DIP Funds Management
Memorandum
To: Clients
From: Trainee Manager, DIP Funds Management
Date: 09/12/2014
Subject: Treatment of recent issue related to DIP #2 Fund
Although incidents like international diversification have taken place and though the DIP # 2 funds followed the principle of allocation of assets while investing, the DIP # 2 funds fell down by 25 % during 2008, and it did not improve all of this position until 2010.
As a consequence, a large number of our clients turned out to be offended and, as a result, intended to make a decision to draw their money out of the DIP # 2 funds. Further, they are also intended to spend their money in bonds on the basis of the discernment that the bond market might provide superior performance in against the DIP # 2 funds.
So, it becomes a crucial responsibility to be aware of what exactly the existing situation is, in addition to putting emphasis on several essential features of investment decision-making.
The fact that cannot be ignored is that the DIP # 2 funds performance has fallen by almost 25 % all the way through 2008, and it did not improve all of this position until 2010.
As a result of this fact, this generates indecision in the context of each distinct financier of the DIP # 2 funds control policy for the reason that it looks like it will be beneficial if they financed their capital in the Australian share market rather than engaging money into the DIP # 2 funds.
Nevertheless, one should have to note that if the existing marketplace was being considered here, which spread over the time frame 2008 to 2010 periods then not only the DIP # 2 funds has experienced such fall in performance level, but also at the same time, the Australian share market as a whole experienced similar kind of downfall.
This indicates that whether the money was invested in DIP # 2 funds or anywhere else, the investor had to incur such a loss. To support our explanation, we attached the performance details of the standard S&P and ASX 200 index during the financial year 2009, which indicated a downfall of 24% (Yourmortgage.com.au, 2014).
From this data, it was also found that over this time frame a significant amount of broad equity portfolios have experienced a negative return of near about 22.1 %. Such negative return was taken into account based upon the entire ordinary accumulation index (Asx.com.au, 2014).
This is not only the single evidence; if we consider the market size of all ASX-listed institutions, then we can also find that they experienced a nearly 19 % fall all the way through the financial year 2009. Here, while the market size for all ASX-listed institutions was $ 1.5 trillion in 2008, it became $ 1.2 trillion due to such a fall in the financial year 2009 (Asx.com.au, 2014).
The historical share price of the Australian share market over the tenure 2009 to 2010 is also being explored here to provide a brief overview of the marketplace. According to this information, it is noted that on January 2, 2008, the opening price, high price, low price and closing price of the S&P/ASX 200 index were 6339.80, 6385.70, 6326.70 and 6353.20, respectively (Google.com, 2014).
Against this performance, on March 6, 2009, the opening price, high price, low price and closing price of the S&P/ASX 200 index became 3188.50, 3190.70, 3124.30 and 3145.50, respectively (Google.com, 2014). Finally, on December 31, 2010, the opening price, high price, low price and closing price of the S&P/ASX 200 index became 4790.40, 4790.40, 4745.20 and 4745.20, respectively (Google.com, 2014).
From the above information, though, it looks like the Australian share market evidenced comparatively better performance from 2010 to 2009; if we compare both the result with the performance in 2008, we can find a significant reduction of almost 18 per cent.
This also established a conclusion that not only our fund but the market as a whole experienced significant fall down. Under such circumstances, it can be concluded that there was a similar probability that each of the distinct investors gained through investing in the Australian share market against the DIP funds management.
Again, as it becomes important to clarify whether each of the distinct investors should move their investment amount to the bond market during this downturn, we would suggest to the clients that prior to taking any resolution like this, they should examine the recital of the Australian bond market with concern.
So, if we considered the performance of the Australian bond market, then the historical information explored that over the tenure from 2008 to 2009, there was significant volatility in the Treasury bond market in Australia (Macquarie.com.au, 2014).
Specifically, it was the fact that the Australian Treasury Bond market approached beneath the remarkable buying force, due to which each of the distinct shareholders needed to find a safer position for their assets (Archive.aofm.gov.au, 2014).
Not only that, during that time, every existing investor has had a propensity to take hold of the bonds vigorously, even though a number of immense holdings actually crammed lending their securities to market-makers (Macquarie.com.au, 2014).
At the same time, it is also noted that Treasury bond performance has turned down by about 10.4 %, while both 3 years Treasury bond future and 10 years Treasury bond contract evidenced performance fell by 30 and 38 %, respectively, during the financial year 2008 – 2009 compared to the performance level in 2007 – 2008 (www.afma.com.au, 2008).
Therefore, in line with the above explanation, it can be concluded that moving money to the bond market during this downturn might not be fruitful for each distinct investor who invests in the DIP # 2 funds.
Again, from the perspective of international diversification following global financial crisis 2008, certain confusions are there concerning whether there is any needs of international diversification.
Worldwide diversified portfolios showed improved performance than locally managed portfolios (Forbes, 2012), and because the global market performed poorly following the global financial crisis, it would thus turn out to be a sensible question.
It is also significant to explain that recital individually does not manipulate the investment strategy; rather, the correlation between risk and return of the portfolio must be assessed (Anderson and Horn, 2010).
This explores that correlation has become an important aspect here. However, until the correlation became +1, the international portfolio provided additional importance to diversifiers (Anderson and Horn, 2010). So, international portfolio diversification is still an important aspect.
At the end, assessing what risks might an investor face while they o for international diversified fund; three types of risk are there that plays important role. Initially, they have to take care of several transaction costs such as taxes, stamp duties, clearance fees, levies, exchange fees, etc.
Secondly, they also have to track the exchange risk (Ca.dimensional.com, 2014). Finally, they have to consider liquidity risk. This explored the circumstances while in a foreign country; the specified stock cannot be promptly sold.
Hence, it can be concluded that the precariousness in the recital level of DIP # 2 funds is not due to DIP fund management professionals but rather mostly relying on the market circumstances. It is appreciable that in conjunction with the market recital, the DIP # 2 funds, at the same time, also experienced improved performance from its preceding fall.
To get assignment help, please contact our live chat adviser