Case Study Of Equity In Equity

Submitted By LivelyChuck
Words: 4672
Pages: 19

Portfolio 1:
Part A
Client and Objectives:
Our Client is a young AFL player who has never undertaken any investments in equity before. Our client has a long time until he will retire and has the potential to make a large sum of money during this time.
This is due to the average AFL player having a salary of about $250,000. Our specific client has an above average salary of $400,000, which is likely to grow over the course of his career. This places him the highest marginal tax bracket which is $180,001 and over (This is taxed at $54,547 plus 45c for each $1 over $180,000). He wishes to invest $100,000 dollars to start his equity investment experience whilst having the potential to grow his wealth for the future.
As a young male with a high salary our client is extremely risk tolerant to this kind of investment. On a scale of one to ten with one being very risk adverse and ten being extremely risk tolerant our client would be a nine or ten. His main goal is to get a maximum possible return from his investment in an attempt to expand his wealth quickly so that he could potentially lead alavish lifestyle. He will look to maintain the investment for over one year as a reduction of 50 percent of capital gains tax would be quite substantial to his final profit margin. As he is looking for high return it may be important to be able to sell his initial investment quickly if better investment opportunities arise. This will require his stock choices to be liquid.
In summary the main objectives of this portfolio will be to:
1) Have a high return on investment (This will be measured against an appropriate market index with an aim to beat it by at least five percent).
2) To minimise taxation on investment (This will be achieved through holding the investment for over one year to reduce capital gains tax by 50 percent).
3) To select equity investment that is liquid enough that can be sold when needed.
4) To minimise risk without sacrificing return.
Investment Strategy:
We believe in bringing an active approach towards investment. However we think that it would also be fine to bring a passive approach dependent upon the specific goals of investment. For the portfolio and goals we are aiming for we will be looking to take an active approach towards investment. We think this due to the fact that the nature of this portfolio is one that will carry a fair amount of risk meaning the prices of the individual stocks can be quite volatile. We believe that with active management there is the potential to be able to buy and sell stock at times when it would be best to do so given certain market conditions. If we were able to correctly choose when to buy and sell our stocks we believe that we could achieve higher returns than if we simply followed a passive approach to investing.
This means that:
1) We will be trying to select stocks that we believe are undervalued and investing in them and;
2) Then trying to sell them off once they hit their correct valuation or when their prices are at a high point. And then reinvest the money made in another asset/s.
In our attempt to find undervalued stocks we will be mostly looking at their fundamentals; looking at the
P/E and the P/B ratio of stocks. We will be looking to find low values of these two ratios to look for stocks that we believe hold a higher intrinsic value than their price.
To classify what a low P/E or P/B ratio is, it is necessary to compare it to a benchmark, as ‘low’ is a relative term. Therefore it was decided that we would compare an individual stocks ratios with the average market ratios and its respective sectors ratios. The average P/E ratio for the ASX ALL


Ordinaries is 14.51 and most of the Australian indices seem to fluctuate around having an average P/E of around 15. Initially we decided that we would try to pick stocks with a P/E of about 10 or under as this seemed relatively low compared to the average P/E of the market. Once this criterion was met we then made sure that