As previously noted, the Brocks have some of their investment portfolio in conse

Question

As previously noted, the Brocks have some of their investment portfolio in conservative stocks. These equities have had very slow growth while regularly paying a small dividend. Pam and Josh have received several emails recently with suggestions about various biotechnology, retailing, and environmental companies. The investment advisers believe that these industries would provide an opportunity for strong long-term financial gains. In recent years, the Brocks have made extensive use of mutual funds in their investment portfolio. However, they are concerned that their selection of the funds may not be coordinated. With over 9,200 different mutual funds available, this financial marketplace is confusing. The Brocks start the evaluation process by connecting various types of mutual funds to their investments goals. Next, they assess the past performance and management of the funds. Finally, they talk with various financial advisers and other investors to gather additional information. Questions Q1. According to Pam, "We both know we should have started our investment program sooner, but we always seemed to have 'emergencies' that took what extra money we had." To what extent should the Brocks invest in stocks as a major portion of their investment portfolio? Q2. Research the industries recommended by the investment advisers. What are some industries and specific stocks you would recommend for the Brocks? Q3. How might Pam and Josh use mutual funds for various investment goals? Q4. What types of mutual funds might be considered by the Brocks for their investment portfolio?

Explanation / Answer

1. Pam is 43, Josh is 45 and they have 3 children. Their investments should be made as per their risk profile and their need for liquidity. Also, we need to keep in mind the fact that Pam and Josh have started making investments a little late in life. The Brocks should consider the risk return tradeoff for each asset class - equity, bonds and cash - and then determine their portfolio, depending on their risk appetite and their desired return rate. As the Brocks have already crossed the age of 40, i suggest that they maintain a moderately aggressive portfolio in which 50 to 55% of the portfolio will be made up of equities, 35 to 40% of the portfolio will be made up of fixed income securities and the balance 5% to 10% will be made of cash.

2. The 3 recommended industries are - biotechnology, retailing, and environmental companies. My recommendation is to avoid the retail industry as it is witnessing a slowdown on a global scale. The same store sales growth has been falling regularly and companies are operating on wafer thin margins.

The Brocks can consider the biotechnology and the environmental comapnies. These two industries are witnessing good growth, the margins are healthy and the future looks promising. There is ample scope to generate capital gains by investing in these 2 industries. My research on Bloomberg has resulted in identifying the following stocks - Gilead in the biotechnology sector. The company has a strong presence in the Hepatitis C market, and has shown consistent revenue and net income growth. It is a stock for the long haul. In the environmental space i would recommend Enphase. The company develops  microinverter systems for the solar photovoltaic industry on a global basis. It business model is unique and is set to gain from the rising demand for solar energy.

3. The Brocks can use mutual funds to meet their investment goals in a systematic manner. Suppose their goal is to save for the college education of their 3 children. They can invest in close ended mutual funds, offering capital appreciation. In a close ended mutual fund, they can time the expiry date of terms close to dates when their children are ready for college. Thus, they can withdraw money when their children are ready for college. For immediate needs, they need to maintain a liquid portfolio and so can invest in open ended mutual funds, where the amount can be withdrawn any time.

They should park funds for the college education of their children in balanced funds. They are a mix of equities and fixed income securties. They will balance the need to achieve high returns while keeping a tab on the risks.

4. The Brocks should consider equity funds and balanced funds. In equity funds, they should invest in open ended schemes and should use the funds for their emergency liquidity requirements. The equity funds are high risk high return funds and so they should not park a substantial portion of their portfolio in such funds.

For saving for the college education, marriage and other future financial needs of their children, the Brocks should consider balanced funds. These funds invest in a mix of equities and fixed income securities and the Brocks will balance the need to earn high returns while minimizing their risks.

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