Investments in Pension Fund

Blue Chip Stocks

According to Investopedia, a blue chip stock is a significant corporation that has been around for a long time and is financially strong and stable. Furthermore, the company is the market leader in its field, or is one of the top three corporations in the sector (Staff, 2017). A blue chip stock is also known for paying consistent dividends that grow over time. A blue chip stock is typically listed in the most prestigious market indexes. In Canada, a blue chip stock may be listed on the TSX-60. A blue chip company is considered a safe investment however the financial crises of 2008 has shown that even the safest companies could prove to be vulnerable.

Growth Stocks

Investopedia defines Growth stock as a stock which grows above average rate than the market. Unlike Blue Chip stock, a growth stock may not be characterized by dividend payments, as it tends to reinvest all of its profits to maintain its growth rate (Staff, 2017). Growth stocks could be termed risky on the ground that investor are dependent on the growth as the only measure of their return. If the growth rate is not maintained or the growth stops, the investors may witness a reduction in the value of their investment.

Value Stocks

Investopedia defines value stock as the stock whose intrinsic value is greater than its market value. The actual features of a company such as dividends and earnings are expected to perform better than what market currently anticipates. As a result the value of the stock is considered under-priced or over-priced depending on the fundamentals. The investors then invest in value stock in anticipation of increased value in future. The value stock may be considered riskier than growth stock. It is considered difficult that market may change its perception towards a stock overnight or in near future. Furthermore, even if the company performs better than expectations, their always remains a risk that such performance may never capitalize.

Pension Fund Investment

All three types of stocks have the potential to be part of a pension fund. It is however suggested that as the risk level of all three stocks is different, the proportion of investment in three stocks should be in this sequence. Blue Chip > Growth > Value.

Question 2

This summary is focused on the performance of the McMaster University Pension Plan and the current Investment manager along with the concerns and recommendations associated with the overall investment process.

The position of the Investment Manager

ABR investment management is managing the pension plan of McMaster University for a couple of years. Some issues, in the recent past have forced to re-evaluate the position of the firm in more depth. As per the recent report of the investment manager, two recent junior research analysts have left the company’s Canadian equity investment team. This might not apparently be a case of greater concern as the Research analysts were working at junior positions and were also recent graduates who may have switched in search for better opportunity. What is actually a matter of concern is the external report with respect to management issues at ABR. For the last two years, the staff turnover at the firm has increased to an unprecedented level. Before dwelling into facts and matter associated thereof, it could safely be argued that the management at ABR investment manager is going through serious crises and this is evident from staff turnover. It is also not difficult to understand that staff turnover is directly associated with the staff performance. A greater turnover indicates possible deterioration in performance of the firm. This is a matter of concern for the pension plan being managed by the firm as the management issues at firm may directly impact the performance and return of the pension plan.

The external report suggests:

“In January, 2007, the Canadian equity team portfolio manager, Ross Webb, left after nearly 14 years with the firm. He moved to a competitor firm where he has assumed portfolio responsibilities there”.

The switching in professional career is not a surprising fact. However, a long association of almost 14 years is a matter of importance. An identification of the reason of disassociation would be worthwhile. If the investment sub-committee could contact Ross Webb and discuss with him the current management crises at ABR along with his reason to leave the firm after a long association, this might provide quite insightful information regarding firm’s present position.

The external report provides:

”A new Canadian equity team portfolio manager, Rick Lam, joined the firm in October, 2007. Since that time, however, all of the analysts who have worked on that team, including the last two junior researchers, have left the company; all but two of the positions have been replaced. At this time, the Canadian equity team comprises one portfolio manager and four analysts”.

This is a matter of serious concern for the investment sub-committee. The committee is interested in finding out the reasons behind the resignations of all the analysts after the appointment of new portfolio manager. Without the identification of reasons of such, it is difficult to believe that same situation may not arise again. The ABR management needs to clarify whether it is a lack of understanding between the portfolio manager and his team or any other issue such as behavioral problem which has led to all the analysts under the manager leaving the firm. An appropriate explanation regarding this is therefore extremely required.

Under Resourced Equity Team

The Canadian equity team presently comprises one portfolio manager and four analysts. The standard number of analysts at the firm is six. This shows that the equity team is under-resourced and is over-performing. This becomes further concerning in the case when all analysts are hired recently. The ABR management has to provide a satisfactory response in this regard as an inexperienced and novice team of research analysts, being headed by a portfolio manager whose past track recorded cannot be termed ideal, might not be able to provide a satisfactory and bright picture for the fund in the future.

Investment in Real Estate

As per the McMaster University Statement of Investment Policies (SIP), Real Estate investment is not included in the permitted asset mix. The report by ABR suggests that a little portion of 2% has been invested in real estate. It is, however, important to note that real estate investment, however small it may be, is a risky investment and may not be a suitable asset class for a pension fund. The ABR management also needs to provide an explanation regarding their investment decision in the Real estate sector.

I recommend that the Investment Sub-committee should have a detailed discussion with the ABR. The Sub-committee should ask for clarification regarding the management crises at ABR. The fund manager should be provided ample opportunity to satisfy the Investment sub-committee. If the majority of the sub-committee approves the statement of the fund manager, committee’s trust in the fund manager should be further continued. If the ABR management is unable to satisfy the Sub-committee, a new fund management company might be the only alternative solution in this situation.

Question no: 3

Socially responsible investing refers to investing in ethical and socially responsible companies. The pros and cons of socially responsible investing are as follows.

Pros of Socially Responsible Investing

The greatest benefit of socially responsible investing is peace of mind. The investors are not only focused on the returns but on the ethical and social position of their investment as well. For example, McMaster University may invest in a paper making firm which always follows sustainability and environmental standards (Mercadante, 2017). This way, the pension fund would be aware of the fact that the money of its employees is not only generating return for them but is also contributing towards the environment and society.

Socially responsible investing is a way to improve the society by directing and focusing on companies that behave ethically. This way more and more funds would be available for such companies and they could increase their operations. On the other hand, companies adopting unethical practices would be gradually forced to move out of the business as lesser and lesser funds would be available to them.

Socially responsible investing is a way to improve the society without directly involving in the process (”Ethical Investing: Benefits And Drawbacks Of Ethical Investing“, 2017). The investors could focus on their respective investments or other official responsibilities while their investment in the ethical companies would be ensuring a contribution to the society.

Cons of Socially Responsible Investing

The greatest issue with socially responsible investing is that the return of the ethical firm may not be higher. This can create a dilemma for the investor as better return is the prime objective of any investment.

Socially responsible investing may lead to ignoring various high return investment opportunities.

It is difficult to term a company completely socially responsible or irresponsible.

Socially responsible is a subjective phenomenon which differs for every company.

Recommendations

Socially Responsible Investing seems like a win-win situation as it is not only focused on providing good returns but also contributes to society. However, it is recommended that the investment committee should consider all relevant facts before moving to ethical investing. At first, it is important to evaluate what is the basic objective of the investment team and through which particular method it strives to achieve this objective. At present, the following are the financial objectives of the investment committee.

To achieve a total rate of return sufficient to support stable and growing expenditure for University purposes.

To preserve the original capital in real terms.

To provide capital growth.

It could be clearly seen that ethical investing is not the main financial objective of the University at present. However, there is no reason that such may not be considered by the investment committee. At first, the investment committee should evaluate both conventional and socially responsible stocks to analyze the investment opportunities presented before it. In the next step, it should analyze the possible return combinations it could achieve from both types of stocks. Three possible scenarios could emerge after the evaluation. If socially responsible stocks are expected to provide better returns as compared to conventional stocks and at the same time are also able to support stable and growing expenditure for University purposes, which is one of the prime financial objectives of it, the investment committee should move towards ethical investing as it is serving a dual purpose of providing higher returns than conventional stock and also contributing towards ethical business. In the second scenario, both types of stock may provide the same type of returns. In this case, the investment committee would have the choice to move completely towards ethical investing, conventional investing, or a combination of both. In the third scenario, the conventional stocks may be expected to provide higher returns as compared to socially responsible stocks. In this scenario, the pension would have only one option available to invest in conventional stocks as socially responsible stocks might not be able to achieve the financial objective of the University. It is, therefore, suggested that the investment committee should make a prudent decision after considering all the related facts and the future potential of both types of stocks.

The draft policy should standardize the procedure of ethical investing. It should, at first, define what ethical investing is. It should then create a benchmark according to which a company could be considered socially responsible or conventional. The draft policy should also highlight the methods that it would implement to analyze the performance and potential of socially responsible stocks.

References

Ethical Investing: Benefits And Drawbacks Of Ethical Investing. (2017). Investopedia. Retrieved 10 April 2017, from http://www.investopedia.com/university/ethical-investing/ethical-investing10.asp

Mercadante, K. (2017). The Pros and Cons of Socially Responsible Investing. The Dough Roller. Retrieved 10 April 2017, from http://www.doughroller.net/investing/pros-and-cons-of-socially-responsible-investing/

Staff, I. (2017). Blue-Chip Stock. Investopedia. Retrieved 10 April 2017, from http://www.investopedia.com/terms/b/bluechipstock.asp

Staff, I. (2017). Growth Stock. Investopedia. Retrieved 10 April 2017, from http://www.investopedia.com/terms/g/growthstock.asp