FPC008 Investment Advice - Assessment Question

Question 3 Platforms and products (10 marks | Word limit: 400 words)

(a) (i) In the current environment in which most asset classes are offering historically lower returns, Tex is very aware of the need to reduce the costs of investing. Discuss the advantages and disadvantages of using a fund manager compared to investing directly. (2 marks)

(ii) Create a table showing the indirect cost ratio (ICR) and the one-year, three-year and five-year performance of the funds currently in Tex’s ABC Super Fund. What conclusions can you draw from your review? (4 marks)

Note to students: This information can be obtained from the monthly reports from the funds or platforms such as Morningstar and Netwealth. Provide the month-end date upon which the data is based.  

(b) Tex’s friend, Lachlan, has built up a large share portfolio outside of superannuation using margin lending. Lachlan has constantly increased the level of borrowing attached to the portfolio until he reached the maximum level prescribed by the margin lender. He tells Tex that this strategy worked well for a number of years, but he has recently been hit with a margin call. Lachlan has no other assets other than the portfolio and reveals to Tex that he is concerned about losing much of the capital in his portfolio. 

Tex asks you to explain the pros and cons of margin lending.

Required:

(i) Identify two (2) advantages and two (2) disadvantages of gearing. (2 marks)

(ii) Describe three (3) ways investors can meet margin calls. In your response include a discussion of which of these strategies Lachlan will most likely employ. (2 marks)