The Portfolio Management Process:


The portfolio management process is the process an investor takes to aid him in meeting his investment goals. The procedure is as follows:

1.Create a Policy Statement: A policy statement is the


statement that contains the investor's goals and constraints as it relates to his investments.

2.Develop an Investment Strategy: This entails creating a


strategy that combines the investor's goals and objectives with current financial market and economic conditions.

3.Implement the Plan Created: This entails putting the


investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements.

4.Monitor and Update the Plan: Both markets and


investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan to adjust for the changes that have occurred.

Policy Statement:
A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process. The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment
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portfolio manager in meeting the investor's needs. When there is market uncertainty or the investor's needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.

Portfolio Management Strategies:


There are two basic approaches to investment management:

A.

Active asset management is

based on a belief

that a specific style of management or analysis can produce returns that beat the market. It seeks to take advantage of inefficiencies in the market and is typically accompanied by higher than average costs (for analysts and managers who must spend time to seek out these inefficiencies). For those who favor an active management approach, stock selection is typically based on one of two styles:

1.Top-down: Managers who use this approach start by


looking at the market as a whole, and then determine which industries and sectors are likely to do well give the current economic cycle. Once these choices are made, they then select specific stocks based on which companies are likely to do best within a particular industry.

2.Bottom-up: This approach ignores market conditions and


expected trends. Instead, companies are evaluated based on the strength of their financial statements, product pipeline, or some other criteria. The idea is that strong companies are likely to do well no matter what market or economic conditions prevail.

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B.

Passive asset management is

based on the

concept that markets are efficient, that market returns cannot be surpassed regularly over time, and that low cost investments held for the long term will provide the best returns.

Passive management concepts to know include the following:

1.Efficient market theory: This theory is based on the idea


that information that affects the markets (such as changes to company management, Fed interest rate announcements, etc.) is instantly available and processed by all investors. As a result, this information is always taken into account in market prices. Those who believe in this theory believe there is no way to consistently beat market averages.

2.Indexing: One way to take advantage of the efficient market


theory is to use index funds (or to create a portfolio that mimics a particular index). Since index funds tend to have lower than average transaction costs and expense ratios, they can provide an edge over actively managed funds which tend to have higher costs.

Modern portfolio theory


Modern portfolio theory (MPT) is a theory of finance which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory, in recent years the basic
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assumptions of MPT have been widely challenged by fields such as behavioral economics. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite way. For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlatedindeed, even if they are positively correlated.

Factors influencing Portfolio Management:


Capital investment decisions are not governed by one or two factors, because the investment problem is not simply one of replacing old equipment by a new one, but is concerned with replacing an existing process in a system with another process which makes the entire system more effective. We discuss below some of the relevant factors that affects investment decisions:

1. Management Outlook: lf the management is progressive and


has an aggressively marketing and growth outlook, it will encourage innovation product and favor capital proposals is a which ensure better one, productivity on quality or both. In some industries where the being manufactured simple standardized innovation is difficult and management would be extremely cost conscious. In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows a policy of 'make-do'
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with its existing equipment. The management has to be progressive and innovation must be encouraged in such cases.

2. Competitors Strategy: Competitors' strategy regarding


capital investment exerts significant influence on the investment decision of a company. If competitors continue to install more equipment and succeed in turning out better products, the existence of the company not following suit would be seriously threatened. This reaction to a rival's policy regarding capital investment often forces decision on a company'

3. Opportunities

created

by

technological

change: Technological changes create new equipment which may represent a major change in process, so that there emerges the need for re-evaluation of existing capital equipment in a company. Some changes may justify new investments. Sometimes the old equipment which has to be replaced by new equipment as a result of technical innovation may be downgraded to some other applications, A proper evaluation of this aspect is necessary, but is often not given due consideration. In this connection, we may note that the cost of new equipment is a major factor in investment decisions. However the management should think in terms of incremental cost, not the full accounting cost of the new equipment because cost of new equipment is partly offset by the salvage value of the replaced equipment. In such analysis an index called the disposal ratio becomes relevant.

Disposal ratio = (Salvage value, Alternative use value) / Installed cost

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4. Market forecast: Both short and long run market forecasts are
influential factors in capital investment decisions. In order to participate in long-run forecast for market potential critical decisions on capital investment have to be taken.

5. Fiscal Incentives: Tax concessions either on new investment


incomes or investment allowance allowed on new investment decisions, the method for allowing depreciation deduction allowance also influence new investment decisions.

6. Cash flow Budget: The analysis of cash-flow budget which


shows the flow of funds into and out of the company may affect capital investment decision in two ways. 'First, the analysis may indicate that a company may acquire necessary cash to purchase the equipment not immediately but after say, one year, or it may show that the purchase of capital assets now may generate the demand for major capital additions after two years and such expenditure might clash with anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget shows the timing of cash flows for alternative investments and thus helps management in selecting the desired investment project.

7. Non-economic factors: new equipment may make the


workshop a pleasant place and permit more socializing on the job. The effect would be reduced absenteeism and increased productivity. It may be difficult to evaluate the benefits in monetary terms and as such we call this as non-economic factor. Let us take one more example. Suppose the installation of a new machine ensures greater safety in operation. It is difficult to measure the resulting monetary saving through avoidance of an unknown number of injuries. Even then, these factors give tangible results and do influence investment decisions.
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Practical Study Organization

of

the

Company Profile:
Arif Habib Investments Limited is an Asset Management, Investment Advisory and Pension Fund Management Company, managing Open-end Mutual Fund and Pension Funds. The Company is registered with the Securities & Exchange Commission of Pakistan (SECP) and regulated under the Non-Banking Finance Companies (NBFC) Rules 2003, NBFC and
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Notified Entities Regulations 2008 and Voluntary Pension System Rules 2005. Arif Habib Investments Limited manages over Rs. 34.86658 billion, as of 31stMarch 2012. It has 16 Mutual Funds, 2 Pension Funds and 9 Investments Plans in its product portfolio to meet the investment needs of its growing clientele. The Company was conceived in the year 2000 and, in March 2002, two of its flagship Funds, the Pakistan Stock Market Fund (PSM) and the Pakistan Income Fund (PIF) were launched. Arif Habib Investments has been an industry leader, setting international standards and bringing innovative products to market.

AHI enjoys the highest Asset manager Quality rating of AM2 (With Positive Outlook) by PACRA in the industry MCB Dynamic Stock Fund has been assigned 5-star ranking for long term due to its outstanding performance by PACRA based on returns achieved up to 30th June 2011.

AHI's new index tracker Fund 'AH Dow Jones SAFE Pakistan Titans 15 Index Fund' is the only Fund structured on an index by International Index Provider in Pakistan. Pakistan Income Fund launched in March 2002 by AHI was the 1st Income Fund in the mutual fund industry. AHI brought first private sector equity fund that is Pakistan Stock Market Fund in the country, which was created an Alpha of 170% since inception in March 2002. Pakistan Cash Management Fund became the 1st Money Market Fund to be assigned stability rating of AAA (f) in the country. Metro bank Pakistan Sovereign Fund-Perpetual, established in 2003 was the first sovereign risk income fund in the industry.

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PIEF rewrote history in the fixed income Funds category (inception in Aug2008) by earning highest ever annualized return of 18.33% in f FY09. Arif Habib Investments Fund; the Pakistan Premier Fund Limited (PPFL), was also placed in KSE's top 25 companies in 2005 and 2006. Pakistan International Element Islamic Fund (PIIF) of Arif Habib Investments Limited is the first Mutual Fund in the country with permission from the State Bank of Pakistan to also invest overseas. AHI was the first AMC to introduce ATM card withdrawal facility for retail clients, now offering VISA Debit card in association with a commercial bank AHI was the first AMC to convert closed end fund (Pakistan Capital Market Fund) into an open end fund in 2006 keeping investors interest supreme. 1st AMC to develop unique software based administrative

investment plans tailor made for retail as well as corporate investors.

Mission Statement
To become a preferred Savings and Investment Manager in the domestic and regional markets, while maximizing stakeholders value

Vision Statement
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To become synonymous with Savings

Practical Study of the Organization with respect to the Issue


The Portfolio Management Process of Arif Habib Investments Limited:
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The portfolio management process of Arif Habib Investments Limited is outlined as follows:
1. Each investor identies objectives, constraints, and preferences

as part of an orderly framework to guide them in managing their portfolios.


2. Capital market expectations for the economy, industries and

sectors, and individual securities are considered and quantied.


3. Strategies are developed and implemented. This involves asset

allocation, portfolio optimization, and selection of securities.


4. Portfolio factors are monitored and responses are made as

investor objectives and constraints and/or market expectations change.


5. The portfolio is rebalanced as necessary by repeating the asset

allocation, portfolio strategy, and security selection steps.


6. Portfolio performance is measured and evaluated to ensure

attainment of the investor objectives.

Arif Habib Investments Limited Structure Portfolio for the following Funds:
Arif Habib Investments Limited id offering the following funds for their customers,

1. Mutual Funds
A. Open Ended Funds
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PAK STOCK MARKET FUND PAKISTAN INTERNATIONAL ELEMENT ISLAMIC ASSET ALLOCATION PAK INCOME FUND PAK CAPITAL MARKET FUND METROBANK-SOVEREIGN FUND PAK CASH MANAGEMENT FUND PAK INCOME ENHANCEMENT FUND PAK CAPITAL PROTECTED FUND PAK STRATEGIC ALLOCATION FUND PAK PREMIER FUND MCB DYNAMIC CASH FUND MCB CASH MANAGEMENT OPTIMIZER FUND MCB DYNAMIC STOCK FUND MCB ISLAMIC INCOME FUN

FUND
3. 4. 5. 6. 7.

8.
9. 10. 11. 12. 13. 14.

2.
A. B.

Pension Funds
PAK PENSION FUND PAK ISLAMIC PENSION FUND

3.
A. B. C. D. E. F. G. H.

Investment Plans
MONTHLY SAVINGS PENSION BUILDER MONTHLY INCOME PLAN SMART PORTFOLIO BALANCED PORTFOLIO SMART TRADER HAJJ SAVER ACCOUNT DYNAMIC INCOME PROVIDE
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The Portfolio Management for Pakistan Market Fund (PSM):


Investment Objective:
The objective of the fund is to provide investors long term capital appreciation from its investment in Pakistani equities.

Fund Profile:
Pakistan Stock Market Fund (PSM) is an open end equity fund that invests in quality stocks listed in Pakistan. The fund is actively managed and fundamental research drives the investment process. Fundamental outlook of sectors/companies and DCF (discounted cash flow) valuations are the primary factors in sectors allocation and stock selection. Major portion of the funds portfolio is high quality liquid stocks. The funds which are not invested in equities are required to be kept in bank deposits and short-term money market instruments/ placements. PSM is a long only fund and cannot undertake leveraged investments. Under the NBFC Rules, it is only allowed to borrow up to 15% of net assets for up to 90 days to meet redemption needs.

Benchmark:

KSE-100 Index

Date of 11th March 2002 Inception Fund Open-end Equity Type Minimum Rs. 5,000 investme nt Fund M.Asim,CFA

Quick Stats

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Manager Rating by PACRA Full year Jul 09 - Jun 10 36 months - Jul 07 Jun 10 Initial Public PKR 50.00 Offer Currency PKR Registrar Arif Habib Investments Limited Trustee Central Depository Company of Pakistan Ltd. (CDC) Auditors KPMG Taseer Hadi & Co, Chartered Accountants

Holding Stock of the Portfolio:


Top Ten Holdings

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Dividend History:
Dividend History
Financia l Year 2010-11 2009-10 2008-09 2007-08 200607 200506 200405 200405 200304 200203 200102* % of Face Value 12.60 19.40 0 34 50 60 50 20 60 40 2.70 Payout /unit (Rs.) 6.30 9.7 17 25 30 25 10 30 20 1.35 Form Bonus Bonus Bonus Bonus Bonus Bonus Cash Bonus Bonus Bonus 36.59 28.98 2.75 Bonus reinvested 19.54 26.34 29.73 35.59 27.75

* Dividend is not for the full year as the fund was launched in March-2002. Face value is Rs.50
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All investments in mutual funds and securities are subject to market risk. The NAV based price of these units and any dividends and return thereon are dependent on forces and factors affecting the capital markets. These may go up or down based on market conditions. Past performance is not necessarily indicative of future results.

SWOT analysis
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Strength:
Low risk on selected stocks Experience Annalists Good Reputation

Weakness:

Lack of future forecast Low return due to Low risk No proper Technical analysis

Opportunities:
Stocks of Multinational Companies Stocks of Cement industry

Threats:
Economic condition of Pakistan Problems of power sector

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Recommendations
I would like to recommend the followings: AHI should have to invest in the stocks of multinational companies AHI should have to focus on cement industry because the because these are cost conscious and generate high return. construction activities are increasing in Afghanistan and in other countries. Portfolio Manager should have too much concentrate on Technical Accurate future forecasting should have to done for the better analysis before selecting the stock. results.

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Conclusion
I have concluded that, Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual. Portfolio Management is the art and science of making decisions about investment mix and policy, matching investments to objectives. AHI has an effective Portfolio Management Process due to which But there are still some weaknesses in the process like lack of Return is not as good as can be because selected stock is less AHI should also have to focus on the stock of multinational and cement industry because these Companies can Stock/Fund holders are taking good return. future forecast and proper technical analysis. risky, so return can be high by taking high risk. companies

generate high return.

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Reference
Project report Portfolio Management Process www.slideshare.com http://www.mcbah.com.pk/ http://en.wikipedia.org/wiki/MCBAHr_Pakistan http://www.scribd.com/doc/24651033/HR-REPORT-mcbah

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