Rudy Wong, Investment Advisor

Group Assignment, Investment Management

Bishal Sarraf Omkar Pandey Suresh Kandel

Case Synopsis

The case portrays the challenges faced by an investment advisor to persuade his clients about the

threats in the mind of investors after the rapid and continuous downfall of U.S. economy that

eventually lead to global financial crisis. It started with the collapse of the U.S. housing market

which began in 2006. This happened mainly because of subprime mortgage business, in which

U.S. banks gave high risk loans to customers with poor credit histories. These loans and other

forms of credit were bundled into portfolios and were spread to investors globally. In the

meantime, the interest rates rose sharply from 1 per cent to 5.35 per cent between 2004 and 2006

causing high numbers of homeowners to default on their mortgages and housing prices to

decline. Further, U.S. economy declined 6.4 per cent in the fourth quarter of 2008 and during the

same period, Canadas gross domestic product (GDP) contracted 3.4 per cent resulting S&P/TSX

to plunge.

Rudy Wong, an investment advisor at OHagan Securities (headquartered in Toronto) since

1996, was worried due to the global financial crisis. He was getting regular phone calls from his

four clients (Bob Miller, Mary Swanson, Jack and Kelly Klein, and Herb and Barb Nicholas) for

an urgent meeting to draw strategies to overcome the impact of massive downfall of economy in

the security markets. The major challenge that lies in front of Wong is to re-assure his clients

about their investment portfolios by communicating logical arguments based on his portfolio

management expertise and analysis, by managing emotions and attempting to re-establish his

clients faith in the markets or by both methods. In addition, he needed to re-examine the

investment strategy and recommend either sticking with the current strategy or making changes.

Investors Profile and Recommendations

Bob Miller

Bob Miller is a 42 year old single man, whose annual salary is $50,000 and he is in a

consolidation phase. Being a single, it permits him to reserve low cash/liquid assets. Miller has

invested 70 per cent of his portfolio in equities and with high exposure to the Canadian oil and

gas sector including Suncor which fell from a high of $72 on May 20, 2008 to $27 on March 6,

2009. His investment objective is to achieve sufficient growth to retire comfortably at the age of

65. It implies that his investment objective is to realize capital appreciation. He has quite long

investment horizon. Though he has stated that he wont change strategy just because of short

term losses, his emotions are swinging with the markets movement. High proportion of equity in

his portfolio shows that he is willing to take more risk.

Recommendations:

As recession is an economic cycle, it will recover after some times. Since he has long

investment horizon, Miller should not be worried about current economic downturn.

Therefore, it is highly recommended that he should hold the equities.

Bob Millers personal characteristics should also be considered. He should be made

assure that the recovery of economic downfall is inevitable by recalling an example of

global market crash 1987. This will help him to prevent from illusion from control.

He should alter the investment in equities of Banks and other financial institutions (if he

has any) whose condition is vulnerable due to credit crunch.

Even if he is single right now, he may have dependents in the near future which may lead

to the need for short-term liquidity needs. This should be considered while making

further investment decisions.

Inclusion of gold in his portfolio is also recommended as it offsets the risk and is

considered as a safe haven. This allows diversification in his investment portfolio which

will offset the fall in stock market.

If Bob Miller were Baburam Malla, the recommendations could have been as follows:-

For Baburam Malla, there would be responsibilities to look after his parents and other

family members. Thus, there is a need for short-term liquid assets. For this it is

recommended to invest some portion of total investment into gold.

Further he can also extend his portfolio to development bonds issued by few banks in

Nepal recently. But since at the time of recession, the stocks prices are low, so altering

might cause loss. Thus one must alter those stocks whose price may further decline in the

coming days.

Mary Swanson

Mary is a retired professor and is in her spending phase. She transferred her UBC pension to

OHagen Securities. Generally, she is a non-emotional decision maker. Swansons portfolio

consists of 60 per cent equities and 40 per cent bonds. In stocks, the portfolio consists of a mix of

large, medium and small-cap stocks and on the fixed income side, it is made up of Corporate

Bonds and Guaranteed Investment Certificates (GICs), five per cent allocated to gold and five

per cent allocated to real estate in Canada. This shows that her investment objective is to achieve

total return, i.e. the combination of capital appreciation and current income. She has fairly long

investment horizon of 30 years. She has no short-term liquidity needs. It provides opportunity to

neglect short-term upheavals and focus on long term. The recent global financial crisis made

Swanson fear a loss of capital. This, in turn, is leading her to re-consider her investment portfolio

and to shift a large proportion of her money to cash.

Recommendations:

As Mary is spending her retired life, there is no high need for capital appreciation.

Therefore, the weight for allocation of fund in equity can be reduced and invested more

in the bonds.

Since Mary is spending her retired life, liquidity needs may occur as she grows older. The

asset can be used to invest in certificate of deposit as it is highly marketable and

convertible. Further, inclusion of gold is another viable option.

Mary should not be allowed to convert all her investment to cash in order to protect her

from the growing inflation rate. For this, certain portion of her investment portfolio must

consist of equity shares. Thus, investment in both risk-free and risky asset are required.

In the context of failing many big organizations, it may not be a good idea to shift from

Treasury bond to corporate bond.

If Mary Swanson were Malvika Subba, the recommendations could have been as below:-

It is very difficult in Nepalese share market to provide and allocate securities according to

the needs of investors due to limited availability of stock and immature share market.

Since she is non-emotional decision maker, she can be assured about the economic time

which falls beyond ones expectations, but also recovers over time. Since she has no short

term liquidity needs why not to wait for the market to regain its position.

Jack and Kelly Klein

The Kleins were regular investors with an objective to save for retirement and to achieve high

growth for their investment fund. This shows that they are highly concerned with capital

appreciation. However, they did not have lot of assets. As their retirement is 30 years away, it

can be inferred that they are in accumulation phase and their liquidity needs are high. They also

have long-term time horizon. The Kleins are highly exposed to the equities as they invested 85

per cent and 15 per cent in equities and bonds respectively, but their portfolios value declined

more than 50 per cent since July 2008. Significant proportion of investment in equities shows

that they are tempted to take high risks. Despite of having calm temperaments that are suitable

for long-term investments, Kleins were nervous when the stock prices plummeted sharply due to

high exposure to equities.

Recommendations

Though Kleins economic condition is not that sound, they have invested significantly

high proportion in equities which is riskier than bonds. Thus, it is imperative for them to

lower the proportion of investment in equities.

It is recommended for them to have diversified portfolio in order to reduce risk. They can

allocate some proportion of their total investment to gold which is considered as safe

heaven. Investing in gold is also considered as wise option during the time of recession.

Further, investments in dividend fund and Treasury bond can be done so as to avoid

market volatility and to cover at least inflation rate.

Since their investment horizon is of long-term, they should have patience to surpass the

economic downfall which will improve after few years of time period. Therefore, they

should not get panic as the price of equity is falling continuously.

If Jack and Kelly Klein were Jagdish and Kamala Khatiwada, the recommendations could have

been as mentioned below:-

Since capital appreciation were their main objectives, investing in gold would be

advisable here.

Investing in Chilime hydropower would be another option as it has been providing fairly

consistent dividend. It would help them to meet short-term needs.

Herb and Barb Nicholas

Nicholas are both 50 years of age which means they are in consolidation phase and are heading

towards spending phase. The Nicholas had invested $100,000 even after knowing that the market

is extremely volatile. Because of their behaviour of high risk tolerance, they had invested 75 per

cent in equities and 25 per cent in bonds. The investment objective of Nicholas is to obtain

capital appreciation because they want their money to grow. They had solid income source that

could help them to cover their short-term needs. Thus, Nicholas did not need to have cash in

reserve. They are biased toward thinking in terms of trends as they feared the trend of

continuously falling stock market would cause the stocks fall to zero. Their investment horizon is

10 years. Taxation is one major constraint as they seem to be included in big tax bracket.

Recommendations:

To reduce the tax burden, Nicholas should invest more in dividend funds. In addition,

they can invest in international equity where the tax rate is low.

As their retirement is 10 years away, they must focus on investing in bonds and other

money market securities like certificate of deposits.

They should be convinced to do away with their trend bias. As an investor, it is important

to assure that the recovery from the financial crisis in not far away with the help of past

examples of recovery.

If Herb and Barb Nicholas were Hari and Babita Nakarmi, the recommendations could have been

as below:-

Since they have high risk tolerance ability, they should be assured about the recession, its

effect and recovery in the coming days. Panic simply because the stock market collapse is

not practical for those people who are high risk taker. So they should be convinced to

hold their position for future.

Lessons Learnt

The role of investment advisor in any investment decisions is of high importance as the

success of investment depends on the role of investment advisor.

Asset allocation, security selection, and market timing are important components to be

considered while making investment decisions.

The impact of emotion, psychology, and personal behaviour in investment should be

considered while making investment decisions.

Preparation of policy statement before any investment decisions helps investors to

articulate realistic investment objectives. In addition, it helps the investors to know

his/her own needs, objectives, and constraints.

Different behavioural aspects like biases, stereotypical thinking, and anchoring should

also be taken into consideration during investment decisions.

Portfolio diversification is essential to minimize the risk and reduce the impact of market

volatility.

The role of investment advisor do not end after the investment had been done, rather it

starts from there and the advisor role becomes more demanding during the time of crisis,

fluctuations in the market and so on.

Being an investment advisor, one must understand his/her clients overall economic

condition and psychology towards risk, return, and patience. With this when the tough

time comes, the advisor need to be tactful and advice their clients strategically to stop

them from panic.