INVESTMENT STRATEGY AND PORTFOLIO DEVELOPMENT

In 2016, La Trobe University announced that they would be exiting all Top 200 fossil fuel-related components of their investment portfolio within a 5-year period and adopt a greater general focus on sustainable investment. As part of this commitment, the University subsequently developed an
investment advisory committee, known as the La Trobe Ethical and Sustainable Investment Committee, to implement these changes and also to take on responsibility for active management of a component of their investment and endowment funds.

This component amounts to $6 million, and the committee is currently in the processing of formalising an underlying investment strategy and structuring an investment portfolio to invest these funds primarily in equity markets in Australia and internationally.

As a member of the Finance Division reporting to the La Trobe University Chief Financial Officer, Mr Mark Smith, you have been tasked with preparing an investment strategy proposal for review and consideration by the Committee.

They have provided a set of requirements and guidelines associated with the active investment mandate of the University as follows:


 Portfolio risk profile: Above-average risk tolerance associated with authorised investment alternatives including individual equity securities, listed investment companies (LICs) or exchange-traded products (ETPs), equity market option securities or futures contracts, currency
forward contracts and cash, but with protection against potential downward market and adverse exchange rate movements.


 Return focus: High growth portfolio profile with a focus on capital growth rather than income or tax-effectiveness perspectives.


 Investment horizon: Minimum 5-year investment (holding) period, but with active management over the investment period to maximise portfolio value.


 Ethical and sustainability focus: The portfolio components should align with the ethical and sustainable investment platform adopted by La Trobe University.

 Country focuses: At least 50% of the available funds are to be invested in companies in the Australian-based S&P/ASX 200 index and/or in securities providing exposure to the Australian Securities Exchange and at least 20% of the available funds are to be invested in companies included in the US-based Nasdaq 100 index and/or in securities providing exposure to the Nasdaq Stock Exchange.


 Share component and diversification: At least 60% of the total portfolio funds are to be invested in individual company equity (share) securities. To ensure a prudent level of diversification, no more than 10% of the total available funds are to be invested in any one individual company or
security (excluding cash or hedging components).


 Research area focus: At least 10% of the total investable funds are to be invested in companies or securities (equities, LICs or ETPs) providing exposure to key research or strategic areas supported
by the University including 1) digital business and/or disruptive business platforms and 2) the environment and renewable energy (Note that at least 10% of the available funds are to be allocated to each of these priority areas).


 Indirect equity investment: Some portfolio allocation in Australian or international share-markets can be achieved using holdings in LICs or ETPs, but this investment component is to be limitedto a maximum of 30% of the total investable funds (A list and price history for preferred LIC and
ETP investment options is provided in the spreadsheet document forwarded by the La Trobe Ethical and Sustainable Investment Committee).

 Short selling: Short selling of direct equity and LIC/ETP securities is permissible if it is consistentwith the proposed investment strategy, although sufficient cash reserves are required to be held to meet position closing out (re-purchasing) requirements.


 Portfolio hedging: Given the endowment nature of the investable funds, some downside risk protection for the investment portfolio against adverse equity market movements is required through hedging using derivative securities (such as market index futures or options) of a minimum of 60% of the Australian market-focused investment component (including direct
equity, LIC and ETP investments) value.


 Preferred derivative securities: Approved equity index futures contracts and option securities to be used for any speculation or hedging positions are:
o Preferred SPI futures contract: December 2020 SPI 200 Futures Contract with a closing price of 5,863.00 on 10/07/20 (Contract value represents A$25  SPI 200 value). Each contract will require creation of a $10,000 settlement account to meet margin movements.o Preferred equity market call option: S&P/ASX 200 Index (A$10  S&P/ASX 200 value) call expiring on December 17th 2020 with an exercise price of 6,300 (ASX code:XJOWK7).

The premium for this call option is 173.2 points on 10/07/20.
o Preferred equity market put option: S&P/ASX 200 Index (A$10  S&P/ASX 200 value) put expiring on December 17th 2020 with an exercise price of 6,300 (ASX code: XJOWL7).

The premium for this put option is 610.7 points on 10/07/20.
 Currency hedging: Given the recent volatility in Australian dollar exchange rates, hedging of 100% of the value of the US stockmarket security exposure is required. This can be achieved using equity securities, LICs/ETPs or currency forward contracts.

The University’s primary bank,
Westpac Banking Corporation, is prepared to initially enter into a currency forward contract with a 1-year forward margin of 130 basis points based on the AUD/USD exchange rate of 0.6948 (AUD$1.00 = USD$0.6948) on 10/07/20. The University is required to provide a 2% security collateral deposit based on the total forward contract value.


 Cash investment: A maximum of 20% of the total funds can be invested in cash, which is to be invested at the 180-day Dealer bill rate of 0.165% per annum on 10/07/20.

The performance of the recommended investment portfolio proposed will be benchmarked to the performance of the S&P/ASX 200 price index, which had a closing value of 5,919.20 on 10/07/20.


Required:


This case study requires the preparation of an investment strategy and portfolio proposal document to be provided to the University, which should include the following information:


 A brief and informative summary of the current investment environment, both in Australia and internationally and linking with the University’s requirements, and identification of any key economic or financial indicators or events impacting on the near-term investment environment.


 Presentation of the underlying investment philosophy and portfolio strategy proposed for the University, including consistency of alignment with the indicated investment requirements. Explanation and justification for this strategy, individually or relative to alternatives, should be provided, which could include backtesting or other quantitative and
qualitative analysis.


 A description, in table or similar format, of the recommended portfolio components, indicating the selected assets / securities and the magnitudes of investment in each.


 If required, a brief explanation of how each of the recommended investment components aligns with the overall investment strategy.

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