FINC20018 Managerial Finance and Financial Markets

Case Study 1: Financial markets

From the point of view of Northwest Capital management, the process of buying treasury bonds and energy stocks is taking indirect securities. As an hedge fund manager it is the primary market which is direct market for me, while in secondary market like stocks, ETF, MF are indirect markets. The main markets where a hedge fund manager focusses on are IPO, primary dealing in debt space. The company's scope today consists primarily of U.S. equities (1,900+ stocks) and some economic indexes, but the potential to expand is vast — geographically as well as across other financial instruments and indexes. Beyond earnings estimates, there are other metrics that investors care about, but that are difficult to forecast ahead or estimate well. Compliance costs and increasing competition from online trading platforms have weighed on the performance of traditional stockbrokers, despite higher trading volumes. Industry revenue is expected to increase at an annualised 5.9% over the five years through 2016-17, to reach an estimated $5.8 billion. Revenue is expected to grow 4.6% over the current year.

Investment banks are expected to generate higher fees from M&A and equity capital market transactions due to projected positive business sentiment over much of the next five-year period. Companies are expected to undertake equity raisings and seek out acquisitions for growth over the next five years, as highlighted by forecast positive business sentiment. Investment banks should also see a shift in the industries that generate deal flow. Most of the deals took place in the materials and resources sector during the past decade, as investors aimed at capitalising on Australia's mining boom. In contrast, an increased number of capital-raising and M&A deals are likely to take place within service-based sectors over the next five years, such as technology, healthcare and aged care. The company's main revenue stream is from financial institutions that use its API to access real-time forecasts with feeds. Hedge funds are the primary customers of the APIs for accessing the estimates. Estimize Screener is another product targeted toward discretionary investors. The company offers two estimates: one that is the regular consensus and one that is weighted based on the estimator's past performance.

As Hedge Fund organizations strive to become service-focused and more strategically relevant to the business, they need new approaches to budgeting, funding, transparency and allocation. The shift from building Hedge Fund systems to delivering, brokering or integrating Hedge Fund services continues to push Hedge Fund organizations to transform their traditional Hedge Fund financial management (Northwest Capital management) models to adapt to the following new realities:

• As cloud computing, the Internet of Things and digital Hedge Fund initiatives continue to take hold, CIOs must rethink their approach to Northwest Capital management in general, and to cost allocation and cost recovery specifically.
• Hedge Fund funding and procurement decisions will continue to become more distributed throughout the enterprise, making better Hedge Fund cost transparency more difficult, but also more important.

Northwest Capital management is the process of effectively managing technology expenditures with the intent to provide the business and the Hedge Fund organization with a common platform to measure services and plan for future investments that optimize technology spending and business performance. The critical need for effective Northwest Capital management is widely recognized. While Northwest Capital management has many components, the focus of this research is on the key concepts of budgeting, funding, transparency and allocation. From the point of view of Northwest Capital management, the process of buying treasury bonds and energy stocks is taking indirect securities. As an hedge fund manager it is the primary market which is direct market for me, while in secondary market like stocks, ETF, MF are indirect markets. The main markets where a hedge fund manager focusses on are IPO, primary dealing in debt space. The company's scope today consists primarily of U.S. equities (1,900+ stocks) and some economic indexes, but the potential to expand is vast — geographically as well as across other financial instruments and indexes. Beyond earnings estimates, there are other metrics that investors care about, but that are difficult to forecast ahead or estimate well. Compliance costs and increasing competition from online trading platforms have weighed on the performance of traditional stockbrokers, despite higher trading volumes. Industry revenue is expected to increase at an annualised 5.9% over the five years through 2016-17, to reach an estimated $5.8 billion. Revenue is expected to grow 4.6% over the current year.

Across all four of these concepts is a common trend — a movement from looking at them at the individual Hedge Fund-asset level to focusing on the true cost of Hedge Fund and business services.

Taking a service-based approach, whereby the Hedge Fund organization delivers or "brokers" a set of business-relevant, Hedge Fund-enabled services, should result in a change as to how an enterprise funds, prices, costs and allocates costs back to the business. While more organizations describe themselves as service-based, and can point to a service catalog or portfolio, the reality is that in many cases, the key financial management concepts discussed here are still tied to the practices of the past. The focus of this research is on modernizing these practices to be more in step with the way Hedge Fund organizations wish to deliver their services. From the point of view of Northwest Capital management, the process of buying treasury bonds and energy stocks is taking indirect securities. As an hedge fund manager it is the primary market which is direct market for me, while in secondary market like stocks, ETF, MF are indirect markets. The main markets where a hedge fund manager focusses on are IPO, primary dealing in debt space. The company's scope today consists primarily of U.S. equities (1,900+ stocks) and some economic indexes, but the potential to expand is vast — geographically as well as across other financial instruments and indexes. Beyond earnings estimates, there are other metrics that investors care about, but that are difficult to forecast ahead or estimate well. Compliance costs and increasing competition from online trading platforms have weighed on the performance of traditional stockbrokers, despite higher trading volumes. Industry revenue is expected to increase at an annualised 5.9% over the five years through 2016-17, to reach an estimated $5.8 billion. Revenue is expected to grow 4.6% over the current year.

While these funding models are still relevant, we see a shift in how Hedge Fund organizations approach funding. Specifically:

• Wherever possible, centralize Hedge Fund spending to ensure maximum economic leverage and eliminate redundant purchases. Even in Hedge Fund organizations where funding is decentralized, a central organization (Hedge Fund, a shared-service entity or a portfolio management office) often takes responsibility for the management of the spending and the benefits realization for the investments.
• Ensure that all Hedge Fund investments are tracked and allocated to Hedge Fund services. All relevant Hedge Fund costs should be captured, normalized and allocated to appropriate value aggregations like technologies, applications or service.
• Fund Hedge Fund services based on demand and the value that services provide to the enterprise. Where possible, evaluate market prices for the same services. Significant progress must be made in terms of Hedge Fund cost transparency to support "service funding." Service-based funding represents a more enlightened approach to budgeting, which tends to be mostly bottom-up, and is too often disconnected from the enterprise strategy.
• Best-in-class enterprises will shift their focus to the yield, or strategic value of Hedge Fund investments. For example, leading-edge enterprises are radically changing their traditional Hedge Fund spending distribution from run the business to grow and transform initiatives. (This maps to business strategies, which are increasingly focused on growth and innovation.)

Case 2: Making Norwich Tool’s lathe investment decision

Determining the cost of Investment decision services is an exercise in activity-based costing, whereby the costs associated with a particular service are tracked and considered when determining the "price" of a service. What makes this task complex in Investment decision is that many Investment decision resources are shared among multiple services. Also, the sheer number of Investment decision resources makes the task of developing service pricing daunting.

For example, infrastructure is one area where enterprises are often confounded by how to distribute the costs of the thousands of Investment decision resources that compose infrastructure. Gartner recommends that Investment decision organizations begin by looking at the key components of their infrastructure, such as servers and network services.

Many specific infrastructure components can be assigned to the key Investment decision services provided by the Investment decision organization. However, it is not practical — or even feasible — for organizations to do a one-to-one mapping between every Investment decision resource and a single Investment decision service. Ultimately, the cost of all Investment decision assets — including fully loaded labor for human assets — must be allocated to Investment decision services. However, some assets can have their cost spread proportionately across multiple services that use the assets. This is common for assets that are part of a shared infrastructure, such as storage area networks. The tools to support service-based pricing have improved substantially during the past few years, and many organizations that are serious about service-based costing are migrating away from Microsoft Excel as a chargeback tool.

Still, we see a lot of organizations with questions about service-based pricing that lack well-defined services and service portfolios. We also see many organizations looking to migrate to service-based pricing that have poor Investment decision cost transparency. In fact, chargeback is often the forcing function that spurs organizations to make the necessary investments in improving Investment decision cost transparency.

While the focus of this research is on evolving key ITFM concepts, chargeback cannot evolve much in isolation. It requires improvements in Investment decision cost transparency allocation structures and pricing models. Also, if it is to be done around services, the implication is that the organization has well-defined services and service portfolios. However, we still see many organizations putting "chargeback" initiatives ahead of cost transparency and even service definitions.

Cost allocation is simply the process or method of attributing Investment decision costs to specific units of value — services, applications, business units, projects, asset classes, technologies, products or investment profiles. One major benefit of cost allocation is that it links Investment decision spending directly to BU activities based on usage, access, capacity or some other metric that apportions Investment decision service costs. In addition, it can motivate the BUs to avoid special requests that do not contribute to their bottom lines or lack a solid business case. Thus, the customers of Investment decision provide budget justification via their willingness to pay for the services rendered, and to balance the supply, demand and price for services.

In addition, allocation of Investment decision costs to business units or projects (sometimes referred to as chargeback) provides the business with a more accurate costing base from which pricing decisions can be made. For many end-customer business products and services, Investment decision support can be significant, and therefore it needs to be included in the price-setting decisions.

We see an increasing desire to mature current allocation models toward a service-based financial view. That said, there are still many models of cost allocation in use today (see Figure 1). Selecting the proper model will impact cost and accuracy and is commonly a function of internal politics, accuracy requirements, and so on.

References:

Levy, H. (2015).Stochastic dominance: Investment decision making under uncertainty. Springer

Tahir, S. H., & Sabir, H. M. (2014).  Impact Of Family Ownership On Investment Decision: Comparative Analysis Of Family And Non-Family Companies Listed At Karachi Stock Exchange (Pakistan).Business Excellence, 8(2), 33

Kerzner, H. (2013).Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons

Guanche, R., De Andres, A. D., Simal, P. D., Vidal, C., & Losada, I. J. (2014). Uncertainty analysis of wave energy farms financial indicators.Renewable Energy, 68, 570-580.

Bodie, Z. (2013).Investments. McGraw-Hill.

Bebchuk, L. A., Brav, A., & Jiang, W. (2015).The long-term effects of hedge fund activism (No. w21227). National Bureau of Economic Research.