Investment Strategy and Portfolio Management

Term Paper, 2010

10 Pages, Grade: A


Table of Contents


Current Situation

Plausible Asset Allocations

Risks Associated

Alternative Investments



Table of Figures

Figure 1: How Does UK Economy compare with India, Brazil and China


Portfolio management majorly involves two types of investing: passive and active. In passive portfolio management the investment manager tracks an index passively by trying to replicate the performance of a benchmark index. This benchmark index is chosen by the portfolio manager based on certain criteria. In active portfolio management the investment manager tries to beat the benchmark index by outperforming the index. This is achieved by superior stock selection and superior weight allocation (Grinold & Kahn, 2000).

Norris Capital’s aim is to achieve significant growth in the value of its investments. Currently the company is also facing a lot of competition from depository institutions, mutual funds and other investment options. The company needs to achieve higher growth and superior returns in comparison to its counterparts. Hence the company should actively manage majority of its portfolio in order to achieve superior returns. Further the company should diversify the asset base and invest in assets of developing nations in order to improve returns. UK is a developed nation and the scope of growth in developed economies is much less as compared to the developing economies (Obstfeld, 2009).

Company expected outflows in cash after adjusting for the inflows is expected to be 3% of the total assets. In order to keep up with this outflow, the company should have a minimum of 3% of the total assets in liquid assets like cash and short- term investments. Currently company has 10% of its total investments in cash and short term investments so it is in a safe situation with cash flows. Money market instruments, commercial deposits, bank safe deposits are some of the liquid assets which can be liquidated immediately to get cash in order to meet any urgent requirements. Company needs to maintain sufficient amount of liquidity in its portfolio in order to manage the outflows which are expected to occur. If the company doesn’t invest in such instruments it may have to go for distressed sale of other assets and can incur losses.

Current Situation

Norris Capital’s portfolio mainly consists of UK assets with 35% in UK equities, 15% in UK corporate bonds and 20% in UK government bonds. Hence Norris Capital has overexposure in the UK economy. Current economy of UK is not having a good phase. Rating of the economy has been degraded from AAA to AA1 by Moody’s. Performance of the economy in the year 2012 has also not been good. GDP of the economy has also contracted for two straight years (The Guardian, 2013).

There are uncertainties regarding the implementation of Basel III by UK banks. Implementation of Basel III would mean banks will be required to keep more liquid capital in their balance sheets (Masters, 2013). This further increases uncertainty for the future growth of the banking institutions in UK. For the time being, banks are not sure how much liquid capital will be mandated once Basel III is implemented and hence they are giving out lesser amount of loans than their capacity allows them to. This will also have an important effect on the UK Economy. Norris Capital should look to allocate more of its assets in other country’s assets to keep it hedged against such risks and changes in the UK Economy.

Norris Capital is faced with two tasks, first task being selection of the right assets and second is the weight allocation of each in the final portfolio. Outperformance of the portfolio depends on these two things; the optimal asset selection and the optimal weight allocation. Selection of superior assets plays the most important role in portfolio performance (Fischer & Jordan, 1991).

Plausible Asset Allocations

Norris Capital needs to adopt two different diversification strategies. The first strategy involves diversifying across the economies i.e. the company should diversify the allocation of portfolio besides UK and look to invest in the economies of other developing countries. Norris Capital has invested 15% of the portfolio in overseas equities but it represents a very small portion of the portfolio. Company needs to invest more in developing nation’s economies which are growing at a much higher rate. For example, China has been growing at over 10% over the last few years. Hence investing in equities of such nations can help Norris Capital earn above average returns. However the company also needs to look into different risks of investing in the asset classes of other economies. Company needs to take into consideration economic, political and currency risks (Oxlade, 2012).

Other diversification strategy which Norris Capital should implement is investing across various asset classes. Norris Capital’s current portfolio includes only bonds and equities. These assets classes are strongly correlated with the GDP of a country. This can hurt long term as well as short term plans of the company in the event of another recession. If the UK economy is not able to recover in the next two years, Norris Capital may not be able to achieve the targeted return and will lose out to its competitors.

Norris Capital has invested 70% of its portfolio in UK assets. Economy of UK has not been performing good post the 2008 crisis. Country’s GDP has been shrinking and there are a lot of uncertainties in the economy (The Guardian, 2013). Economists are still unsure about the future growth of UK’s economy. Considering the objectives of Norris Capital, it needs to achieve greater returns which it cannot if the investment is heavily dependent on the UK Economy. It can look to invest in developing economies like China and India. These two countries are said to be next growth engines of the world. Economists are expecting that these two countries will drive the growth of the world economy in the near future.


Excerpt out of 10 pages


Investment Strategy and Portfolio Management
California State University, East Bay
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ISBN (Book)
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investment, strategy, portfolio, management
Quote paper
Victor Odour (Author), 2010, Investment Strategy and Portfolio Management, Munich, GRIN Verlag,


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