Investment Strategy and Portfolio Management: A case of
Norris Capital UK
Norris Capital is a United Kingdom charitable fund established in 2008. It offers an investment avenue for education purposes (this is what gives it its charity status). Members of this organization contribute regularly with a mission of realizing a significant value growth in order to finance an educational goal, (for instance the school fees for children or college fees) after a specific time frame. After a minimum five years timeframe, the contributors are now allowed to withdraw their funds. This means that the first contributors in the year 2008 are now eligible to withdraw their funds if they so wish. The organization’s main competition is the mutual funds, depository institutions and others, in attracting inflow of funds from existing and new contributors. This paper presents an investment strategy and portfolio management that could be used by this organization to realize its growth perspectives.
Current Issues in the Investment Environment
In UK, there is a clear need to support infrastructure in order to develop the social and economical investment market. Some of the missing elements in the investment environment today include but not limited to: social and economic impact measurement standards, capability of pricing the risks and measuring the impact of these investments, as wells as enough tax incentives. However, none of these obstacles are insoluble and various recommendations can be drawn in overcoming them.
The present lack of knowledge and acceptance of social investment and advisors commonly referred as the “gate keepers to capital” in this space bars extensive acceptance on the part of investors. Therefore the management of this entity ought to engage in a clear communication mechanism in ensuring that products in development are reflected to the executives. In this perspective, the management should review the opportunities in this space and bring on board the necessary consultative expertise to help in this matter.
In this market arena, while some funds would offer reports on the social impact on their essential investment, there is modesty consistency in the approaches employed by many managers (JPA, 2010). Apparently, investors consistently find it cumbersome in determining the collective social benefit that would be accrued from their investment. In addition, the measurement of a blended financial and social return is next to impossible at this phase. Very few organizations have devoted their resources in developing social impact measurement mechanisms including the global impact rating technique, return on investment as well as investment for good rating methodology. The success of these standards however, is depended on the acceptance and adoption by organizations.
Norris Capital should deal with this challenge in collaborating with other like minded firms in the social investment market. One f the ways to achieve this is establishing an outcome matrix that would facilitate mapping and reporting on the social impact created through daily business operations of a social entity. Employing such like a tool by investors would embed social value into the process of decision making by portraying a clearer picture of the impact created by the business firm (Mason, 2012).
It is difficult to comprehend the pricing of social investment. This is because most impact investments have promising track records. Many businesses have unique business models. For instance, the existing opportunities are unknown, and the liquidity varies. This makes it cumbersome to evaluating the expected return and also to realize the social impact of an investment. The author of a paper in search of Gamma is noted to challenge investors in initiating key performance indicators within the investment theory, so as the monitoring of the impact and assessment throughout the investment life is realized. The expected impact is then incorporated in the expectation of return (NCVO, 2012).
The final note is that, UK has tax schemes that were principally designed to encourage investment in the mainstream business. However, these do not translate to mean direct investment opportunities in the social and economical enterprises (NCVO, 2012).The four main deficiencies of these government tax schemes as highlighted by the NCVO commission on tax incentives for social investment include: venture capital trust, community investment tax relief, seed enterprise investment and the enterprise investment scheme.
Alternatives for Plausible Strategic Asset Allocations
The success of Norris Capital would not be supported by donations, grants or bequests but through consistent membership donations and capital diversifications. Additionally, the investment programs that are designed to grow and protect the assets are also crucial to this organization. At the centre of such an investment program is the policy indicating the strategic asset allocation. While defining precisely the line between asset allocations policy with it is implementation, in general, asset allocation involves evaluating the amount of investment portfolio to be directed to specific asset categories. For instance, the amount to be directed to equities, fixed income, real estate and so on. The implementation aspect takes into account that wide policy and puts the necessary resources to work (Collie, 2010).
Markowitz introduced two categories of returns. One of these was that the anticipated return had an array of uncertainty which would be different from each security. The second was that, securities did not move at all. This means that diversification would reduce the decline of a potential in a portfolio to the less than the average personal security down sizes. Norris Capital has done well to diversify its asset capital as depicted by 35% UK equities, 15% in UK corporate bonds, 20% in UK government bonds, and also 10% in cash and short-term instruments. Covariance and taking risk is the foundation of modern theory of portfolio according to Markowitz.
Strategies in asset allocation should be based on this organization’s attitude to risk. This will range from a passive process to an activeone that incorporates various levels of risk. Norris UK should invest more in assets that are likely to result into improved growth over time, so that the there is enough inflows and capital for investors to withdraw funds at any time they desire. This firm should employ strategic asset allocation method which is based on a base policy mix, a proportional combination of assets based on the expected return on each asset category.
The capital allocation of these assets in Norris is however depicted with one problem, it was distributed sparingly. This means that the management or those concerned had not explicitly used a conventional wisdom articulating that the allocation of capital on assets should not be held too far from the others. The differences in fund return should reflect the management decision on security selection, as well as market timing. At one time it emerged that the average allotment across such funds stabilized at roughly 60% in equities, and 40% in both and cash. In ascertaining effective asset allocation for an organization such as Norris, the long term needs which are having regular inflows for school based funds should be the main consideration. Buck, (2013) finds that although investing in cash and bonds as part of diversified portfolio is commendable; it does not however erode the power of inflation in the investment market. Therefore, the input in cash and short term instruments should be further reduced in favor of the other asset. The precise allocation for Norris should therefore go in the ration of 40% in equities, 35% in corporate bonds, 20% in government bonds and 5% in cash and short term instrument.
The management is left to make a decision of deciding at the outset the rate of return which they anticipate from equities, corporate bonds, government bonds, and the cash and short term instruments. At the same time it is imperative to check the historical volatility of each category in determining the amount of money that could be lost if the anticipated performance fails to live up to its expectations (Buck, 2013).
Strategies for Attracting Inflows from Contribution
The basic reason on why firms establish operating reserves is to alleviate the effects of business cycles on both expenses and revenues. The organization could address the discrepancy between expenses and revenues in four ways: a) increasing revenues (b) reducing spending (c) employment of temporary avenues of resources in balancing temporary shortcomings, (for instance, Norris Capital should opt to borrow money from other financial institutions in meeting the capital shortcomings), and (d), using the organizational accumulated reserves in overcoming the anticipated shortfalls (Bernstein, 1991).
Most charities (of which Norris Capital falls) have much pressure in spending rather than saving. This pressure emanates from the charitable rating group or the influence of the media. Rather than reserving cash to eliminate financial vulnerability, this firm must spend only in line with the program ratios, translated as the ratio of program expenses to total expenses are so as to evade negative publicity. This would in turn attract the trust of the members of this firm in contributing and investing more in this program. In addition, it will also attract new members, thus boosting the company reserves. In this perspective, the opportunity cost of holding up the reserves may be relatively high. This may result into operating reserves to be ignored as the main goal of this organization. In other words, the cost benefits outweigh the reserve benefits. Stated differently, the average charity firm is on a relatively tight budget resulting into few if any extra money to be reserved in difficult times. If the reserves happens to have a lower opportunity cost, then this entity should substitutes some expenses in favor of reserves.
It should be remembered that disruptions to the available cash flow such as the anticipated increases withdrawals in Norris Capital have a potential of causing adverse effects on operations. The financial operations such as withdraws, and employee payrolls may be jeopardized if there are no operating reserves (Keatinge et al, 2005). This poses a problem in transactions consuming a lot of managerial time and increased staff. Furthermore, the organizational mission oriented programs may be negatively impacted since the resourced devoted to such an output are insufficient. This means that the accumulation of particular operating reserves is not essentially zero- sum whereby the reserves are established at the expense of the output.
Since this organization considered as a charity, the management should think of involving other partners to support its operations. In addition, they should design strategies aimed at increased the organizations membership as well as the contributions. If the organizational objectives are to be efficiently achieved, then the support of the members is more than important.
In order to make the life of Norris Capital much easier, the company has to devise a plan of attracting new members to its pool. In this perspective, the management must sit down and think collectively on the best way to achieve the desired goals. This organization is presently thirsty for new membership. The contribution for these new members will stand for the withdrawals made by the members who have completed a five year time span. In this endeavor they should establish awareness strategies through the media, social interactions or other means in achieving this goal.
Although the sector of finance and investment is broad, it greatly assists in endowing charitable organizations such as Norris Capital and other private entities in being aware of the crucial investment issues that are likely to come out. While the requirements within each firm will vary with regard to the circumstances, charity organizations should have carefully thought out policies and strategies (Hatton, 2005). Norris Capital should design a written investment policy and ensure that it is updated regularly, and adhered to. This will go along way in ensuring that the management of these firms as well as the members does not incur liability. Cash management is very crucial aspect especially in an environment characterized by low interest. If this aspect is ignored or overlooked, this organization will continue lacking money and eventually declared bankrupt by not holding cash for along time.
Greater emphasis will continue to be placed on the consisted additions of members, mechanisms to encourage more inflows of funds by the existing members and diversification of capital. If these systems could be relied on, they may then function as the cornerstone of the cash flow that would be important in funding the operations of this organization, whether it is the programs (including withdrawals), employee salaries, grants or expenses.
References
Bernstein, S. R. (1991). “Managing Contracted Services in the Nonprofit Economy”. Temple
University Press: Philadelphia, PA, 1991
Buck, G (2013). “Focus on asset allocation” Available on
http://www.charitytimes.com/pages/ct_features/oct-nov06/text_features/ct_octnov06_focusfeature2_in_for_the_longrun.htm
Collie, B (2010). “Asset allocation for non profits” Available on
http://www.russell.com/documents/institutional-investors/research/asset-allocation-for-non-profits-a-fiduciarys-guidebook.pdf
Hatton, T (2005)”The New Fiduciary Standard: The 27 Prudent Investment Practices for
Financial Advisers, Trustees, and Plan Sponsors. Bloomberg Press. 2005
JPA Europe Limited,( 2010). “Social Enterprise and the Social
Investment Market in the U.K.: An Initial Overview” p. 19.
Keating, E., M. Fischer, T. Gordon, and J. Greenlee (2005). “Assessing Financial Vulnerability
in the Nonprofit Sector.” Working Paper, Hauser Center for Nonprofit Organizations, JFK School of Government at Harvard University, 2005.
Mason, C (2012) “Big Society Capital, interview”
National Council for Voluntary Organisations, (NCVO 2012)”Commission on Tax Incentives for
Social Investment”
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