投资于emerging market的策略

The following artile is my team's  recent research report in Emerging market, which focus on 8 Asian countries. the report concentrates on building a portfolio including bond, equity, and cash mangement, in order to effectively go down the risk of investment.


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Aim and the Time horizon
The aim is to prove that decision-making in a widely multinational portfolio of emerging-markets will surely provide a relatively higher rate of investment return (based on the principal of maximisation of return) at a given risk (minimisation of the risk) than that investment return in a single blue-chip corporation in either Australia or the United States.
The time period under consideration is from 10/08/2007 to 19/10/2007, which includes 5 two-week research periods in the written report.

Description of the management big picture
Our group members as a team are looking for an opportunity in the emerging markets portfolio. The initial fund is US$ 100 million. The main asset classes are: bonds, cash and equities. The initial plan is as follows;
1. Total fund is US$100 million
2. Time period: 09/08/2007---19/10/2007
3. Target market: focuses on 8 Asian emerging countries including China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, and Thailand.
4. Initial budget: we invested 50% of the total funds in Asian equities represented by Morgan Stanley Capital Fund ( known as MSCI) indices, 40% of the funds in fixed interest securities represented by the Asian Bond Fund indices and 10% of the funds as a cash investment in the Pac Er Cash Management Trust (NAX, the currency is denominated in EUROS)
Our portfolio benchmark:
The interrelationships among bonds, cash, and equity are as follows;
1. The initial portfolio ratio among cash, bonds and Asian equity is 1:4:5, however, during the period of research, our team will adjust the ratio to achieve our goal of maximizing our return. This means that we will rebalance the portfolio ratios as dictated by the international market conditions.
2. 2007 the sub prime mortgage financial crisis is becoming a widespread international financial problem. This has been associated with a decline in stock markets worldwide, with several hedge funds becoming worthless, with coordinated national bank interventions, and bankruptcy of several mortgage lenders. Under this situation, our team have decided to reduce our risk exposure of investing in emerging markets,
3. our initial choice is as follows;
Asset name Attribute Initial Final choice
Bonds Safer 40% of the fund is based on this less risky asset, with higher returns when compared to the cash return
Cash Safest Cash is the perfect tool to reduce the overall portfolio risk.
equities More risky Maximize return will depend on the MSCI benchmark equity return (Passive Index)

We put a fairly large ratio of our overall funds into the bond market because bonds are a relatively risk free asset. Meanwhile, over the past several years, Asian stock markets have shown an increasing profit return with a relevantly stable volatility, we therefore, decided to put 50% of our funds into the MSCI Asian indexes. Cash management trusts are becoming a popular derivative tool to control liquidity. Our ratio is 10% of the total fund.

Structure of the portfolio
The structure of our portfolio can be divided into 3 main parts, which includes investing 50% of our funds (total fund is 100 million US dollars) in Asian equities represented by the Morgan Stanley Capital Fund (known as the MSCI indices), the second part is to invest 40% of our funds in fixed interest securities represented by the Asian Bond Fund indices (ABF2) and the final 10% of our funds as a cash investment in the Pac, Er Cash Management Trust (NAX, the currency is denominated in EUROS). To achieve the goal of maximizing the return of the portfolio, we will rebalance our portfolio ratio with different weightings during the period of our 10 week research.

Analysing process
Our team surely want to maximize the return, meanwhile, while at the same time minimising risk. We are generally not considered as risk averse; actually we try to find a suitable risk/return relationship among these three assets. From the above description, we understand the risk return trade off between the MSCI Asian indices, the Pan-Asian Bond Index Fund (known as ABF2), and Pac, Er Cash Management Trust in the construction of our portfolio.

Data collection
1. Equity: Based on DataStream on level 3 in the library, we collected the historical price of the MSCI Asian indices, dated from 10th August, 2007 to 19th October, 2007; the first price was the actual closing price on 9/8/07. Since we have to do the two-weekly analysis for equity research, the frequency we use is based on diary data. Meanwhile, we downloaded the 2 year closing price to calculate a suitable mean, which we will use as a proxy for the expected return on the equities.
2. Bonds: the relevant historical bond data are from the official website: http://www.emergingportfolio.com . We download the iBoxx ABF Index Family of eight target Asian countries. Dates are from 10th August, 2007 to 19th October, 2007. The frequency we use is based on diary data. The daily mean, and standard deviation will refer to the closing index during the past 2 years.
3. Cash: Due to the search of DataStream in the library, our group found a Cash Management Trust known as Pac, Er Cash Management Trust (which is an Australian corporation) as the research index, and downloaded the target time period from 10th August, 2007 to 19th October, 2007. Since we have to do the two-weekly analysis for research, the frequency we use is based on diary data.

Expected Returns (CASH, MSCI EQUITY INDEX, ABF)
According to the financial definition, the expected return of stocks is based on the CAPM; the formula is:
E(r) = rf +β(rm- rf)
The risk free rate is 6% and the risk premium is 7.85% (from the long term analysis on the Australian stock market), the β we used is the long-term basis. Regression is used to calculate the expected return, standard deviation and correlations

Meanwhile, in the emerging market of 8 Asian countries, we use the 1-year daily historic closing prices to calculate the daily mean and the daily standard deviation, then we continue to get the annual mean return (=250*daily mean) and the annual standard deviation (=δy =δd * 250 ½ , δd means daily standard deviation). Comparing with 2-week actual returns of MSCI equity and ABF, we believe that the annual mean return can be approximately regarded as the expected return of both the ABF bond and MSCI equity. In the quantitative analysis, I will explain some more in detail.

Actual return
We downloaded the daily historic closing prices from the website of the MSCI Asian index, Asian Bond Fund Index, and PAC, ER Cash Management Trust. Every 2 weeks are 10 trading days, we assume that P1 = the first-day closing price, T10 = the tenth trading day closing price, the actual return over 2 weeks = (P10-P1)/P1*100%. The WACC method is also useful in calculating the specific MSCI or ABF index return due to the consideration of the 8 different indicis. In the quantitative analysis, I will explain some more in detail.

Evaluate the portfolio
We believe that, if the portfolio makes a profit in the research period, then the existence of the investment portfolio is reasonable and vice versa. Meanwhile, external factors probably influence the actual result of our portfolio, for example, the Reserve Bank of America were worried about the Sub prime mortgage financial crisis, therefore, due to a lack of liquidity in the financial markets creating a credit squeeze and the increased exposure to bad debts loaned to questionable debtors interest rates would rise due to the increased risk premium. This had a contagion effect on world markets especially in Europe where they increased liquidity in order to slow the selling off of the US dollar. Hedge funds and mortgage brokers in the Asia Pacific region had serious problems with Rams home loans in Australia unable to raise capital on the markets; they were finally bailed out by the Westpac bank. With the world markets in such a high state of volatility and uncertainty the Federal Reserve Bank of America decided to reduce official interest rates. This action will partly stimulate an increase in the Worldwide Stock Indexes such as the stock indexes of the emerging markets due to the interest rate differential.

Predict the returns
The basic method is to adapt the expected return of the portfolio to the forecast. The useful theoretical application is to use the CAPM approach. However, the multinational investment indexes may be complex and difficult to calculate, I advise to adapt multi-index approach, which consider some financial factors such as interest rate, GDP, CPI index. Multi-index approach can predict expected return more accurate than CAPM. And then we use WACC to get a multi-E(r ) in the emerging countries. Additionally, the common understanding is that the expected return in emerging country is higher than that of developed countries.

• Your decision about different asset classes to develop and restructure the portfolio:
The initial fund is $100 million US dollars, the asset classes were weighted in the following ratios: Cash (10%), equity (50%), and Bond (40%)

We listed the relevant returns of each two-week index during the research period for our portfolio,
two-week index returns of the portfolio
(which include cash, msci and ibf)
　DATE cash msci ibf
10/8/07 To 24/8/07 0.001775 0.003068 0.001802
To 7/9/2007 0.000886 0.052868 0.002096
To 21/9/2007 0.000885 0.072526 0.00054
To 5/10/2007 0.000884 0.018742 0.003865
To 19/10/2007 0.000883 0.022058 0.002064

The above chart is the two-week index returns of the portfolio, which adopted the closing prices of the following eight Asian countries indexes. The MSCI indexes and Iboxx (ABF) indexes, The cash index is referred to the index of Pac, ER Cash Management Trust.

The initial two-weeks is from 10th August to 24th, August. The relevant results are as follows;
Unit: US dollar
cash fund msci fund ibf fund Total fund
10017746.23 50153396.72 40072075.44 100243218

From the first report, our team realized that the MSCI equity profit is higher than the other two assets, therefore, our team is increasing the MSCI ratio from 50% to 60%, meanwhile, the bond ratio is decreasing to 30%, the cash ratio is still 10%, of the balance of the total fund, before the next evaluation and report, the asset classes were weighted as follows;
Unit: US dollar
Cash MSCI ABF
10%*100243218=10024322 60%*100243218= 30%*100243218
10024321.84 60145931.04 30072965.52

During the second two-week period from 24th August to 7th September, we realize that the MSCI equity profit is higher than the other two assets, we retain the above ratio. The results are as follows;
cash fund msci fund ibf fund sum=
10033200.8 63325731 30135990 103494921.9

The third period is still weighted in the above ratios; the results are as follows;
cash fund msci fund ibf fund sum=
10042079.7 67918513 30152274 108112867

The fourth period weightings remain the same as above; the results are as follows:
cash fund msci fund ibf fund sum=
10050958.7 69191475 30268802 109511235.5

The fifth two week period retains the same weightings: the results are as follows;
cash fund msci fund ibf fund sum=
10059837.6 70717713 30331292 111108842.5


applications’ of quantitative and qualitative analysis in assessing the construction of the portfolio
A:
Our team did the quantitative research; the direct results will be showing in the following chart, then the next paragraphs we will explain the process.
 10-week return report:
return Cash MSCI Bond
Actual return 0.005313 0.1693 0.01036
Expected return 0.00434 0.08435 0.00707
As a clear result, our team earn 1108842.5 US dollar, which is equal with 11.1% net profit rate of return in my portfolio investment in 10-week period.

Asian Bond Fund expected return can be concluded in the following chart. The key method is to adapt 2-year 500 closing prices to get the daily mean and daily standard deviation, and then convert into annual mean return, which we estimate it as the expected return of ABF. Time period is from 19/10/2005-19/10/2007, which includes 500 closing prices.
• Expected return of ABF
Annual Asian bond fund expected return= 0.03535529
converted into 10-week expected return= 0.007071058
• Actual return of ABF
Time period is from 10/08/2007 to 25/10/2007; the relevant closing prices refer to the Iboxx China, Iboxx Hong Kong, and other 6 Asian Iboxx indices. We calculate each
Two-week results, then assume that P1= the first-day closing price, T10= the tenth work-day closing price, the actual return of 2 weeks = (P10-P1)/P1*100%. WACC method is also useful to get the specific ABF. The results as follows;
Country ratio actual return of each country actural return
China 0.1124 -0.001773 -0.0001992
thailand 0.0992 -0.0014 -0.0001389
singapor 0.1822 0.0182967 0.00333366
philippines 0.0496 0.036155 0.00179329
malaysia 0.107 0.0023713 0.00025373
Korea 0.2067 0.00903 0.0018665
Hong Kong 0.183 0.033595 0.00614789
Indonesia 0.0599 0.022571 0.001352

ibf ibf fund
24/08/2007 0.001801886 40072075.44
7/09/2007 0.002095728 30072965.52
21/09/2007 0.000540356 30135990.26
5/10/2007 0.003864643 30152274.43
19/10/2007 0.00206449 30268802.22
sum 0.010367104 30331291.87

Second part is MSCI Asian Index.
Expected return as follows;
MSCI ASIAN INDEX
DAILY MEAN 0.00389,
The approximate 10-week return of MSCI = daily mean*10 week work day(5*10)= 0.08435
ANNUAL MEAN 0.97251

DAILY ST DEVIATION 0.01687
ANNUAL STD 0.2667

INDEX WEIGHTS
KOREA 23.27% HK 18.35%
CHINA 10.2% SINGAP 8.76%
MALAYS. 5.82% THAI 3.39%
INDONES 1.95% PHILIPP 0.57%

Base on lif=1.0(lif means limited investability factor)

The market weights are dependent on a combination of the following factors.
Size of local market, market liquidity, market openness, reviewed annually bond.

Actual return of MSCI:

msci msci fund
24/08/2007 0.003068 50153396.72
7/09/2007 0.052868 60145931.04
21/09/2007 0.072526 63325730.9
5/10/2007 0.018742 67918512.87
19/10/2007 0.022058 69191474.61
sum 0.169263 70717712.99

Qualitative analysis
The qualitative aspects of the portfolios construction were very important in analysing the quantity and quality of the various assets included in the portfolio.
The bonds represented by the Asian Bond Fund ABF2 were Sovereign and Quasi-Sovereign issues in local currencies they had a minimum time to maturity of 1 year. The Quasi-Sovereign bonds had to have an investment grade rating from Fitch, Moody’s or Standard & Poors. Unrated Quasi-Sovereigns were allowed by the fund if Government guaranteed. The market weights for each countries index were dependent on a combination of the following factors; the size of the local bond market, market liquidity, Sovereign local debt rating, market openness. The weights are reviewed annually and the indexes rebalanced monthly. Although each country are using their own accounting standards they are converging toward IFRS with Singapore and Hong Kong already fully converged, this creates confidence and liquidity via standardisation, accountability and transparency. The equities are represented by the
MSCI AC (All Country) Far East ex Japan Index which is a free float-adjusted market capitalization index that is designed to measure equity market performance in Asia, excluding Japan. As of June 2006 the MSCI AC Far East ex Japan Index consisted of the following 9 developed and emerging market country indices: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. The weights of each country index have been worked out after taking into account changes to Taiwan’s Limited Investability factor. The cash index is referred to the index of Pac, Er Cash Management Trust, which was downloaded from DataStream computer. The Cash currency is EURO, it means that team need to consider the problem of currency management because our investment fund is US dollar.

Currency Management Strategy
In our investment portfolio, initially 100 million US dollars have been invested in the eight Asian emerging market countries, therefore, the currency risk is one of the significant risks to the portfolio. Then, how to make the right currency management strategies and decisions using very diverse methodologies that take into account such variables as Interest rates, Forward rates, Interest rate parity and Purchasing power parity. In regard to our portfolio, the major issue is how to deal with the foreign exchange risk through measuring the right exposure to the risk. There are usually two ways to measure the risk. One is the Accounting exposure. The other is the Economic exposure. However, Economic exposure is more important for our portfolio, as it measures the rate that the value of a security will decline due to an unexpected change in relative foreign exchange rates. Our equity ratio is 60-70% of the total fund, additionally, our Cash Management Trust uses EURO’S, this forces us to consider expected changes in exchange rates in forecasted cash. There are two methods to deal with this exposure, one is simply to ignore the exposure, this method may be appropriate if Foreign exchange movements are expected to be modest and the EURO amount of the exposure is small relative to the cost of hedging and the local currency is expected to depreciate. Secondly, we may hedge the exposure which includes hedging with forward contracts as well as hedging with futures contracts and hedging with foreign currency options.

Comparison of expected return with outcome performance of a benchmark portfolio index
During this 10-week research period, our team earned 11.1% profit rate of return. As the comparison expected return, our team refer to Bond Track (ABF), Equities Track (MSCI Asian Index), and Cash Track (Pac, Er Cash Management Trust) as our benchmark portfolio index. The relevant expected returns are bond (0.707%), equity(8.435%), and cash (0.234%). Actual track return has a significant advantage than the return of benchmark portfolio index. Our research return is higher than the target expected return of these three assets in 8 eight Asian countries. As a conclusion, investing in the emerging market will be getting higher returns in the emerging markets than target expected track index. Meanwhile, the return of equity is higher than the other two assets.


Reference:

o Jaime Sabal, Financial decisions in emerging markets, New York : Oxford University Press, 2002.
o Emerging Industries and Technologies Forum, (1999 : Canberra, A.C.T.) http://www.industry.gov.au/library/content_library/1_Emerging_Industries_and_Technologies_Forum.pdf
o The emerging markets monitor (Online), http://web.ebscohost.com/ehost/detail?vid=1&hid=112&sid=44d8ee9b-a9d6-4af5-a3b1-7c28882bc997%40sessionmgr104
o http://www.msi.com
o http://www.emergingportfolio.com
o http://www.asx.com