Financial advisor
Asset allocation model
52% Equities
40% Fixed income securities
8% Cash and its equivalents
This model will be effective for Dr. O’Hara since he is a moderately aggressive investor. This means that he is able to tolerate moderate level of risk which is the risk associated with this model. For moderate aggressive investors like Dr. O’Hara, the balanced kind of portfolio is the best and it divides the composition of assets almost equally between equities and fixed income securities and this provides a balance between income and growth (Carther, 2010). Since Dr. O’Hara is an investor who needs growth, asset allocation using this model will work well for him. Dr. O’Hara also has the objective of investment for 5 years and more and this strategy will be good for him since it requires an individual to have a long time horizon which is generally of five years and more.
Suitable investment alternative
The suitable investment alternative for Dr. O’Hara’s wedding and nephew’s tuition assistance would be a bank savings account. This is because a bank savings account is safe just as is Dr. O’Hara’s objective. In a bank savings account, the money deposited is not subject to fluctuations and hence he will get his principal amount plus an interest therefore will not loose any money. In the bank savings account, he will also be paid a rate of return and this is paid on the entire amount that is in the account. Furthermore, a bank savings account offers access to the money easily therefore he can withdraw his money any time.
Suitable mutual fund for the 401(k) plan
The suitable mutual fund for Dr. O’Hara’s 401(k) plan would be the Pimco Mutual Fund. Pimco Mutual fund has been in existence since 1997 and the portfolio manager is Mihir Worah and he is the Pimco managing director. Mihir Worah is experienced in fund management with him having managed commodities and Treasury Inflation-Protected securities (TIPS). A combination of these two which makes the fund creates diversification that goes beyond standard bonds and stocks hence creating a barrier on inflation (Pimco, 2010). Under the management of Mihir Worah, the TIPS and commodities performed well in 2009. He has risen the fund to the broad quantitative class. Therefore, Dr. O’Hara can be assured that his investment will be safe.To match Dr. O’Hara’s needs for investment, the Pimco mutual fund has an average duration of more than 4 years and its returns are high for instance 12.12% in 2009. Therefore, Dr. O’Hara’s required rate of return of 9% will be achieved. As the manager, Mihir Worah is qualified since he holds a doctorate from the University of Chicago where he studied theoretical physics. He has also studied money management which together with his ability in math makes him well equipped for bond and investment management.
In line with Dr. O’Hara’s asset allocation, the fund has formed strategies for equities, fixed income and cash. Through the equity strategies, one is offered long term returns which are attractive just as is the objective of Dr. O’Hara. The fixed income strategy offers investors capital preservation hence no expenses, regular income, diversification of portfolio and barrier against slowdown of economy. Therefore, the doctor’s objective of minimal market volatility is taken care of. The cash strategies at Pimco provide preservation of the investor’s principal amount and an income which is consistent. According to Morningstar, (2010), the fund’s current NAV is $ 11.49, 1 year, 3 year and 5 year returns are $ 8.69, $ 9.61, and $ 8.34 respectively. The fund’s management fee is 0.25%.However, just like in business and other investment fund, investing in the Pimco mutual fund has some risks. These involve interest rate, liquidity, market, and the risk of loosing more than the invested amount.
Risk adjusted performance
The fund with the best risk adjusted performance is the one in which the Treynor ratio is highest.
Treynor ratio = (Average portfolio return – Risk free rate) ÷ Beta of portfolio
Franklin Domestic Fund: Treynor ratio = (0.078-0.04)/ 0.950 = 0.04
ScudderPacificBasin Fund: Treynor ratio = (0.125-0.04)/1.25 = 0.068
American Mortgage Securities Fund: Treynor ratio = (0.075-0.04)/0.25 = 0.14
Therefore, the American Mortgages Securities Fund has the best risk adjusted performance.
References
Carther, S. (2010). Achieving optimal asset allocation. Retrieved from: http://www.investopedia.com/articles/pf/05/061505.asp. Accessed November 25, 2010.
Morningstar, (2010). PIMCO Total Return. Retrieved from: http://quote.morningstar.com/fund/f.aspx?t=PTTRX. Accessed November 25, 2010.
Pimco, (2010). Pimco: Your global investment authority. Retrieved from: http://www.pimco.com. Accessed November 25, 2010.
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