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In recent years, the global fund sector has continued to register robust growth in many countries with developed financial markets. Collective investment schemes are becoming the most preferred investment vehicles for investors because of their obvious advantages including diversification, professional management of investments, liquidity and investment advice for investors and superior returns (Roll, 2008). Indeed, as by the end of 2011, the global investment fund industry was worth US $11.7 trillion which translates to 17 percent of primary securities holdings around the world. However, recent events in international financial markets and the prevailing global economic conditions have made the investment environment increasingly uncertain and more difficult to predict for fund investors. Since most investors are risk averse, this situation has impacted negatively on the flow of funds to investment schemes. On the other hand, the number of fund investors liquidating their shares is on the rise (Rhodes, 2005).

Although the global recession of 2007 looks like a thing of the past, its effects on investor confidence and investment activity still hang around. In fact, the world seems to be still stuck in the recession and the few signs of complete recovery evident are shrouded in uncertainty and the risk of falling back into an even deeper recession (Remolona, Kleiman and Gruenstein, 2009). Many major economies including the U.S., European economies and economies of the emerging markets such as China, Singapore, India and Brazil continue to post high rates of unemployment and low activity in major economic sectors including housing, manufacturing, financial and the service sector (Quigley and Sinquefield, 2011). The European debt crisis affecting Greece, Spain and Italy has also had a substantial effect on investment in the Euro zone and around the globe. The full impact of this crisis is yet to become full-blown as a result of the efforts of the European Union members to avert the worst of the crisis. Both the global economic slowdown and the European debt crisis have had an impact on fund investments by reducing financial markets activity in general, not only in the Euro zone but around the globe, including the US.

Issues Facing Fund Investments in the US

There are several key issues affecting the investment fund sector in the US. These include: laws and regulations, competition from the banking sector, level of education, wealth of the population, the age of the investment fund industry, security trading costs and the GDP of countries forming the US.

Laws and regulations

Recent legislations by the US government aimed at protecting fund investors have been a boon to the investment fund industry in this region. These laws raised investor confidence in fund investment by increasing disclosure requirements, making fund managers more responsible and accountable for fund assets, reducing conflict of interests between funds managers and investors. The effect of these laws has been to increase the level of investment inflows into these schemes.

Competition

The fund industry in the US and elsewhere in the world faces stiff competition from the banking sector since banks offer substitute products to fund investors. A concentrated banking industry, as in the US, offers more competition to the fund sector than a less concentrated one since the former is allowed by regulation to offer products offered by investment funds. Studies show that growth of the funds sector is higher in those countries where investment funds face lower competition from the banking industry than in those countries where competition is higher (ShUSla and Trzcinka, 2006). Thus, a concentrated banking sector is one of the reasons why the fund industry has taken a long time to develop in the US as opposed to its rate of growth in other countries like the US.

Level of Education and Wealth of the US population

The level of education and wealth of a countryís population are positively related to growth in investment funds industry (Volkman and Wohar, 2010). Thus countries whose population is more educated and well-off (e.g. the U.S.) tend to have higher rates of growth for the funds sector than those with lower levels of education and wealth. The effect of education on investment funds growth is based on the fact that education is important in understanding investments and also in gaining financial literacy. The degree of wealth on the other hand determines the amount of disposable incomes that individuals are willing to commit to investment in securities. The US population has been experiencing gradual rise in both the levels of wealth and education and this trend is expected to continue into the foreseeable future. As a result, the funds sector in the US also experienced constant growth in the past. The momentum of this growth is expected to be maintained into the near future.

Age of the Investment Funds Industry

As past studies have indicated, the age of the investment funds industry is positively related to the level of development of this sector (Warther, 2005). Consequently, countries where investment funds were introduced early have a more sophisticated funds sector compared to countries where investment funds were introduced recently (Rolls, 2004). In fact, since the US was the first country to introduce investment funds, age of the funds sector is one of the reasons the US funds industry is more developed than that of the US (Sharpe, 2007). Thus, the US industry is relatively young but it is expected to expand over the years.

Security Trading Costs

The transaction costs incurred in the exchange of securities also affect the rate of growth as well as development of investment funds. The level of securities trading costs depends on the efficiency of the financial markets in which transactions are taking place (Treynor and Mazuy, 2006). More efficient financial markets have lower transaction costs making buying and selling of securities more attractive. In contrast, the less efficient financial markets have high transaction costs. This situation is unfavorable to investors since it increases the liquidity risk of holding securities. Investors have always preferred to hold those securities which can be easily converted into cash without significant loss of value (Sirri and Tufano, 2003). The US financial market is relatively efficient and, as a result, its trading costs are substantially low. Therefore, it provides a favorable environment for growth of investment funds. Moreover, the advent of internet technology in security trading has significantly reduced trading costs enabling financial markets to offer more liquidity to investors.

The GDP of Countries forming the US

Countries forming the US, namely England, Scotland, Wales and Northern Ireland have seen modest but constant economic growth in the past few decades. Over the years, the economies of these countries have proved to be stable and this has had a great impact on the investor confidence. Also, the per capita incomes of the US population have been rising gradually over the years and more people have now taken to investing in securities than the case was in the past. Stability in these economies has been a boon to the funds industry and it is one of the factors predicted to drive growth in this sector in the future.

Asset Allocation

Asset allocation refers to the allotment of investment funds among different asset classes such as equities, bonds, cash and the adjustment of the amounts in different asset classes over time to take advantage of price variations (Zheng, 2009). There exist two forms of asset allocations, namely strategic asset allocation and tactical asset allocation (Wermers, 2009).

Strategic Asset Allocation

Strategic Asset Allocation entails selecting the fundís investment policy regarding the asset classes to invest (Company, 2006). It is a long-term policy which determines the fundís long-run returns and the variability in those returns. Several factors are considered as setting a fundís long-term investment policy. These include: the objective of the fundís portfolio, the risk-tolerance level of the fundís investors and the time horizon of the selected investments. Strategic asset allocation is the major determinant of the fundís long-run return.

Tactical Asset Allocation

Tactical Asset Allocation involves the adjustment of amounts allotted to each asset class in a fundís portfolio to take advantage of market inefficiencies or movements (Merton and Henriksson, 2006). Some of the techniques used in tactical asset allocation include market forecasts, market timing and financial models (Leger, 2007).

Overview of Kaplan

Kaplan is a charitable fund that was formed to advance educational goals. The aim of the fund is to help its members to grow their funds by investing in securities so that they can meet their educational objectives. Essentially, Kaplan is a growth fund and thus it should embrace growth as its objective. A majority of the fund members have specific financial objectives in their minds prior to making contributions to the fund. Their aim is to achieve growth of their funds to meet future educational goals. Thus, these members have lower levels of risk-tolerance and they would prefer investments with more certain returns and which offer capital gains (Mandelker, 2004). Kaplanís investment policy should be geared towards protecting membersí capital and achieving capital gains over the time horizon in which membersí funds are available for investment.

Kaplanís Investment Strategies

Investment in Equities

To reduce risk, increase stability in earnings and achieve growth Kaplan should invest significant amount of its funds in the equities of blue chip companies in the US, other countries within Europe and also the rest of the world (Lunde, Timmermann and Blake, 2009). Blue chip companies tend to have stable earnings and they offer substantial opportunities for investment growth. These companies also have the ability to withstand adverse economic condition and post positive earnings during such situations (McKinlay and Richardson, 2003). The fund should also seek to invest in companies with particular characteristics in terms of growth and value.

In order to develop competitive advantage, the fund should charge specific portfolio managers with specific equity classes. This will enable the managers to develop expertise in their management areas including market forecasting and spotting inefficiencies in the market (Malkiel, 2005). To provide investors with a wider range of investment options, the funds must invest in both emerging and developed market equities of reputable companies. Moreover, the fund should employ a bottom-up approach in analyzing the performance of the companies selected.

Other Investments

In building its portfolio, the fund should consider growth equities in the US and other parts of the globe. It should also consider government bonds of those countries with lower risk of default, as well as alternative investments such as hedge funds and real estate (Morey, 2003). To maintain adequate cash for covering day to day operations and paying withdrawals from the fund, the fund should invest in Treasury Bills in the US, Certificates of Deposits, Repos and liquidity funds of reputable financial institutions.

Possible Strategic Asset Allocation

To cater for withdrawals from the fund and to meet membersí need for growth, the following strategic asset allocation is suggested:

Active Vs Passive Management

Active investment management strategy entails selecting securities in the hope of out-performing the market. It is based on the notion that financial markets do not always operate efficiently and, therefore, it is possible to earn abnormal returns by correctly analyzing security prices and by market timing (Kosowki et al, 2010). Passive management, on the other hand, is based on the idea that markets operate efficiently and, therefore, it is not possible to out-perform the market unless it is by luck (Otten and Bams, 2007). Passive investment thus entails investing in a market index that tracks the performance of all the securities in a given asset class. While active investment involves a lot of management and transaction costs, these costs are avoided in passive investment. However, with passive investment it is not possible to earn abnormal returns as in active investment (Merton, 2010). Thus, the two strategies are complements of each other and should be employed jointly.

The fund should employ active management in equities and corporate bonds since these securities are more volatile and they offer the best opportunities for growth (Kothari and Warner, 2004). In contrast, government bonds and cash and short-term investments are more stable and thus the fund should use passive management for these assets.

Conclusion

The various issues facing the investment environment US include competition, laws and regulations, level of education and wealth of US investors, the countryís GDP, security trading costs, and the age of the funds industry. Kaplan must take all these factors into consideration when designing its investment strategy. The fund also needs to diversify its investments to different asset classes to minimize risks and meet its objectives. Moreover, it should apply both active and passive investment approaches as appropriate.

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