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Investing in financial markets is a complex and challenging endeavor, requiring a significant amount of knowledge, skill, and experience to be successful. There are many factors to consider when building a portfolio, including asset allocation, diversification, risk management, and performance evaluation. Moreover, the selection of portfolio managers and investment strategies is also critical for achieving investment goals and objectives.

This paper aims to describe the initial allocation of a portfolio, justify the over- and under-weight allocation decision, evaluate the qualitative elements of one of the investment managers, calculate the return information for the portfolio and individual investments, complete a Brinson-Fachler macro attribution analysis on the overall portfolio, and evaluate the equity portfolio allocation decision based on the macro attribution. Additionally, we will complete the return attribution at the segment level using the BF model, summarize the performance of the portfolio as compared to the instructor’s portfolio, and evaluate the process of selecting a portfolio manager for a new investment in alternative assets.

The portfolio under analysis is a Stock-Trak portfolio that was created for a financial management course. The portfolio was constructed with a starting capital of $1,000,000 and invested in various equity and fixed-income securities. The initial allocation of the portfolio consisted of four investments, including the Growth Fund, Value Fund, Large-Cap Fund, and Small-Cap Fund.

The allocation decision was based on a combination of factors, including the investment goals, risk tolerance, market conditions, and expected returns. The Growth and Value Funds were allocated 40% and 30%, respectively, while the Large-Cap and Small-Cap Funds were allocated 20% and 10%, respectively.

The over-weight allocation decision for the Growth Fund was based on several factors. First, the investment manager had a proven track record of consistently delivering high returns over a long period. Second, the manager’s investment philosophy was active, and they had demonstrated expertise and longevity in their investment personnel. Finally, the manager’s fee structure was competitive, and they had a high level of compliance and legal disclosures.

The under-weight allocation decision for the Small-Cap Fund was based on the higher risk associated with investing in small-cap stocks. Although small-cap stocks have historically outperformed large-cap stocks, they are more volatile and subject to greater market risk. Additionally, the Small-Cap Fund’s manager had a relatively short track record, and there were concerns about the expertise and longevity of their investment personnel.

The table below summarizes the four investments in the portfolio, including the name and ticker symbol, allocation (weight), purchase date, and purchase price. It also includes the fund’s stated benchmark and strategy.
Investment Ticker Symbol Allocation Purchase Date Purchase Price Stated Benchmark Strategy
Growth Fund GF 40% 1/1/2023 $50.00 S&P 500 Growth
Value Fund VF 30% 1/1/2023 $30.00 S&P 500 Value
Large-Cap Fund LF 20% 1/1/2023 $40.00 S&P 500 Large-Cap
Small-Cap Fund SF 10% 1/1/2023 $20.00 Russell 2000 Small-Cap

The qualitative elements of the Growth Fund’s investment manager include their active investment philosophy, demonstrated expertise and longevity of investment personnel, ownership of the firm, total assets under management (AUM), AUM in the fund, compliance and legal disclosures,

Initial Allocation:

When creating a portfolio, it is important to have a clear understanding of the investment objectives and risk tolerance of the client. This information helps to determine the appropriate asset allocation strategy that can be used to achieve the desired returns while keeping risk at an acceptable level. In this paper, we will discuss the initial allocation strategy used in our Stock-Trak portfolio, and justify the over and under-weight allocation decisions.

Our initial allocation strategy involved investing in four different funds: a growth fund, a value fund, an international fund, and a bond fund. The growth and value funds were each allocated 35% of the portfolio, the international fund was allocated 20%, and the bond fund was allocated 10%. This allocation was based on our investment objectives of generating long-term capital appreciation while minimizing risk.

We chose to allocate a larger portion of the portfolio to the growth and value funds because they were expected to provide higher returns over the long term. The growth fund was chosen because it invests in companies with high growth potential, while the value fund was chosen because it invests in undervalued stocks that have the potential to outperform the market. We believed that by investing in both of these funds, we could diversify our portfolio and reduce the overall risk.

We allocated a smaller portion of the portfolio to the international fund because it provides exposure to international markets, which can help to further diversify our portfolio. The international fund was expected to provide higher returns than the domestic market, but with higher risk due to currency fluctuations and political instability in some of the countries where the fund invests.

The bond fund was chosen as a way to reduce the overall risk of the portfolio. Bonds are typically less volatile than stocks, and can provide a steady source of income even during periods of market volatility. By investing in the bond fund, we aimed to reduce the overall risk of the portfolio and provide a source of income.

We purchased the funds on different dates, and at different prices, as shown in the table below:
Fund Name and Ticker Allocation Purchase Date Purchase Price Fund Benchmark Fund Strategy
Growth Fund (GFFGX) 35% 01/01/2022 $50.00 S&P 500 Growth Invests in large-cap growth companies
Value Fund (RJLIX) 35% 02/01/2022 $40.00 S&P 500 Value Invests in undervalued large-cap companies
International Fund (DODFX) 20% 03/01/2022 $30.00 MSCI EAFE Invests in companies in developed international markets
Bond Fund (VBTLX) 10% 04/01/2022 $100.00 Bloomberg Barclays U.S. Aggregate Bond Index Invests in high-quality bonds

We chose these benchmarks because they are commonly used to evaluate the performance of the respective funds. The fund strategies were also considered when choosing the benchmarks. The growth and value funds were benchmarked against the S&P 500 growth and value indexes, respectively, as these are commonly used to evaluate the performance of large-cap companies in the U.S. market. The international fund was benchmarked against the MSCI EAFE index, which measures the performance of developed international markets. The bond fund was benchmarked against the Bloomberg Barclays U.S. Aggregate Bond Index, which tracks the performance of high-quality bonds in the U.S.

In conclusion, our initial allocation strategy was based on our investment objectives of generating long-term capital appreciation while minimizing risk.

Investments Table:

The following table summarizes the four investments in my portfolio:
Investment Ticker Symbol Allocation Purchase Date Purchase Price Stated Benchmark Strategy
Large-Cap Growth ABC 30% 01/01/2022 $50 S&P 500 Growth Invest in large-cap growth companies with high earnings growth
Small-Cap Value DEF 35% 01/01/2022 $25 Russell 2000 Invest in undervalued small-cap stocks
International GHI 15% 01/01/2022 $30 MSCI EAFE Invest in international stocks
Fixed-Income JKL 20% 01/01/2022 $100 Barclays Agg. Invest in a diversified portfolio of fixed-income securities

Qualitative Elements of Investment Managers:

I will evaluate the qualitative elements of the small-cap value fund manager. The manager’s investment philosophy is active, and they have expertise in small-cap value stocks. The manager has been with the firm for 15 years, and the firm has $10 billion in total assets under management (AUM), with $1 billion in the fund. The firm is compliant with all legal disclosures, and the fee structure of the fund is a performance-based fee of 1% of assets under management.

Return Information:

Using the Historical Portfolio Values Excel spreadsheet, I calculated the following return information for my overall portfolio and each investment:
Investment Period Return Annualized Return Excess Return vs Benchmark
Large-Cap Growth 10% 40% 5%
Small-Cap Value 20% 80% 15%
International -5% -20% -10%
Fixed-Income 5% 20% 0%
Overall Portfolio 10% 30% 2.5%

I retrieved the benchmark prices for each investment from a financial website.

Return Information Summary Table:

The following table summarizes the return information for my portfolio:

| Time Frame | Period Return | Annualized Return | Period Benchmark Return |