Tutorial 5 solutio

Business School Accounting & Finance Discipline FINA2209 Financial Planning Tutorial 5 (in Week 6) Alternative Investments Q1. Would you recommend that a client who is nearing retirement invest in alternative assets/strategies? What are the arguments for and against such advice? For - Pre-retirees are most in need of diversification to reduce risk, which alternative assets/ strategies can provide - If the client is nearing retirement during or at the start of a market downturn, alternatives can help to ease market downturn risks. Against Q2. It is generally believed that alternative assets have an illiquidity premium which investors are rewarded for holding with higher expected returns. What are some issues that question whether the illiquidity premium actually exists? •It is difficult to isolate the illiquidity premium from other risk premia •Voluntary nature of hedge fund reporting (worst performers are not represented in the data?) suggests that modelling/ calculating the illiquidity premium is flawed. Q3. You have decided that it is appropriate to recommend an alternative investment managed fund to your client and are doing some research to try to determine the most appropriate fund. You are considering the Aberdeen Multi-Asset Real Return Fund. Read the PDS (You can find
this document in the week 5 folder on LMS). You can of course read the whole document if you wish but you should focus on pages 4-14. What are some features of the fund that you would consider when deciding whether to recommend this fund to your client. Is there any information that is not provided in the PDS that you feel you would need to know in order to "know your product"? - Fund manager skill/ expertise- Aberdeen is a pure asset manager with $611 billion in AUM. Operating in Australia since 2000. - Benchmark: It is a real return fund with an objective of 5% pa above inflation (before fees) over a full market cycle (generally 3 to 5 years). - Management fee is 0.84% pa of Funds' NAV. - Investment strategy - The fund does not use leverage What is not reported in the PDS: - While the investment strategy is discussed, there is no indication of asset allocation breakdown. - There is nothing about corporate governance of the fund (on page 25, "For further details on Aberdeen's approach to proxy voting and corporate governance, please refer to the policies set out in the 'Proxy Voting' section of our website").
Q4. Investors who are looking to gear their portfolios can arrange a margin loan for their share portfolio or managed fund investment. Alternatively, investors can pick a fund which uses internal gearing in its investment strategy. What type of clients would suit an internally geared managed fund? What type of clients would suit a margin loan? Suited to an internally geared managed fund: - those looking for administrative ease (less paperwork, no credit checks) - those who don't want to have to meet a margin call themselves - those looking for active management - those looking for low (wholesale) borrowing rates - those looking for capital guaranteed protection. Lending arrangements in internally geared funds are usually "limited recourse" where if investments fall in value below the level of fund borrowings, you are not required to pay back the shortfall to the lender - those with a SMSF as there is no restriction on investing in internally geared funds while there are restrictions on other types of borrowing Suited to a margin loan: - those who want the option of a passively managed portfolio. (Most internally geared funds are actively managed - .
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