Rudy Wong, Investment Advisor

Group Assignment, Investment Management

Bishal Sarraf Omkar Pandey Suresh Kandel

Case Synopsis The case portrays the challenges faced by an investment advisor to persuade his clients about the threats in the mind of investors after the rapid and continuous downfall of U.S. economy that eventually lead to global financial crisis. It started with the collapse of the U.S. housing market which began in 2006. This happened mainly because of subprime mortgage business, in which U.S. banks gave high risk loans to customers with poor credit histories. These loans and other forms of credit were bundled into portfolios and were spread to investors globally. In the meantime, the interest rates rose sharply from 1 per cent to 5.35 per cent between 2004 and 2006 causing high numbers of homeowners to default on their mortgages and housing prices to decline. Further, U.S. economy declined 6.4 per cent in the fourth quarter of 2008 and during the same period, Canadas gross domestic product (GDP) contracted 3.4 per cent resulting S&P/TSX to plunge. Rudy Wong, an investment advisor at OHagan Securities (headquartered in Toronto) since 1996, was worried due to the global financial crisis. He was getting regular phone calls from his four clients (Bob Miller, Mary Swanson, Jack and Kelly Klein, and Herb and Barb Nicholas) for an urgent meeting to draw strategies to overcome the impact of massive downfall of economy in the security markets. The major challenge that lies in front of Wong is to re-assure his clients about their investment portfolios by communicating logical arguments based on his portfolio management expertise and analysis, by managing emotions and attempting to re-establish his clients faith in the markets or by both methods. In addition, he needed to re-examine the investment strategy and recommend either sticking with the current strategy or making changes. Investors Profile and Recommendations Bob Miller Bob Miller is a 42 year old single man, whose annual salary is $50,000 and he is in a consolidation phase. Being a single, it permits him to reserve low cash/liquid assets. Miller has invested 70 per cent of his portfolio in equities and with high exposure to the Canadian oil and gas sector including Suncor which fell from a high of $72 on May 20, 2008 to $27 on March 6, 2009. His investment objective is to achieve sufficient growth to retire comfortably at the age of 65. It implies that his investment objective is to realize capital appreciation. He has quite long

investment horizon. Though he has stated that he wont change strategy just because of short term losses, his emotions are swinging with the markets movement. High proportion of equity in his portfolio shows that he is willing to take more risk. Recommendations: As recession is an economic cycle, it will recover after some times. Since he has long investment horizon, Miller should not be worried about current economic downturn. Therefore, it is highly recommended that he should hold the equities. Bob Millers personal characteristics should also be considered. He should be made assure that the recovery of economic downfall is inevitable by recalling an example of global market crash 1987. This will help him to prevent from illusion from control. He should alter the investment in equities of Banks and other financial institutions (if he has any) whose condition is vulnerable due to credit crunch. Even if he is single right now, he may have dependents in the near future which may lead to the need for short-term liquidity needs. This should be considered while making further investment decisions. Inclusion of gold in his portfolio is also recommended as it offsets the risk and is considered as a safe haven. This allows diversification in his investment portfolio which will offset the fall in stock market. If Bob Miller were Baburam Malla, the recommendations could have been as follows: For Baburam Malla, there would be responsibilities to look after his parents and other family members. Thus, there is a need for short-term liquid assets. For this it is recommended to invest some portion of total investment into gold. Further he can also extend his portfolio to development bonds issued by few banks in Nepal recently. But since at the time of recession, the stocks prices are low, so altering might cause loss. Thus one must alter those stocks whose price may further decline in the coming days.

Mary Swanson Mary is a retired professor and is in her spending phase. She transferred her UBC pension to OHagen Securities. Generally, she is a non-emotional decision maker. Swansons portfolio consists of 60 per cent equities and 40 per cent bonds. In stocks, the portfolio consists of a mix of large, medium and small-cap stocks and on the fixed income side, it is made up of Corporate Bonds and Guaranteed Investment Certificates (GICs), five per cent allocated to gold and five per cent allocated to real estate in Canada. This shows that her investment objective is to achieve total return, i.e. the combination of capital appreciation and current income. She has fairly long investment horizon of 30 years. She has no short-term liquidity needs. It provides opportunity to neglect short-term upheavals and focus on long term. The recent global financial crisis made Swanson fear a loss of capital. This, in turn, is leading her to re-consider her investment portfolio and to shift a large proportion of her money to cash. Recommendations: As Mary is spending her retired life, there is no high need for capital appreciation. Therefore, the weight for allocation of fund in equity can be reduced and invested more in the bonds. Since Mary is spending her retired life, liquidity needs may occur as she grows older. The asset can be used to invest in certificate of deposit as it is highly marketable and convertible. Further, inclusion of gold is another viable option. Mary should not be allowed to convert all her investment to cash in order to protect her from the growing inflation rate. For this, certain portion of her investment portfolio must consist of equity shares. Thus, investment in both risk-free and risky asset are required. In the context of failing many big organizations, it may not be a good idea to shift from Treasury bond to corporate bond. If Mary Swanson were Malvika Subba, the recommendations could have been as below: It is very difficult in Nepalese share market to provide and allocate securities according to the needs of investors due to limited availability of stock and immature share market.

Since she is non-emotional decision maker, she can be assured about the economic time which falls beyond ones expectations, but also recovers over time. Since she has no short term liquidity needs why not to wait for the market to regain its position.

Jack and Kelly Klein The Kleins were regular investors with an objective to save for retirement and to achieve high growth for their investment fund. This shows that they are highly concerned with capital appreciation. However, they did not have lot of assets. As their retirement is 30 years away, it can be inferred that they are in accumulation phase and their liquidity needs are high. They also have long-term time horizon. The Kleins are highly exposed to the equities as they invested 85 per cent and 15 per cent in equities and bonds respectively, but their portfolios value declined more than 50 per cent since July 2008. Significant proportion of investment in equities shows that they are tempted to take high risks. Despite of having calm temperaments that are suitable for long-term investments, Kleins were nervous when the stock prices plummeted sharply due to high exposure to equities. Recommendations Though Kleins economic condition is not that sound, they have invested significantly high proportion in equities which is riskier than bonds. Thus, it is imperative for them to lower the proportion of investment in equities. It is recommended for them to have diversified portfolio in order to reduce risk. They can allocate some proportion of their total investment to gold which is considered as safe heaven. Investing in gold is also considered as wise option during the time of recession. Further, investments in dividend fund and Treasury bond can be done so as to avoid market volatility and to cover at least inflation rate. Since their investment horizon is of long-term, they should have patience to surpass the economic downfall which will improve after few years of time period. Therefore, they should not get panic as the price of equity is falling continuously.

If Jack and Kelly Klein were Jagdish and Kamala Khatiwada, the recommendations could have been as mentioned below: Since capital appreciation were their main objectives, investing in gold would be advisable here. Investing in Chilime hydropower would be another option as it has been providing fairly consistent dividend. It would help them to meet short-term needs.

Herb and Barb Nicholas Nicholas are both 50 years of age which means they are in consolidation phase and are heading towards spending phase. The Nicholas had invested $100,000 even after knowing that the market is extremely volatile. Because of their behaviour of high risk tolerance, they had invested 75 per cent in equities and 25 per cent in bonds. The investment objective of Nicholas is to obtain capital appreciation because they want their money to grow. They had solid income source that could help them to cover their short-term needs. Thus, Nicholas did not need to have cash in reserve. They are biased toward thinking in terms of trends as they feared the trend of continuously falling stock market would cause the stocks fall to zero. Their investment horizon is 10 years. Taxation is one major constraint as they seem to be included in big tax bracket. Recommendations: To reduce the tax burden, Nicholas should invest more in dividend funds. In addition, they can invest in international equity where the tax rate is low. As their retirement is 10 years away, they must focus on investing in bonds and other money market securities like certificate of deposits. They should be convinced to do away with their trend bias. As an investor, it is important to assure that the recovery from the financial crisis in not far away with the help of past examples of recovery. If Herb and Barb Nicholas were Hari and Babita Nakarmi, the recommendations could have been as below:-

Since they have high risk tolerance ability, they should be assured about the recession, its effect and recovery in the coming days. Panic simply because the stock market collapse is not practical for those people who are high risk taker. So they should be convinced to hold their position for future.

Lessons Learnt The role of investment advisor in any investment decisions is of high importance as the success of investment depends on the role of investment advisor. Asset allocation, security selection, and market timing are important components to be considered while making investment decisions. The impact of emotion, psychology, and personal behaviour in investment should be considered while making investment decisions. Preparation of policy statement before any investment decisions helps investors to articulate realistic investment objectives. In addition, it helps the investors to know his/her own needs, objectives, and constraints. Different behavioural aspects like biases, stereotypical thinking, and anchoring should also be taken into consideration during investment decisions. Portfolio diversification is essential to minimize the risk and reduce the impact of market volatility. The role of investment advisor do not end after the investment had been done, rather it starts from there and the advisor role becomes more demanding during the time of crisis, fluctuations in the market and so on. Being an investment advisor, one must understand his/her clients overall economic condition and psychology towards risk, return, and patience. With this when the tough time comes, the advisor need to be tactful and advice their clients strategically to stop them from panic.