B) Investment Management

Investment management relates to the selection of assets in which funds will be invested by a firm. The assets which can be acquired fall into two broad groups: long-term assets and short-term, or current assets.

Nowadays investors face a lot of choices. Along with stocks and bonds of large companies and government debt securities, investors can now own stocks of small companies, the stocks and bonds of companies headquartered in foreign countries, high-yield bonds, collateralized mortgage obligations, floating-rate notes, swaps, puts, calls, and futures contracts. The list is seemingly endless and it continues to grow. Furthermore, the ability to purchase these securities has become both less expensive and more convenient with the advent of advanced communications and computer networks. The challenge to investors is increasing because the investment environment is becoming more and more complex. With the rapid evolution that the investment industry is undergoing, new securities, markets, investment management techniques have appeared.

When making decisions with regard to what marketable securities to invest in, how big the investment should be, and when the investment should be made, the investor:

• sets investment policy and determines objectives,

• performs security analysis,

• constructs a portfolio,

• revises the portfolio,

• evaluates the performance of the portfolio.

For any type of security, the risk can by reduced by investing in more than one firm. This is called "diversification". An investor with stocks and bonds issued by a number of firms is said to have a diversified portfolio.

Diversification does not eliminate all risks. Events like recession, high interest rates, and so on may depress profits and stock prices of all firms.

Words you may need:

collatcralized mortgage obligation облигация, обеспеченная пулом ипотек

floating-rate note облигация с плавающей ставкой

advent n приход, появление

to construct a portfolio создать портфель

to revise a portfolio пересмотреть портфель

to depress the profits снижать прибыль

Ex. 13. Read the dialogues, sum up their content and act them out.

A) Investment Decision Making

Financial manager. Our company is working on an investment project. What do you think we should take into account in our work?

Consultant: First, I'd like to know something about your project. Could you describe it in general terms?

P.M.: Yes, sure. The project is aimed at investing in fixed assets. The market research we've carried out has revealed that the demand for our products exceeds our supply. So we are intending to buy new equipment abroad, to expand our production facilities and to increase output, which will allow us to increase sales and get higher profits.

Con.: Have you drawn up the capital budget?

P.M.: We are not through yet, but we've calculated the project outlays, estimated the anticipated flow of future benefits from our investments, operational and financial activities.

Con.: What time period do your calculations cover?

P.M.: We proceed from standard service life of major technological equipment, with adjustment for depreciation. In our case, it is five years.

Con.: Any project needs funding, doesn't it? What sources of financing do you intend using?

P.M.: Internally generated funds and borrowed resources. We are going to issue shares and obtain long-tern Rouble and hard-currency loans. The estimates of the actual cash flow has been based on this plan.

Con.: You've adjusted your calculations for inflation, haven't you? What if the inflation rate happens to be higher than the interest rate? You may have problems with creditors.

P.M.: Yes, to avoid the situation, commercial banks insist on monthly interest payments.

Con.: Speaking about the loan repayment I would like to know which loan will be repaid first – the Rouble or the hard currency loan.

P.M.: The one with a higher interest rate.

Con.: Right. Now that you've estimated the real cash flow, you should prepare your company's profit and loss statements as well as balance sheets for each stage of the project.

P.M.: Well, I agree that the profit and loss statement is useful for the evaluation of the project. Is the balance sheet necessary?

Con.: Manuals on project evaluation recommend to do it, UNIDO's manuals in particular. The balance sheet allows to forecast the company's financial position during various stages of the project implementation. Besides, having done it you'll be able to check your estimates.

P.M.: I see your point. The statements are also important from the point of view of taxes. What else should we focus on while working on the capital budget?

Con.: I know from my experience that the key problems in capital budgeting are forecasting sales, calculation of the cost of capital as well as analysis and estimates of cash flow risks.

P.M.: Thank you. I'll tell my staff to be most careful about these things.