Australian Capital Market and Hybrid Mutual Funds

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Table of Contents

Impacts of GFC and EAB on Hybrid Funds
Defined Benefits Division Asset Allocation Approaches
Conclusion
List of References

Impacts of GFC and EAB on Hybrid Funds

The 2008 global financial crisis, as well as the European debt crises had significant effects on balanced funds. The flaws witnessed in the equity market had substantial effects on hybrid mutual funds as well. The hybrid funds are always aimed at increasing returns for stock and debt investors. In the year 2009, the debt focused funds resulted to 22% returns while hybrid funds that focused on stocks experienced returns of 62%. Considering that the capital markets indicated declines, the mutual funds could not escape crisis. Analysts claim that apart from arbitrage funds that took advantage of market volatility, all types of hybrid funds suffered a loss of returns at the end of the year 2009 (Das, Markowitz & Scheid 2010, p. 316). The financial reports indicated that equity focused funds recorded a decline of 4.5% in the market while asset allocation schemes registered a decline of 5.2%. The Enterprise Bargaining Agreement introduced in the year 1991 by the Australian government had an effect on the Hybrid Funds. Considering that the Enterprise Bargaining Agreement stated that salaries of employees had to be increased, many hybrid funds were directly affected by the salary increments. Currently, equities and debt instruments are to be invested in the hybrid funds, which would earn investors high returns. The market information pointed out that Defined Benefit Division had very low returns for the last five years. Given that returns were below the long run return rate needed to sustain surplus, the VBI fell below 100.

Most hybrid funds suffered significantly from the 2009 global financial crisis due to weaknesses that occurred in the equity markets. Various debt-focused hybrid funds that had a small percentage of 25% suffered a decline of not less than 3%. These drops could not be compensated by the proceeds from debt securities. With unpredictability in the world economy, the market is expected to continue showing booms and depressions. Given that the company predicts a decade of subdued growth, it would be prudent to take pertinent measures and approaches in order to offset future declines in Defined Benefits returns. The approaches would include investing in a portfolio consisting of high and low risky returns.

Defined Benefits Division Asset Allocation Approaches

International shares

International shares are important when an individual is considering investing in a balanced mutual fund. Not all countries are affected economically at the same time. However, if they become affected at the same time, their level of returns would vary. An international share of about 14% would be significant for a Defined Benefit Division. Nevertheless, the international shares should be drawn from emerging markets such as Malaysia, Singapore, India, Taiwan and South Korea. The Defined Benefit Division should also focus on investing in shares from sectors indicating high growth rates. These sectors would include technology and energy sectors (Bodie, Kane & Marcus 2008, p. 67). Most stable companies in this market include Unilever and BMW. Considering that Europe witnessed a debt crisis in 2010, it would be wise to take caution to avoid investing in European shares. This is because the region is susceptible to further crisis considering that most countries are controlled by a single central bank based in Germany.

Infrastructure portfolio

The infrastructure portfolio consists of various assets that are worth investing in them given that they promise huge returns, as well as capital gains. It is worth investing in assets that have future potential capital growth. This strategy is important while considering returns in the long-term perspective. In addition, it is essential to invest in assets that other companies might find it difficult to access. Investing in such assets reduces the chances of changes in the market conditions, which would influence returns. Owning an interest of 50% and above in such assets is more appealing and can assure sustainability of hybrid funds in case a financial crisis reoccurs. For instance, it would be prudent to invest in assets such as those of Adelaide Airlines.

Property

This includes direct investment in various properties at the market. Managers of Hybrid Funds should consider investing in Flexible retail segments and industrial properties. However, property investments should be diversified in various proportions, depending on the risk and returns associated with various properties. Owning 100% of assets is very risky given that negative returns would have a significant impact on the general performance of Hybrid Funds (Reilly &Brown 2007, p. 91). Financial analysts suggest that managers of Hybrid Funds should avoid investing in properties that can be accessed by many competitors.

Investing in Listed Equities

Inquisitive and extensive analysis is needed before investing in stocks. It is advisable that a company possesses more than half investments in listed equities (Oster 1994, p. 82). Australian Hybrid Funds should have investments in the best 100 companies listed in the Australian Stock Exchange. These companies would include companies operating in the mining industry. They would also include retailing and telecommunication companies. Since Australia recorded an average marketable securities return of 6%, which was above the return earned by the US securities at the end of the year 2009, there is a possibility that Australian equities would earn Australian investors a substantial return. Given that Australian economy indicates a positive outlook in the medium-term, shareholdings for “blue chips” companies would be expected to record considerable returns.

Conclusion

Defined Benefit Division should embrace a reasonably static strategy as regards to asset allocation. A static tactic refers to a strategy that involves investing in assets that are defensive, as well as those indicating a potential of growth. On the other hand, it is advisable to adopt a dynamic strategy since it enables managers of Hybrid Funds to rebalance their portfolio at various levels in the market. Before allocating funds on various assets, it would be pertinent to take into account the funding ratios. The funding ratios include Vested Benefits Index and Accrued Benefits Index. To ensure sustainability of returns on Hybrid Funds, it is advisable to adopt a defensive allocation approach, especially when there is a high level of VBI and ABI (Elton, Gruber & Brown 2006, p. 57). However, low level VBI/ABI would allow managers to embrace assets with high level of capital growth. A number of balanced mutual funds invest in low, moderate and high-risk assets. This is because the returns of these assets move in opposite direction. Listed equities constitute high-risk investments while debt instrument constitutes low risk investment. A moderate low risk asset would consist of a high quality property. It is important to note that Vested Benefits Index and Accrued Benefits Index are variables, which indicate the performance of Defined Benefits Division and not actual portfolio returns.

List of References

Bodie, Z, Kane, A & Marcus, A 2008, Investments, McGraw-Hill Irwin, New York.

Das, S, Markowitz, H & Scheid, J 2010, “Portfolio Optimization with Mental Accounts”, Journal of Financial and Quantitative Analysis, Vol. 45, no. 1, pp 311-334.

Elton, E, Gruber, M & Brown, S 2006, Modern Portfolio Theory and Investment Analysis, John Wiley, New York.

Oster, SM 1994, Modern Competitive Analysis, Oxford University Press, Nueva.

Reilly, K &Brown, C 2007, Investment Analysis and Portfolio Management, Southwestern, Thomson.

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