Security Selection and Asset Allocation

8/8/2019 Security Selection and Asset Allocation

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Uzoamaka Okenwa

Project 2 Asset Allocation and Securityselection

Section I

Asset Allocation

For the asset allocation scheme, I used the top down approach. By

using this approach I will allocate 40% of the total funds to REITs and then

allocate 40% to Large CAP Growth stocks and the remaining 20% will go

to the Large CAP Value stocks. I will then choose the stocks that fall into

those categories and then split the funds in each category. For each of

these categories, I will invest in different industries, these industries

include; REIT retail, Healthcare and residential, Internet Information

Providers, Oil and Gas, Medical Instruments and Supplies, and finally

Financial industry.

I have chosen to include REITs in this portfolio for two reason, first income

and secondly diversification. REITs are dividend-paying stocks that will provide a

stream of income. Besides the income reason, a study of investor returns from 1972

to 2004 showed the decline in correlation between REIT and other asset classes.

According to the study, adding REIT to a portfolio can reduce the risk and boost the

return. REITs are not correlated with Large CAP stocks; hence I decided to invest in


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them. I further diversified into Large CAP growth and Large CAP value. Large Cap

growth stocks are Shares in a company whose earnings are expected to grow at an

above-average rate relative to the market.

Section II

I chose some characteristics to serve as a guideline for selecting the

stocks in this portfolio. I used market cap, price earnings ratio, return on

equity and net profit margin as the characteristics to screen the stocks to

be included in this portfolio. For the REITs I chose a minimum market cap

of $100 million. For the Large cap growth stock I used a market cap

minimum of $10 billion and finally for Large Cap Value stocks a minimum

$30 billion. I also used price earnings ratio as a criteria, however I made

the decision by comparing the P/E of each with other stocks in the same

industry. For return on equity I set a limit of 7% on all stocks, however, I

choose some stocks, which did not satisfy this criterion, but have a proven

record of performance in the past 5 years. Finally, I used net profit margin

as another criteria, with a minimum of 2%.

Section III

Market Cap

Market capitalization is the total dollar market value of all of a

company's outstanding shares. Market cap is calculated by multiplying a
http://www.investopedia.com/terms/m/marketcapitalization.asphttp://www.investopedia.com/terms/m/marketcapitalization.asp


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company's shares outstanding by the current market price of one share. The

investment community uses this figure to determining a company's size, as

opposed to sales or total asset figures.

Price-Earnings Ratio - P/E Ratio

Generally, a high P/E suggests that investors are expecting higher

earnings growth in the future compared to companies with a lower P/E.

However, the P/E ratio does not always tell the whole story by itself. It is

usually more useful to compare the P/E ratios of one company to other

companies in the same industry, to the market in general or against the

company's own historical P/E. It would not be useful for investors using the

P/E ratio as a basis for their investment to compare the P/E of a technology

company (high P/E) to a utility company (low P/E) as each industry has much

different growth prospects.

Return On Equity

ROE is the amount of net income returned as a percentage of

shareholders equity. Return on equity measures a corporation's

profitability by revealing how much profit a company generates with the

money shareholders have invested.

Net Profit Margin

A ratio of profitability calculated as net income divided by revenues, or

net profits divided by sales. It measures how much out of every dollar of

sales a company actually keeps in earnings. Profit margin is very useful
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when comparing companies in similar industries. A higher profit margin

indicates a more profitable company that has better control over its costs

compared to its competitors.

Section IV

Summary Of Companies

Realty Income Corporation, The Monthly Dividend Company is

organized to operate as an equity real estate investment trust (REIT). The

primary business objective of the REIT is to generate dependable monthly

cash distributions from a consistent and predictable level of funds from

operations (FFO) per share. The Companys monthly distributions are

supported by the cash flow from the portfolio of retail properties leased to

regional and national retail chains. The Company has in-house acquisition,

leasing, legal, retail and real estate research, portfolio management and

capital markets expertise.


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Inland Real Estate Corporation is a real estate investment trust (REIT)

that acquires, owns, operates and develops open-air neighborhood,

community, power and lifestyle shopping centers and single-tenant retail

properties. During the year ended December 31, 2008, the Company owned

interests in 144 investment properties, including those owned through the

unconsolidated joint ventures.

LTC Properties, Inc. is a healthcare real estate investment trust (REIT) that

invests primarily in long-term care and other healthcare related properties

through mortgage loans, property lease transactions and other investments.

The Company invests in properties that provide opportunity for additional

value and diversifies its investment portfolio by geographic location,

operator and form of investment. The Company provides mortgage financing

on such properties based on established investment underwriting criteria.

National Health Investors, Inc. (NHI) is a real estate investment trust

(REIT), which invests in health care properties primarily in the long-term care

industry. As of December 31, 2008, it had ownership interests in real estate

and mortgage investments NHI revenues are derived primarily from

mortgage interest income and rental income.

Omega Healthcare Investors, Inc. is a self-administered real estate

investment trust (REIT), investing in income-producing healthcare facilities,

principally long-term care facilities located in the United States. It provides

lease or mortgage financing to qualified operators of skilled nursing facilities


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(SNF), assisted living facilities (ALF), independent living facilities (ILF) and

rehabilitation and acute care facilities

Universal Health Realty Income Trust (the Trust) is a real estate

investment trust (REIT). The Trust invests in healthcare and human service-

related facilities, including acute care hospitals, behavioral healthcare

facilities, rehabilitation hospitals, sub-acute facilities, surgery centers,

childcare centers and medical office buildings (MOBs).

Ventas, Inc., a real estate investment trust (REIT) with a portfolio of seniors

housing and healthcare properties in the United States and Canada.

First Real Estate Investment Trust of New Jersey, an equity real estate

investment trust, engages in the acquisition, development, construction, and

holding of real estate properties primarily in New Jersey, Maryland, and New

York. The companys property portfolio comprises residential apartment

communities and commercial properties, which consist of multi and single

tenanted properties.

Mid-America Apartment Communities, Inc., a real estate investment

trust (REIT), engages in acquiring, owning, and operating apartment

communities primarily in the Sunbelt region of the United States. The

company qualifies as a REIT under the Internal Revenue Code. As a REIT, it

would not be subject to federal income tax to the extent it distributes 90% of

taxable income to its shareholders.


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Senior Housing Properties Trust, a real estate investment trust

(REIT), primarily invests in senior housing properties in the United States.

The trust invests in hospitals, nursing homes, senior apartments,

independent living properties, and assisted living properties. This REIT would

not be subject to federal income tax, if it distributes at least 90% of its REIT

taxable income to its shareholders.

Google Inc. maintains an index of Websites and other online content, and

makes this information freely available through its search engine to anyone

with an Internet connection. The Companys automated search technology

helps people obtain nearly instant access to relevant information from its

online index. The Company generates revenue primarily by delivering online

advertising.

Yahoo! Inc. (Yahoo!), together with its consolidated subsidiaries, is a

global Internet brand. Together with its owned and operated online

properties and services. The Company generates revenues by providing

marketing services to advertisers across a majority of Yahoo! Properties and

Affiliate sites.

eBay Inc. (eBay) provides online marketplaces for the sale of goods and

services, as well as other online commerce, or ecommerce, platforms, online

payments services and online communications offerings to a diverse

community of individuals and businesses.


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CNOOC Limited, together with its subsidiaries, engages in the

exploration, development, production, and sale of crude oil, natural gas, and

other petroleum products in offshore China.

Chesapeake Energy Corporation is a producer of natural gas in the

United States. The Company own interests in approximately 41,200

producing natural gas and oil wells that are producing approximately 2.3

billion cubic feet equivalent (bcfe) per day, 92% of which is natural gas.

Occidental Petroleum Corporation (Occidental) conducts its operations,

through various oil and gas, chemical, midstream, marketing and other

subsidiaries, and affiliates.

Stryker Corporation (Stryker) is a medical technology company with a

range of products in orthopaedics and a presence in other medical

specialties.

Alcon, Inc. (Alcon) is a research and development driven, global medical

specialty company focused on eye care. In July 2008, Novartis AG acquired a

25% stake in Alcon from Nestle SA.

Baxter International Inc. (Baxter) develops, manufactures and markets

products that save and sustain the lives of people with hemophilia, immune

disorders, infectious diseases, kidney disease, trauma and other chronic and


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acute medical conditions. As a diversified healthcare company, Baxter

applies a combination of expertise in medical devices, pharmaceuticals and

biotechnology to create products that advance patient care worldwide.

Shell (Royal Dutch Shell plc) is a holding company, which owns, directly

or indirectly, investments in the numerous companies constituting the group.

Shell is engaged globally in the principal activities of oil and natural gas

industry. The Company operates in five business segments: exploration and

production, gas and power, oil sands, oil products, and chemicals.

Chevron Corporation (Chevron) manages its investments in subsidiaries

and affiliates, and provides administrative, financial, management and

technology support to the United States and International subsidiaries that

engage in fully integrated petroleum operations, chemicals operations,

mining operations of coal and other minerals, power generation and energy

services.

Exxon Mobil Corporation (Exxon Mobil) through its divisions and

affiliates is engaged in exploration for, and production of, crude oil and

natural gas, manufacture of petroleum products and transportation and sale

of crude oil, natural gas and petroleum products. ExxonMobil is a

manufacturer and marketer of commodity petrochemicals, including olefins,

aromatics, polyethylene and polypropylene plastics and a wide variety of

specialty products.


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Bank of America Corporation (Bank of America) is a bank holding

company and a financial holding company. On January 1, 2009, Bank of

America announced the purchase of Merrill Lynch & Co., Inc. On July 1, 2008,

Bank of America completed the acquisition of Countrywide Financial

Corporation.

The Bank of New York Mellon Corporation is a global financial services

company with approximately $928 billion in assets under management and

$20.2 trillion in assets under custody and administration. The Company

operates its business into seven business segments: asset management,

wealth management, asset servicing, issuer services, clearing services,

treasury services and others. In March 2009, it acquired JPMorgan Trust Bank

Limited in Japan from JPMorgan Chase & Co.

Wells Fargo & Company (Wells Fargo) is a financial holding company

and a bank holding company. The Company is a diversified financial services

company providing retail, commercial and corporate banking services

through banking stores located in 39 states and the District of Columbia. On

December 31, 2008, Wells Fargo acquired Wachovia Corporation.


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Section v

Asset Allocation and Security Selection

40% inREIT Company

%Allocation $ Allocation

1 Realty Income Corp. 3.50% $350,000.00

2 Inland Real Estate Corp. 4.50% $450,000.00

3 LTC Properties Inc. 5.00% $500,000.00

4 National Health Investors Inc. 4.00% $400,000.00

5Omega Healthcare InvestorsInc 4.00% $400,000.00

6Universal Health RealtyIncome 4.00% $400,000.00

7 Ventas Inc. 6.00% $600,000.00

8 First Real Estate Investment T 3.00% $300,000.00

9Mid-America ApartmentCommunit 4.00% $400,000.00

10Senior Housing Properties

Trus 2.00% $200,000.00

40.00%$4,000,000.

00

40% in Large Cap Growth

11 Google 5.00% $500,000.00

12 Yahoo 4.00% $400,000.00

13 eBay Inc 4.00% $400,000.00

14 Cnooc Ltd 6.00% $600,000.00

15 Chesapeake 5.00% $500,000.00

16Occindental PetroleumCorporation 4.00% $400,000.00

17 Stryker 5.00% $500,000.00

18 Alcon Inc 4.00% $400,000.00


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19 Baxter International 3.00% $300,000.00

40.00%$4,000,000.

00

20% in Large Cap Value

20 Shell 3.00% $300,000.00

21 Chevron 3.00% $300,000.0022 Exxonmobil 4.00% $400,000.00

23 Bank Of America 4.00% $400,000.00

24 Bank Of New York 3.00% $300,000.00

25 Wells Fargo 3.00% $300,000.00

20.00%$2,000,000.

00

Total funds 100.00%$10,000,000

.00

40% in REIT

DescriptionMarketCap P/E

ROE%

Net ProfitMargin (mrq)

REIT - Retail 46.89B 18.8 9 14.5

1 Realty Income Corp. 2.30B 20.7157.54

6 41.529

2 Inland Real Estate Corp. 516.14M 15.388

9.29

6 7.056

REIT - HealthcareFacilities 19.99B 16 10.1 36.3

3 LTC Properties Inc. 459.28M 16.0089.15

3 58.908

4National Health InvestorsInc. 809.21M 14.147

12.664 84.741

5Omega HealthcareInvestors Inc 1.28B 16.61

11.308 31.954

6Universal Health RealtyIncome 402.73M 34.597

7.635 10.894

7 Ventas Inc. 3.86B 16.648

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5 25.652REIT - Residential 24.82B 12.5 13.3 26.2

8First Real EstateInvestment T 105.87M 17.039

25.858 14.15

9Mid-America ApartmentCommunity 980.86M 54.044

7.147 8.179

10Senior Housing Properties

Trust 2.00B 16.3577.14

7 44.388


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40%in Large Cap Growth

Internet InformationProviders

11 Google 120B 28

16.0

3 19.39

12 Yahoo 20.05B 48.75 4.08 2.32

13 eBay Inc 18.38B 10.5515.5

2 20.83

Oil & Gas

14 Cnooc Ltd 50.51B 8.2323.3

4 34.45

15 Chesapeake 12.28B 19.26 4.62 6.22

16Occindental PetroleumCorporation 45.43B 6.74

27.29 27.25

Medical Instruments &

Supplies

17 Stryker 14.84B 13.3915.3

5 17.08

18 Alcon Inc 26.4B 13.0450.7

5 32.52

19 Baxter International 50.60B 15.1530.6

4 15.3120%in Large Cap Value

Oil & Gas

20 Shell 133.38B 5.0420.9

8 5.78

21 Chevron 130B 5.5629.2

3 8.77

22 Exxonmobil 326.05B 7.6338.5

8 9.47

Financial

23 Bank Of America 56.11B 14.05 1.81 5.51

24 Bank Of New York 32.16B 22.81 5.15 10.56

25 Wells Fargo 79.83B 24.15 4.09 6.34

Section VI

Portfolio Expectation

It is evident that stocks follow a random walk, however, the

characteristics which are used as a criteria for selecting the stocks in a


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portfolio, gives an idea of the future performance of the entire portfolio. I

have selected stocks whose company has shown a track record of high

performance.

I expect that this portfolio will perform very well given the quality of

stocks that it contains. Even though companies are going through tough

times now, it is important to notice that since the new administration came

into office, many policies have been put in place to make the economy

better. Therefore, in the long run, these companies will have even better

growth than what is seen at the moment.

Documents

Security Selection and Asset Allocation