Wealth Management, 7FNCE028W

Semester 2, 2023-2024

Student Id:

Title: Developing a Resilient and Balanced Asset Portfolio Management

Word Count: 2010

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 Executive Summary
This report intends to demonstrate a resilient and risk-neutral asset portfolio management
for clients under a £20M fund, encompassing the influence of macro-economic factors, industry
specific factors, as well as client needs. The report employs six distinct financial assets, namely,
stocks/equity of United Utilities, Rolls Royce, Associated British Foods, Tesla, Marshalls, as
well as one risk free asset of UK treasury bonds. Analysis has provided that macro-economic
factors in the UK, such as improved and increasing GDP growth, lower interest rates, as well as
low employment rates have supported financial asset investment, through higher corporate
profits, stable earnings, and hedge against inflation. Similarly, the industry specific analysis has
provided that the United Utilities with a low beta coefficient 0.41 is prone to a low systematic
risk, thus ideal for investors to invest in that company. A given diversified proposed portfolio has
exactly matched with the client need analysis, risk-neutral as well as maximising portfolio return.

Similarly, a Sharpe ratio of 15.942% is obtained that states portfolio has yielded a high
risk-adjusted performance relative to its volatility. Thus, the clients are suggested to invest £10M
funds in a risk free asset of GB50YT, £6M in stocks of United Utilities, and £1 M in each of the
remaining companies, Rolls Royce, Associated British Foods, Tesco, and Marshalls as well. To
enhance resiliency and stability of asset portfolio returns and minimise risks within client budget,
the report has recommended continuously reviewing company specific risks as well as regularly
monitoring macroeconomic factors

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Contents
Executive Summary.....................................................................................................................................2
1. Introduction.............................................................................................................................................5
2. Macro-Economic Specific Factor Analysis................................................................................................5
3. Industry Specific Factors Analysis............................................................................................................7
4. Client Need Analysis................................................................................................................................9
5. Firm Specific Analysis...............................................................................................................................9
6. Investment Portfolio Construction........................................................................................................11
7. Conclusion.............................................................................................................................................12
7.1 Recommendations...........................................................................................................................13
References.................................................................................................................................................14
Appendices................................................................................................................................................18
Appendix 1.............................................................................................................................................18
Appendix 2.............................................................................................................................................19
Appendix 3.............................................................................................................................................20
Appendix 4.............................................................................................................................................21
Appendix 5.............................................................................................................................................22
Appendix 6.............................................................................................................................................23

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 List of Tables

Table 1: Macro-Economic Specific Factor Analysis

Table 2: Industry-Specific Factor Analysis

Table 4: Portfolio Summary

Table 3: Firm-Specific Analysis

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 1. Introduction
An effective asset portfolio management is essential to maximise return and minimise
risk in a diversified portfolio for an investment perspective (Koumou, 2020). This report aims to
demonstrate a resilient and balanced asset portfolio management for clients under a £20M fund,
encompassing the influence of macro-economic factors, industry specific factors, as well as
client needs, while addressing associated risks effectively. For this purpose, the report relies on
six distinct financial assets, namely, stocks/equity of United Utilities, Rolls Royce, Associated
British Foods, Tesla, Marshalls, as well as one risk free asset of UK treasury bonds. Likewise,
the report provides recommendations based on CAPM model (for risk evaluation) to clients to
invest on the financial assets yielding maximum portfolio return as well as optimising risk-
return.

To accomplish underlying aim of the report, a top down investment approach is opted
that focuses more on macro-economic factors, including GDP, employment rate, interest rate,
and inflation rates as well (Rizvi et al., 2020). An active investment strategy is used which
entails actively monitoring market as to make profits and outperform an index or benchmark
(Easley et al., 2021). Similarly, a Capital asset pricing model (CAPM) is opted for to assess
possible systematic risks as well as expected return for assets in a proposed portfolio (Andrei et
al., 2023).

2. Macro-Economic Specific Factor Analysis

Macro-
Economic
Factor Leading Factor Analysis Lagging Factor Analysis
1. GDP Growth Pre-COVID: 1.6% (2019) Economic uncertainties such as global supply
Post-pandemic: 7.6% (2021) chain disruptions after pandemic could result in
(SEE APPENDIX 1) (Aaron, lower GDP growth, which in turn, impact the
2023). corporate earnings and investment opportunities

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 GDP growth is positive which
lead to increase investment
throughout the country (Goel et al., 2021).
opportunities within the
country.
Pre-COVID: 1.79% (2019)
Post-pandemic: 2.59% (2021)
(SEE APPENDIX 2) Rising inflation will result in economic

(O’Neill, 2023). uncertainties as well as high level risk in the

investment environment (Montes and Nogueira,
2. Inflation This rising inflation may 2022). The financial asset investment, such as
Rates develop conservative and bonds may become less attractive due to
cautious behaviour among decreased return on bonds, leading a sharp decline
investors, who may perceive in bond price, thus capital losses for bondholders.
real asset investment a more
safe and stable choice.
Pre-COVID: 0.8% (2019)
Post-pandemic: 0.1% (2021)
(SEE APPENDIX 3) (Statista, Lagging interest rates could negatively impact

3. Interest 2022). Declining interest rates valuation of fixed-income securities, such as

Rates may positively influence equities and bonds, thus lowering their return
investors decisions to (Maloney and Moskowitz, 2021).
consider investments in real-
estate and financial assets.

Pre-COVID: 76.6% (2019)

Post-pandemic: 74.8% (2021)
A decline in employment data reflects slow
(SEE APPENDIX 4) (Clark,
economic growth, uneven recovery from the
4. Employment 2024)
pandemic, and decrease in consumer spending,
Data Low employment rate
thus, demand investment projects to hedge against
increases corporate profits
inflationary pressure (Macchiarelli et al., 2021).
and stock returns, benefitting
equity holders.

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 Table 1: Macro-Economic Specific Factor Analysis

3. Industry Specific Factors Analysis

Company Share Leading factors Beta Analysis
in Issue
United Utilities 1.20 M  Delivering superior
Group Plc. quality water and 0.41 (United
sewerage treatment at Utilities, 2024)
an affordable, cost-
effective and beneficial
manner.
 Possessed unique and
less imitable tangible
and intangible resources
to remain ahead of its
competitors
Rolls Royce 21.70 M  Generating high sales,
Holdings Group Plc. profitability, and 1.88 (Rolls-
positioned Royce, 2024)
competitively due to
relying on
differentiation as a
business strategy.
 Engaged in
sustainability
initiatives, such as 25%
reduction of solid and
liquid waste by 2025,
reduce 50% energy use,

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 and net carbon emission
by 2030 (Rolls-Royce,
2024).
Associated British 941.15  Providing safe and
Foods Plc. K nutritious food at an 1.52 (Associated
affordable price. British Foods,
 Making a lasting 2024).
contribution in society
through delivering with
rigour, acting with
integrity, respecting
everyone’s dignity, and
through sustainable
means.
Tesco Plc. 25.66 M  Highest ranking grocery
retailer and 0.67 (Tesco, 2024)
merchandise with a
nearly 26% market
share (Tesco, 2024).
Marshalls Plc. 1.38 M  Leader in
transformation, 1.27 (Marshalls,
innovation, and 2024)
resiliency

Table 2: Industry-Specific Factor Analysis

The analysis has inferred that the United Utilities as well as Tesco (defensive industries)
exhibited β of 0.41 and 0.67 respectively, indicating a low systematic risk. On the other hand,
Rolls Royce (1.88) and Marshalls (1.27) due to their cyclical industry nature have depicted β
coefficient of greater than 1, highlighting a high systematic risk (Roncoroni et al., 2021).

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 However, Associated British Foods, despite of lies in a defensive industry nature, exhibited a β
of 1.23 (high systematic risk), which is in fact, greater than industry standards.

4. Client Need Analysis

The most suitable proposition on client risk preference will be risk-neutral, that aims to
blend risk aversion and risk-lover characteristics inclusively. This risk preference will strike a
balance between risk and return, considering effective diversification and risk management
strategies as well. The allocation of funds will be carefully structured to meet unique
requirements of the clients and aims to present a well-rounded and resilient investment portfolio.
Based on risk-neutral client risk preference, the client investment goal is based on “maximising
portfolio return” for a given level of risk. This exhibits that while maintaining an acceptable and
affordable level of risk, the portfolio is comprised of highest possible returns conveniently.

A UK treasury bond is opted for as “risk-free asset investment in the portfolio. The
rationale behind its selection lies in safety (backed up by the UK government), liquidity and
flexibility (easily sold and bought in the market), as well as stability (low volatile assets offering
hedge against market volatility). Although, UK treasury bonds offers low yield, but still due to
outweighing benefits in comparison to other financial assets (stocks), they are considered as
reliable source of income for investors as they gain periodic interest payments.

5. Firm Specific Analysis

Sr. Company Nature Stock Industry P/B P/E Index ROE EPS Beta ESG
No ticker P/E 5 year rating
Monthly

1 United Equity UU.L Water 3.2 99.9 25-30 -1.2 0.30 0.41 10.7
Utilities supply and (Low
Group Plc. sewarage Risk)
treatment (UU,
2023)

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2 Rolls Equity RR.L Defence, 49. 13.1 21.58 100 0.29 1.88 24.8
Royce nuclear, 9 % (Medium
Holdings power, and Risk)
Group Plc. civil (RR,
aerospace 2023)

3 Associated Equity ABF.L Food 1.5 16.9 21 13.8 1.96 1.52 31.2
British processing 4 3 7% (High
Foods Plc. and Risk)
retailing (ABF,
2024)

4 Tesco Plc. Equity TSCO. Grocery 1.5 13.7 15.35 17.6 0.29 0.67 21.3
L and general 9 6 4% (Medium
merchandis Risk)
e retailer (TSCO,
2024)

5 Marshalls Equity MSLH. Building 1.1 34.2 15.89 3.4% 0.11 1.27 21.7
Plc. L Materials (Medium
Risk)
(MSLH,
2023)

Table 3: Firm-Specific Analysis

The analysis yielded that Rolls Royce Holdings Plc has achieved higher price to book
ratio of 49.9 in comparison to other financial assets of the portfolio firms, leading positive
investor sentiment about the company’s management and its growth (Doblas et al., 2020).
Similarly, the analysis inferred that United Utilities Plc with 99.9 and Marshalls Plc with 34.2
have yielded higher price to earnings per share (P/E) ratio relative to P/E index. This implies
future growth potential of the firms (Maheswari and Ramya, 2024). All the portfolio companies
have found to yield satisfactory return on equity. However, United Utilities Plc has generating a
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negative ROE of (-1.2) that implies the firm is incurring losses instead of profits as to meet its
financial obligations or interest payments (Saputra, 2022).

The Associated British Foods Plc has generated higher earnings per share (EPS) of 1.96
relative to other financial stocks of the proposed investment portfolio (Rahmawati and Hadian,
2022). The United Utilities, despite of negative ROE has found to exhibit a lowest risk profile of
10.7 in the context of “Environmental, Social and Governance (ESG)” rating. Likewise, Rolls
Royce, Marshalls, and Tesco Plc have ranked in a medium risk category in the pursuit of ESG
rating. On the other hand, Associated British Foods Plc, despite of highest EPS relative to
portfolio, has ranked at 31.2 with high risk category of ESG rating. This implied that the
company has failed to attract investors due to weak environmental stewardship, lack of social
responsibility, as well as ineffective governance practices (Gibson Brandonet al., 2021).

6. Investment Portfolio Construction

The proposed investment portfolio comprising of 50 year Gilt Bond Yield as well as
stocks of UU, RYCEY, ABF, TSCO, and MSLH have provided annual returns based on stock
prices. A 50 year Gilt Bond Yield with 3.69% and United Utilites Plc with 0.89% have generated
highest of annual returns, thus, weighed 50% and 30% respectively (SEE APPENDIX 5).

The table “portfolio summary” has provided key metrics based on calculations that
exhibited performance of the supposed portfolio, expected return, risk allocation, as well as risk-
adjusted performance. All of these mentioned metrics assist the investor to make informed
decisions by evaluating the suitability and attractiveness of the given portfolio (Dzicher, 2021).
The expected return of the portfolio (expressed in percentage %) is found to be 2.16%. This
states that investors expect to earn 2.16% of an average return from the portfolio over a certain
period of time (Kadan and Tang, 2020). The Standard Deviation metric measures the risk or
volatility of the overall portfolio, indicating that how much return yield from the portfolio
deviates from the expected return (Stamos and Zimmerer, 2021). The standard deviation of this
portfolio is 11.34%, which is high, highlighting that the portfolio is comprised of riskier/volatile
financial assets.

Portfolio Summary

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 Expected Return 2.16%
Standard Deviation 11.34%
Risk-free rate 0.35%
Total Weight 100.0%
Sharpe Ratio 15.942%

Table 4: Portfolio Summary

The other metric, risk-free rate (expressed in percentage %), is usually a government
bond, which represents that the investor is expecting to obtain a return with “no risk of financial
loss” (Salisu et al., 2022). A 0.35% risk-free rate is obtained. A metric, total weight entails sum
of the weight of all financial assets in a given portfolio. A total weight in this investment plan is
100%, which highlights a uniform distribution of weights across a diversified portfolio.
Similarly, a Sharpe ratio evaluates a risk-adjusted return relative to its volatility. A higher Sharpe
ratio indicates better risk-adjusted performance (Hatami et al., 2022). A Sharpe ratio of 15.942%
is obtained that states portfolio has yielded a high risk-adjusted performance relative to its
volatility. Thus, the clients are suggested to invest £10M funds in a risk free asset of GB50YT,
£6M in stocks of United Utilities, and £1 M in each of the remaining companies, Rolls Royce,
Associated British Foods, Tesco, and Marshalls as well (SEE APPENDIX 6).

7. Conclusion
The report by using a CAPM model has intended to develop a stable and balanced asset
portfolio management for clients under a budget constraint of £20M fund, involving six financial
assets of diversified companies and one risk free asset. The report has provided that the macro-
economic factors in the UK, such as improved and increasing GDP growth, lower interest rates,
as well as low employment rates have supported financial asset investment, through higher
corporate profits, stable earnings, and hedge against inflation. Similarly, the industry specific
analysis has provided that the United Utilities with a low beta coefficient 0.41 is prone to a low
systematic risk, thus ideal for investors to invest in that company. A given diversified proposed
portfolio has exactly matched with the client need analysis, risk-neutral as well as maximising
portfolio return.

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7.1 Recommendations
Following recommendations are provided to clients as to yield a stable, resilient, and
balanced returns while minimising possible risks in a proposed asset portfolio;

 Review of Company Specific Risks

As United Utilities ranked in a low systematic risk profile company due to low beta
coefficient, therefore, an ongoing review of possible risks, such as regulatory, operational, or
competition are needed to be assessed. These risks, either directly or indirectly could influence
its performance and other companies as well, thus lag behind effective asset management
portfolio (Koumou, 2020).

 Regular Monitoring of Macroeconomic Factors

Macroeconomic factors directly influence the performance of asset portfolio, therefore, it is

essential to monitor these factors and adjust asset allocation as to yield maximum return and
minimise associated risks (Lambert and Platania, 2020).

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ABF, p (2024) Associated British Foods Plc Company ESG risk rating - sustainalytics,
Sustainalytics. Available at: https://www.sustainalytics.com/esg-rating/associated-british-foods-
plc/1008409441 (Accessed: 06 March 2024).
Andrei, D., Cujean, J. and Wilson, M. (2023) The lost capital asset pricing model. Review
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Associated British Foods , P. (2024) Associated British Foods plc, Financial Times.
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(Accessed: 06 March 2024).
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https://www.statista.com/statistics/281992/employment-rate-in-the-united-kingdom/ (Accessed:
06 March 2024).
Doblas, M.P., LAGARAS, M.C.P. and ENRIQUEZ, J.A. (2020) Price to earnings and
price to book ratios as determinants of stock return: The case of financial institutions listed in
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Dzicher, M. (2021) Sampling methods for investment portfolio formulation procedure at

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Easley, D., Michayluk, D., O’Hara, M. and Putniņš, T.J. (2021) The active world of
passive investing. Review of Finance, 25(5), 1433-1471.

Gibson Brandon, R., Krueger, P. and Schmidt, P.S. (2021) ESG rating disagreement and
stock returns. Financial Analysts Journal, 77(4), 104-127.

Goel, R.K., Saunoris, J.W. and Goel, S.S. (2021) Supply chain performance and
economic growth: The impact of COVID-19 disruptions. Journal of Policy Modeling, 43(2),
298-316.

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Macchiarelli, C., Naisbitt, B., Boshoff, J., Holland, D., Hurst, I., Liadze, I., Mao, X.,
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 O’Neill, A. (2023) United Kingdom - inflation rate 2028, Statista. Available at:
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 Statista, F. (2022) Bank Interest Rate Forecast UK 2022, Statista. Available at:
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 Appendices

Appendix 1

Source: (Aaron , 2023).

18
Appendix 2

Source: (O’Neill, 2023).

19
Appendix 3

Source: (Statista, 2022).

20
Appendix 4

Source: (Clark, 2024).

21
 Appendix 5

UU.L TSCO. MSLH.

Security 50 Year Bond RR.L ABF.L L L
Annual 3.69% 0.89% 0.27% 0.29% 0.82% -0.46%
Return
Standard 5.66%
Deviation 20.91% 17.56% 8.79% 6.61% 10.67%
Minimum 5.00%
Weight 5.00% 5.00% 5.00% 5.00% 5.00%
Maximu 50
m Weight 50% 50% 50% 50% 50%

22
Appendix 6

Companies Financing Stock Ticker Nature Weightag Investmen

Assets e t of Fund
Great Britan 50 Bonds/Debt GB50YT=RR Risk-free assets 50% £10M
Year Bond Yield
United Utilites Equity UU.L Water supply and 30% £6M
Group Plc. sewage treatment
Rolls Royce Equity RR.L Defence, nuclear, 5% £1M
Holdings Group power, and civil
Plc. aerospace
Associated Equity ABF.L Food processing and 5% £1M
British Foods Plc. retailing
Tesco Plc. Equity TSCO.L Grocery and general 5% £1M
merchandise retailer
Marshalls Plc. Equity MSLH.L Building Materials 5% £1M

23