Indian Economy Is Considered Finance Essay - Free Essay Example

Sample details Pages: 17 Words: 5173 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? Avadhani highlighted that after getting a success of mutual fund in portfolio management, brokers and investment consultants were professionally qualified to become portfolio managers in India. Portfolio management are define as, It is rare to find investors investing their entire savings in a single security. Instead, they tend to invest in a group of securities. Don’t waste time! Our writers will create an original "Indian Economy Is Considered Finance Essay" essay for you Create order Such a group of securities is called portfolio management (S. Kevin, 2006 pg.1). Portfolio Management Services completely supervised by the regulator of capital markets, SEBI (The Securities Exchange Board of India) rules (Avadhani, 2009). SEBI is a regulatory body in India. SEBI ensures that the securities market is fraud free market and therefore the main objective of SEBI is to verify that investors money is safe (Avadhani, 2009). In India, for holding a portfolio in Portfolio Management Services Company a minimum amount limitation is 5 lakhs ($ 0.5 million) until 1st march 2012 but now its increased by 25 lakhs ($ 2.5 million) that could be a massive amount for any of the middle class person (Official website of SEBI). There are numerous providers who offer a portfolio management service for example, Birla AMC, HSBC AMC, and Reliance AMC. Each company has minimum amount requirement for providing a portfolio management service like Birla AMC has minimum requirement is as Rs. 25 lakh ($ 2.5 million) While, HSBC AMC has minimum requirement is as 50 Lakh ($ 5 million) and Reliance AMC has minimum requirement is as Rs. 1 Crore ($10 million) (Beniwal, 2009). However, Arora (2006) conducted a study and she found that still in Indian capital market, wealth management and portfolio management services type of businesses are less preferable in compare to mutual fund. Today, Most of the Global consultants and experience d players like Citibank, Standard Chartered, and HSBC are aggressively attempting to capture Indian financial market. On the other side, most of the Indian banks and companies like; HDFC banks, Reliance, Axis bank, and Kotak have started to compete with them to acquire market share (Arora, 2006). The aim of this dissertation is a compare two-wealth management companies in context of offering a portfolio management services. This study selected two companies on the basis of the domestic company (Reliance Capital Ltd.) and the foreign company (HSBC Global asset under management Ltd.) in India during 2009 to 2011. Reliance Capital Ltd. is an Indias leading and fastest growing private sector. From February 2007 Reliance Capital Ltd. started an offering a portfolio management services in India. (Official website, Reliance capital ltd, 2008). While, HSBC Global asset under management Ltd. is one of the worlds largest bank and financial services organization in the world. In India, HSBC started offering portfolio management services business from 27th March 2006 (official website of HSBC Global asset management Ltd.). This dissertation will going to analyse that how the foreign company is different from the domestic company in terms of return of the portfolios, overall investment in PMS business and financial performance of the companies. This paper consists of the following sections, Chapter 1 introduces the main topics and principles of the paper. Chapter 2 reviews the literature gathered by researcher of the portfolio management. Chapter 3 states the research questions and the methodology used in this study. Chapter 4 presents findings from the secondary data analysis process. Chapter 5 provides in-depth discussions of the findings along with literature reviews; this chapter provide answers to the research questions posed in chapter 3. Chapter 6 is the final chapter, which concludes and provides recommendations for further research. CCHAPTER: 2 LITREATURE REVIEW 2.1 Introduction Since 1991, the Indian financial markets especially within the capital markets have gone through important changes. Indian capital market, institutional investments, derivatives and market intermediation has been affected from these changes (Arora, 2006). According to The Investment Commission (2008) Indian financial market is worlds third largest capitalist base within the world. Moreover, it has also saw rise in private sectors such as; foreign banks, insurance companies, mutual funds, venture capital and investment institutions. Today, in India there are 10,000 listed companies, 10,000 brokers, 500 foreign institutional investors, 150 merchant bankers, 400 depository participant, 40 mutual funds offering over 450 schemes, and 20 million investors across 23 stock exchanges (Millstein et.al 2005). In India, there are two main stock exchanges; one is Bombay stock exchange (BSE) and other is National stock exchange (NSE) and the rest of 21 are Regional stock exchanges. (The Investment Commission, 2008). However, Avadhani (2009) stated that after the success in mutual fund Indian investors are attracting to portfolio management services. This paper will use the term Portfolio management service, Return on offering portfolio, overall investment in PMS business and financial performance of Reliance and HSBC companies for offering a PMS. This literatures review is aimed to clear the concept of the Portfolio management services and what are the other factors that need to be considered for having a portfolio management service in India. Moreover, this section will give a brief idea that how to measure a financial performance of the investment companies. It will be helpful for investors, before making an investment decision in any particular investment company or investment bank. Finally the methodology applied when assessing a company. 2.2 Wealth Management Services in India An all-inclusive service to optimize, protect and mange the financial goal of an individual, household, or corporate. (Dun and Bradstreet, 2009, pg.2). A wealth management service is a relationship between client and wealth manager, in this relationship, the manager is taking care of the entire customers needs of his financial life (Jain and Jhala, 2012). Wealth management is perfect conceptualized as platform where, the wealth manager provides various services and products to his client (Dun and Bradstreet, 2009). However, Indian investors are looked wealth managers as trusted advisors rather than money manager (Dun and Bradstreet, 2007). It creates a challenge for the wealth managers in contexts of mixing all aspects of a customers financial life into a one umbrella right from estate getting to insurance. The approach, elements and intricacies however vary from every advisor during this area (Mody, 2007). Wealth management may be defined as four parts. Its involves analysis of the customers financial resources effectively to reach financial goals, helping to accomplish financial freedom, preserving the clients wealthy state and reaching this state (Dun and Bradstreet wealth management, 2009). However, Cooper and Worsham (2004) suggested that, the wealth manager needs all the background of his clients fiscal life as well as he needs all the full information regarding his nonfinancial goals, hopes preferences, values, needs, attitudes and fears of the client. Hence, Wealth management service is an on going process that involves keeping track of the clients desire and goals to create a portfolio for the customer and regularly monitoring and analysing the performance of the portfolio and investment (Dun and Bradstreet, 2009). 2.3 Growth of Wealth Management in India According to Gokhale et.al (2011), With a GDP growth rate hovering around the 9% mark and a strong future outlook, Indias growth story is associate more and more enticing marketplace for wealth management companies. In 2010, assets under wealth management for wealth sector (Mutual fund, Fixed Income, Equity) in India was USD 220 Billion which is expected to grow at around 33% YOY (year over year) over USD 502 Billion by 2013 (Doshi, 2011). Following chart clearly shows that from 2009 to 2012 growth of assets under wealth management is increasing gradually. Figure: 2.3.1 Growth of Asset under wealth management in year 2009-2013 (India) Source: Northbridge Capital Research Northbridge capital Research also expecting that, in 2013 a growth of asset under management will increase around 502 USD Billions (Doshi, 2011). Also, the individual wealth in India is increasing accordingly in 2009 in USD trillion it was 1.59, in 2010 it was 2 USD trillion, in 2011 it was 2.52 USD trillion and now in 2012-2013 it will around 3.18 USD trillion (Doshi, 2011). While according to Gokhale et.al (2011), still the proportion of wealthy individuals in India is very small as compared to developed markets. Moreover, according to Press trust of India (2008), in 2012 India will have one trillion dollars worth investable wealth. Also, Press trust of India mentioned that Indian wealth market would have a target size of 42 million households by 2012, as against just about 13 million in 2007. However, it is believed that growing and developing the wealth of client is an art (Unicon, 2010). To fulfil investors desire wealth management companies are offering a portfolio management services (Arora, 2006). Portfolio management service is sophisticated investment vehicles, which provide customizing investing into stocks, mutual fund, fixed deposited income, real estate, bond, unit trusts, guilt and future contract or other financial instruments to meet the particular investment objective (Unicon, 2010). All financial decision regarding portfolio like when to buy, what to buy, when to sell and what to sell etc. all these decisions are a form of management, called wealth management (Arora, 2006). However, for this research paper, it is necessary to understand that what is portfolio management theory and how it is applied in India. 2.5 The portfolio management theory To understand the portfolio management service in India, it is important that to understand that what is portfolio management theory. Markowitz introduces a Modern portfolio theory in 1952. Markowitz gave a small adage that, dont put all of your eggs in one basket from this adage he gave idea about diversify portfolio to world (Shipway, 2009). Markowitz (1952) highlighted that; the number of securities that investors own is doesnt matter but the correlation of those securities with each other that matters. Chhabra (2005) give a way of developing portfolios. He says that the optimum way to build a portfolio is to combine different assets classes. The construction of the portfolio is highly depends on the market risk, return and on the correlations of the asset classes (Chhabra, 2005). https://www.fxwords.com/images/words/efficient_frontier.JPG Source: fxwords.com Figure 2.5.1 Efficient Frontier When optimal portfolios, mapped on the risk-return plane, that form a curve called as the efficient frontier(Chhabra, 2005). Figure 2.5.1 illustrates the Markowitzs efficient frontier. However, from efficient frontier investors could select their preferred portfolio on the bases of individual risk return preferences. (Elton Gruber, 1997). To select Every investor finds the suitable point on this line based on his personal utility function, this helps in determining an optimum allocation between different asset classes like stocks, bonds, and cash (Chhabra, 2005). In order to achieve a really diversified portfolio, one should also diversify within each and every asset classes. For example: equity portfolios should be composed of a large number of minimally correlated stocks, bonds should be diversified in both across maturities and credit ratings (Chhabra, 2005). According to Markowitz (1952), diversification is helps in minimizing a non-systematic risk and diversification combined with the use of a utility function provides the investor with the right balance between risk and return in his portfolio. According to Merton (1987) to get advantages of diversification for decreasing risk is rely on the degree of statistical interdependence in between returns on available investments. However, it is also true that, across the world there are vast numbers of investors who are not well diversified. Zweig (1998) suggests that, it is easier to talk about constructing a diversified portfolio than to actually build one. This neglect of diversification is seen across all client segments, as well as affluent clients who have access to financial advisors, financially sophisticated investors, and participants of employer-sponsored retirement plans (CJoetzmann and Kumar, 2003). Although, what happens if investors dont have a well diversified portfolio? According to Chhabra (2005) because of the risk of undiversified portfolio, thousands of investors have been suffered within the Internet bubble with irrational exuberance. Several of their investments became worthless, as their technology pro portfolios sustained serious losses and never recovered (Shiller, 2001). The requirement of the individual investors is to impose totally different consideration rather than the averages of the market (Brunei, 2003). Kahneman and Tversky (1979) argue that approach of the efficient frontier is a fundamentally unsatisfactory because efficient frontier is using a market risk but its not thought for their impact on portfolio holder. They also stated that it is hard to identified a personal utility functions and have well documented flaws. 2.6 Risk management According to Chhabra (2005), in the ideal framework, risk is outlined as the volatility of the underlying portfolio because volatility is significant measure of market risk. Which is helpful to identify fluctuation in price of the portfolio for a specific period of time (Chhabra, 2005). However, modern portfolio theory have been giving a description of market risks but the same importance has not been given to the issues of personal risks (Fabozzi et. al. 2002). However, In Arora (2006) cited a work of Roy (1952) mentioned a particular importance on the safety first within the context of portfolio diversification. In last few decades, changes in the financial markets in the form of the options, principal protected funds and convertible bonds, has allowed to construct a portfolio with different individual risk tolerances (Chhabra, 2005). An ideal portfolio must be able to answer the following three very different dimensions of risk such as: personal risk, market risk and aspirational risk (Chhabra, 2005). Sources: Chhabra, 2005. Figure 2.6.1: Risk Dimensions Figure 2.6.1 shows three different dimensions of risks. Personal Risk: Investors must protect himself from personal risk. This means to protect himself from anxiety regarding a dramatic decrease in his lifestyle (Chhabra and Zaharoff, 2001). Market Risk: Investors need to take on market risk, in order to grow with his wealth segment and maintain his lifestyle. (Chhabra, 2001 cited work of Sharpe et al. 1998). Aspirational Risk: investors could take on aspirational risk if he desires to break away from his wealth segment and enhance his lifestyle (Chhabra, 2005). Modern Portfolio Theory identifies only the market risk and seeks to minimize it by optimal asset allocation (Chhabra, 2005). One of the most important decisions that a manager or an advisor needs to make is to allocate funds across different asset classes as asset allocation decision dictates the overall exposure to different systematic market risks and helps to reducing it in a certain extent (Mody, 2007 cited work of Bein and Wander, 2002). According to Chhabra (2005), personal risk, market risk and aspirational risk are helps in allocating risk in various different asset buckets. This is known as Risk Allocation. He also suggests that, it is important to enlighten the investor about the importance of risk as well as asset allocation in their portfolio. 2.7 Asset Allocation: An asset allocation service or a financial planner chooses the proportions of the assets in each asset class on the basis of the circumstances of the particular investor. This process is known as Asset allocation. By (Nuttall, 2000, pg.7) Brinson et al (1991) for example claim that around 91% of most portfolio returns can be relay on the asset allocation of the portfolio. The investor is often suggested that to get a comprehensive financial plan to address cash flow, estate planning, and other issues (Arora, 2006). The asset allocation process involves of concentrated stock positions and their diversification and readjustment of the asset allocation based on investors risk tolerance to minimize market risk (Chabbra, 2005). However, Arora (2006) stated in her study that, in Dynamic Asset allocation technique only considers the market portfolio (investment assets) while all assets and liabilities are ignored. According to Brentani (2004), At the point of asset allocation decision, the investor or fund manager must have to decide that what mix of assets will provide a balance risk and return portfolio. He also stated that, in assets allocation theory, High-risk assets allocation means the greatest long-term returns while low risk asset allocation means lower returns. In dynamic assets allocation strategy, when the market is rising and selling them if the market go falls so as to maintain the value of a portfolio at a particular level whereas maintaining the potential for higher returns (Modi, 2007). This technique of assets allocation is called as a portfolio insurance, or hedging (Brentani, 2004). There are various assets allocation strategies used by portfolio managers such as; Strategic Asset Allocation, Constant Weighting Asset Allocation, Tactical Asset Allocation, Dynamic Asset Allocation, Insured Asset Allocation, Integrated Asset Allocation (Mody, 2007). However, Brentani, (2004) stated that, which assets allocation should undertake at a fund Management Company would be largely depend on the culture of that company. Mody, (2007) cited work of Bergen, (2004) says that the all strategies of assets allocations are only general guidelines on how investors may use asset allocation as part of their core strategies; and choosing a single asset allocation strategy or a combination of the any two strategies of assets allocation is dependent on the investors goals, age, market expectations and risk tolerance. 2.8 Classification of Assets allocation Under the wealth allocation framework, each the asset types and also the role it plays within the portfolio determine the location of every asset into one of the three different risk buckets (Chhabra, 2005). Therefore, as rightly pointed out by the author, the same asset may be a part of different buckets for various individuals (Mody, 2007). An important purpose illustrated by Chhabra (2005) is that under this framework, the portfolio can often be mean variance inefficient that is, off the efficient frontier. FIGURE 2.8.1 Asset Classifications for Each Risk Bucket. Personal Risk Market Risk Aspirational Risk Protective assets Market Assets Aspirational assets Cash Equities Alternative Investments Home Purchase Fixed Income Investment real Estate Home Mortgage Cash (Reserved for Opportunistic Investments) Investment Concentration Safe Investments Strategic Investments Small Business Principal Protected Funds Concentrated Stock and Stock option positions Annuities to provide safe source of income Hedging Insurance Human Capital Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 11. As table 2.8.1 shows that, securities that provide some degree of principal protection take place within the personal risk category (Chhabra, 2005). For examples, cash, short Term government backed treasury bonds, inflation indexed bonds, principal protected funds, annuities of certain kinds and risk management instruments and strategies. Such financial instruments are a part of this personal risk category because they protect the value of the principal and are conservative investments, which help sustain the basic standard of living (Chhabra, 2005). Conventional securities are place within the market risk bucket, since they follow the market. For example, fund of hedge funds, commodities etc. belong to this category since they imitate the market risk return pattern. Executive stock options, concentrated stock positions, single manager hedge funds, leveraged investment real estate and call options are examples of investments which are placed in the aspirational risk bucket since thes e investments give an opportunity to significantly enhance capital and provide greater returns (Chhabra, 2005). On other hand, the wealth allocation framework recognizes three very different risk dimensions and seeks to optimize all three of them simultaneously (Chhabra, 2005). 2.8 Limitations of Portfolio Management Theory According to Curtis (2004), there are many issues in modern portfolio theory, especially when its applied to portfolio management services. Curtis (2004) also mentions that, modern portfolio theory is theoretical description of how capital markets operate but not a process for constructs investment portfolios. Modern portfolio theory assumes that all investors are always rational wealth maximizes, which is clearly incorrect because there are numerous events that occur that dont fall into the principles governed by the Modern Portfolio Theory, however are governed by totally different rules and can be understood solely by reference to totally different theories (Curtis, 2004). The Modern Portfolio Theory solely acknowledges market risk and seeks to minimize it by diversification. It does not incorporate safety and aspiration (Lopes and Oden, 1999). Due to these issues, when financial managers attempt to communicate with their clients about their portfolios using Modern portfolio const ructs, communication largely ceases (Curtis, 2004). 2.9 Portfolio Management Service in India From official website of SEBI, it is known that, portfolio management service was introduced on 7th January 1993 as formal investment vehicle in India. Before 1993 it was unregulated activity. With in one year SEBI highlighted importance of Portfolio management service in the Indian capital Market. In the year 2000, ICICI (Industrial Credit and Investment Corporation of India) was the first financial institutional participated to offer a portfolio service (from Citrus interactive official website). According to SEBI (official website), discretionary PMS product has declined by 40% while non-discretionary PMS product has rise by 26% until December 2010 to December 2011. In April 2012, total AUM of the portfolio management service industry has rise by 14.5 %. From the official website of the SEBI, Portfolio management service can be classified by three categories; Discretionary PMS, Non-discretionary PMS and advisory PMS. In Discretionary PMS, Portfolio manager is the one who take all the decision regarding the portfolio, In Non-discretionary PMS, portfolio manager is managing his clients portfolio according to his clients guidelines, and Finally, in advisory PMS, portfolio manager only suggests his investment suggestion to his client (Beniwal, 2009). In India, only AMCs (Asset Management Companies), Brokerage houses, Independent experts can offer a portfolio management service (Beniwal, 2009). To have portfolio management services investors need to know that how to measure a performance of that particular companies portfolio manager and portfolio. 2.10 Measure a portfolio performance According to Brentani (2004) to measure a portfolio performance, measuring a risk of the portfolio is important aspect. Sharpe (1966) introduced a measure for risk adjusted of investments performance that is known as sharp ratio. Sharp ratio is a famous to evaluate portfolio managers in the investment management industry (Bailey et.al 2012). According to Brentani (2004) sharp ratio is useful an estimate of total risk of portfolio to calculate an excess return to volatility. Higher a sharp ratio shows higher value of the particular portfolio. Another measurement to evaluate a performance of the portfolio managers is information ratio. Brentani (2004) stated that information ratio can be defined as the differences between the return of portfolio and selected a benchmark, divided by the tracking error. According to Blatt (2004) information ratio is useful for investors to determine that whether to hire or fire their portfolio managers. Moreover, Clark (2003) stated that information rati os shows that managed portfolio are beat a benchmark or not. Moreover, Grinold and Kahn (1995) stated that information ratio with 0.5 is good, with 0.75 is very good and with 1.00 is exceptional. Usually portfolio managers are trying to achieve a 1.00 information ratio. However, Clark (2003) also stated that information ratio can only tells that portfolio beat benchmark but it cannot say that why and how portfolio failed or not beat benchmark. 2.11 Introduction of Stock Exchange in India According to Bhatia (2009), stock exchange is a destination where the buyers and sellers meet to trade in shares in an organized manner. BSE (Bombay stock exchange) and NSE (National stock exchange) are the main stock exchanges of India. Also there are 21 Regional stock exchanges in India (The Investment Commission, 2008). 2.11.1 BSE (Bombay stock exchange) BSE was established in 1875 and also Asias first stock exchange and one of Indias leading exchanges groups. For 137 years, BSE has facilitated the growth of Indian corporate sector by giving it an efficient capital-raising platform. BSE offers an efficient and transparent place for trading in equity, debt, instruments, derivatives, and mutual funds. In BSE stock exchange, 5000 companies are listed which make BSE worlds No.1 exchange in terms of listed members. Total market capitalization of BSE is in USD Trillion 1.06 as of May 15, 2012. Also BSE is worlds fifth most active exchange in terms of number of transactions handled through its electronic trading system. In addition to that, BSE is also one of the worlds leading exchanges for index options trading. SENSEX is the most popular equity index and widely tracked stock market benchmark index of the BSE. It is traded internationally on the EUREX (European Derivatives Exchange Market) as well as In BRCS nations (Brazil, Russia, China and South Africa). (Sources: Bombay Stock Exchange official website). 2.11.2 NSE (National Stock Exchange) NSE was integrated as a tax paying company in November 1992. In 1993, NSE was given the status of a stock exchange under the act of 1956 securities contract (Regulations). In 1994, NSE began operations in the Wholesale debt Market (WDM) and also in the same year NSE began operation in Capital Market (Equity). In 1996, NSE was the first exchange in India to trade derivatives specifically on an equity index. NSE also has online trading system. Today the NSE is deals with online examinations and award certification. NSE has his all Comprising branches in all over India (official website NSE). NSE was introduced Indias first clearing corporation (National Securities Clearing Corporation Ltd.) and Indias first depository (National Securities Depository Ltd.). National Stock Exchange (NSE) is the worlds third largest exchange in the world. The NSE provides a platform for securities exchange from last 14 years. NSE mainly deals with equity, corporate debt, certificate of deposit, commercial paper, and central and state government securities. Owner of diverse financial and insurance establishment, NSE can be mainly divided into three segments: Wholesale debt, capital market (automatic screen-based dealing system), Futures and options (derivatives). IISL (Indian Index Services and Products Ltd.) Index service firm established by NSE. Also, there are various opened stock indices, including: SP CNX nifty, CNX Nifty Junior, CNX 100 (this is the total of SP CNX Nifty and CNX Nifty Junior), SP CNX 500 (this is equal to CNX 100 plus 400 major players across 72 industries), CNX Midcap (this replaced CNX Midcap 200 on 18 July 2005), SP CNX Defty, CNX IT, Bank IT (Sharma, 2008). 2.11.3. Stock Indices and their Returns during the 2009 to 2011 BSE (Bombay stock exchange) and NSE (National stock exchange) are the main stock exchanges of India (The Investment Commission, 2008). BSE Sensex index is the indicator of the health of Indian stock market. BSE Sensex is closely followed by a number of investors, promoters, market experts, brokers and several other stakeholders in India as well as in the world. BSE Sensex is an index of equity shares of Indias top 30 companies, which representing 12 major sectors in India. It is also believes that, from the movement of Sensex one can relatively know the strength and weakness of the BSE stock exchange (Vadlalmudi, 2009). However, there are others major index which is playing an significant role in BSE stock exchange such as BSE 500 and BSE Midcap. BSE 500 index has nearly 93% of the total market capitalization on BSE and its covers almost 20 major industries of the economy. BSE Midcap index is helpful to track the performance of the companies with relatively smaller market capitalizat ion (Official website of the BSE). In the National Stock Exchange of India, SP CNX Nifty index is a free float market capitalization index and it is the leading index for large companies (website: Bloomberg, 2013). However, SP CNX Nifty has a well-diversified 50 stock index accounting for 23 sectors of the Indian economy. SP CNX Nifty is useful for a various purposes such as benchmarking fund portfolios, index funds and index-based derivatives. SP CNX Nifty is main indicator of the NSE stock exchange (Chakrapani et.al 2011). Table 2.4.1 will shows that what was the overall return of the BSE Sensex, BSE 500, BSE Midcap and CP CNX Nifty in year 2009 to 2011. These are the Major indexes of the Indian stock markets. Stock Indices and their Returns Year BSE 500 BSE Midcap SP CNX NIFTY BSE SENSEX 2009 96.38% 130.23% 73.75% 80.53% 2010 7.48% 0.99% 11.10% 10.90% 2011 -9.11% -7.67% -9.20% -10.50% Table: 2.12.3.1 Stock Indices and their Return Source: From the official website of the SEBI (The Securities Exchange Board of India) by Annual reports of SEBI 2009 to 2011. 2.12 Financial analyzing by financial ratios Financial statements and different financial information are helpful for investors to evaluate a companys financial growth and performance (Way and Media, 2007). There are various tools for analyzing a financial performance of the companies. Investors are using financial ratios to measure a companys financial performance before creating an investment. Financial ratios reveal how a company is financed, how they used its resources, its ability to pay its debts and its ability to get profit. Ratios offer a glimpse of a companys position at a selected time, and are most helpful in comparison across a time periods and when comparing a same companies in the same sector (Robert et.al, 2007). According to James and Media, (2007) financial ratios highly useful to judge companies Profitability, Efficiency and Liquidity ratios. Profitability ratios are useful to know the profit earning capacity of the company for the sake of clear understanding (Rao, 2007). There are various ratios, which are used to measure the profitability of the company such as; Gross profit margin, Operating profit margin, Net profit margin, Cash flow margin, Return on Equity, Return on Asset, Return on Capital Employed etc. (Lopes, 2010). Inventory ratio, Cost of goods Sold, Fixed asset and turnover ratios are the major ratios of the efficiency ratios (Vp, 2010). All the above ratios are helpful to measure a companys performance. These ratios are also useful to compare two companies financial performance. However, for investment companies, only few ratios are usable for measure their financial performance, which is discussed in next part of this chapter. 2.14 Financial ratios for investment companies According to Damodaran (2009), financial services firms are different from non-financial firm. He also mentioned that PMSs main income comes from management and sales fees. There are various ratios that are used in investment companies. For example, ROE (return on equity), ROCE (return on capital employed), Sharp ratio, P/E ratio (price earning ratio), ROA (Return on Asset) and Earing price ratio etc. Stiroh and Rumble (2005) conducted a study in USA for financial holding companies in that study they used Return on Equity and Return on Asset for knowing a profitability. Mahajan et. al (2012) said in there study that ROE reflects that how well banks management is using the banks real investment resources to generate profits for their shareholders. Raza (2011) conducted a study in his study he used financial ratios like ROE and ROCE, Capital per share and Earning per share to compare seven investment banks in Pakistan for time period 2006 to 2009. 2.15 Return on Equity (ROE) and Return on Capital Employed (ROCE) Adams and Scott (2009) stated that ROE calculates how much money an investment company can create from what shareholders have invested in it. There are many analysts regard the ROE as the most important financial ratio for investors because ROE ratio is the most meaningful measurement about management performance (Bhm, 2008). Ahsan (2012) cited a work of (Rappaport, 1986), ROE is famous among investors because its links the income statement to the balance sheet. (Net profit/ Shareholders equity). According to Bhm (2008) stated that a higher a ROE indicates that company is more efficient to generate a profit. However, there is another ratio, which is also helpful to know the profitability of the company that is ROCE. This ratio is useful to measure profitability and it will show that how well the business is utilising its capital to generate a profit. However, there is basic difference between ROE and ROCE, in ROE net profit is after interest but before taxation while in ROCE net profit is before interest and taxation calculated (Shoesmith, 2004). In magazine of Outlook Profit (2008) it is stated that ROCE is not only useful to measure a profitability of the business but it also gives an clear picture that how good the management is in managing their capital. It also stated that high ROCE is a sign of successful growth of the company. To analysis of two Wealth Management Companies, in terms of providing a portfolio management service, not only depends on return of the particular offering portfolio. It also contents other factors like financial performance of that company, risk management, growth of overall investment in PMS business, tax saving, advisory fees, stock market value etc. However, next step of this study is research methodology, which is playing an important role of the any research. CCHAPTER: 3 Research Methodology CCHAPTER: 4 FINDINGS CCHAPTER: 5 DISSCUSSION

Social Media as an Advertising Tool - 974 Words

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Path-Goal Leadership Expectancy Theory Global Leadership - Sample

Question: Discuss about a Case Study for Overview Of Path-Goal Leadership Expectancy Theory Global Leadership theory? Answer: Introduction Volkswagen is a popular car manufacturing organization established in the year of 1937, just before the start of Second World War. The Government of Germany, under the control of Adolf Hitler and the National Socialist Party, formed this new state-owned automobile company (History.com 2016). Initially, it was known as Gesellschaft Zur Vorbereitung des Deutschen Volkswagens mbH. But it was changed to Volkswagen Werk or The People's car company later in the same year (Hotten 2016). Because of its historic Nazi connection, Volkswagen's initial sales were comparatively slower than other car manufacturing companies were. However, slowly they started to gain market share by selling 60 percent of their stock to the public only to denationalizing it. In 1972, Volkswagen's model Beetle surpassed the worldwide sales record of Ford Motor Company by selling 15 million vehicles. The popularity and superiority of Volkswagen are critically affected after the Environment Protection Agency accused them of cheating the emission tests. According to EPA, the vehicle company was using a "Defeat Device" in the diesel engines that will change the performance of the engine to improve the results at the time of testing (Goel 2015). The company has also been accused of changing the software on the three-liter diesel engines that were installed on some Porsche, Audi and VW vehicles. These accusations have affected the brand image of the Volkswagen Company as customers are losing their trust on it. Besides, EPA also has the power to fine the company up to $37,000 for each vehicle that is compromised (Hotten 2016). In this way, the total fine amount will rise to $18bn. The organization must take immediate actions to deal with these problems. Otherwise, it will be hard for them to regain their position in the vehicle industry. The management of the company will have to take a major decision to regain the trust of their stakeholders like consumers, Government of US, employees, media and their shareholders. This assignment will focus on several leadership theories that the leaders of the Volkswagen Company can follow before making any future decision about the company. The management will have to find out the type of crisis they are facing right now and its effects on the organization. From the case study, it can be said that the Volkswagen is facing a crisis related to "Organizational Misdeed Management Misconduct." Due to the crisis, the chances are high that the company will face severe reputation threat in the market (Harwati 2013). Therefore, they can adopt some leadership theories to make some positive changes in their organization to gain shareholder confidence in the future. Emotional Intelligence theory, Expectancy Theory and Global Leadership theory are the three theories that can serve the purpose better than any other theories (Hall 2013). Emotional Intelligence theory of leadership will help the leaders of the Volkswagen to monitor and understand the emotions of their shareholders and stakeholders. If they can understand what the shareholders are thinking after the incident, they will be able to implement their plans and decisions according to that. Expectancy theory is another tool that will help the leaders of the company to decide which decision they should make and why that decision is superior to other alternative decisions (Chemers 2014). For example, Volkswagen can offer a huge discount on their vehicles to regain their market position by attracting new customers. They can also ask for an apology from their customers and other stakeholders and then upgrade their vehicles according to the rules and regulations of EPA to re-launch them in the m arket. Expectancy theory will help the organization to choose the right option between those alternatives. The management of Volkswagen must understand that they should work together disregarding their cultural and personal differences to pull the company out of this crisis. Leaders of the company should lead the way and must follow the global leadership methods to unify all the employees under one goal. This report will further focus on describing those leadership strategies and linking them with the current problem of the organization (O'Neil and Drillings 2012). Mathias Mueller, the new chief executive of Volkswagen, already announced that right now their priority is to win back the trust of the customers by leaving no stone unturned. Emotional Intelligence theory, Expectancy Theory and Global Leadership theory can help Mathias Muller and his team to obtain that goal in a proper manner. Discussion and Findings Leaders of the Volkswagen are expected to make some serious decisions to regain their market position and customer trust which is currently falling at an alarming rate. However, they understand the fact that they cannot make a decision and lead the team unless the team or the employees are also agreed with the decision. Because of the "Cheating Emission" case, the senior management also lost the trust of their employees (Krall and Peng 2015). Therefore, they will have to execute some leadership strategies to evaluate the situation so that they can take proper steps to regain the trust of their employees too. Emotional Intelligence theory There is no doubt that the crisis Volkswagen is facing is highly dangerous for their company. Most of the other vehicle companies and customers are assuming that it is the end of the organization as their market share is falling; the brand image has gone down, and even the employees are finding it difficult to keep faith in their senior management. In this condition, the leaders of the organization must come forward and lead the team to help the company. However, this not an easy task to do, therefore, emotional intelligence theory can help those leaders to understand and manage their own emotions and the emotions of the employees around him (Neck and Krishnakumar 2014). According to Daniel Goleman, an American psychologist who is responsible for the popularity of EI theory mentioned five primary elements of emotional intelligence: Self-awareness Self-regulation Motivation Empathy Social skills The more the leaders of Volkswagen will manage these elements, the higher the chances are that they will be able to regain the trust of their employees. Self-awareness A leader should always control his feelings and emotions in front of the other employees because he knows his feelings can affect the people around him. A self-aware leader understands his strengths and weaknesses and can lead according to that. The leaders of the Volkswagen will have to make them fully aware about the situation by increasing self-awareness and knowledge. They can follow two steps to improve their self-awareness. First, they can carry a journal with them to write down their thoughts on the current condition of Volkswagen Company. Second, they will have to slow down their feelings like anger and disappointment to find out the roots of these emotions (Barbuto et al. 2014). The leaders of the Volkswagen must act positively before the employees because their negative attitude will destroy whatever motivation and trust is left to the employees. Self-Regulation The situation of the Volkswagen demands that the leaders must not take any rushed decision (Sadri 2012). They will have to critically analyze the condition of the company and take ample time to find out proper solutions to pull the company out of it. By regulating themselves effectively, the leaders of the company can achieve this goal. Self-regulation requires following two steps, Understanding the value The leaders will have to understand their value and strengths so that their decisions will not compromise at any stage (McCleskey 2014). The leaders should also examine the organizations code of ethics to figure out what is important to the organization now. If they can understand the code of ethics of the company, then they will make right choices. Take the blame The leaders must come forward and accept their mistakes in front of their subordinates and employees (McCleskey 2014). It is possible that they will face consequences, but the result will be positive as they will gain the respect of the employees which is the priority right now. Motivation Before motivating the employees, the leaders must motivate themselves to provide quality work in the organization. Volkswagen needs the best out of their leaders now than ever. Therefore, the leaders must increase their motivation level to meet the requirement of the company. Empathy If the leaders want to win back the respect and trust of the employees, it is important that they exhibit their motto of being empathic with them (Goleman 2013). Having empathy is critical for the leaders of Volkswagen to re-unify the employees and successfully remove the crisis of the organization. Social skills The leaders of Volkswagen must have proper social skills to accept both good news and bad news (Humphrey 2013). Due to the emission test cheating of Volkswagen, conflict between the employees, suppliers and shareholders are rising. That is why the leaders of the company must have proper social skills to handle those conflicts by using conflict resolution methods. Expectancy Theory Expectancy theory is a process that an individual experiences before making a choice. This theory is also called as Motivation theory in organization behavior established by Victor Vroom (Van 2013). This theory also states that increased effort will lead to increased performance. Right now, Volkswagen needs the quality performance of its employees to fight with their current crisis. Therefore, it can be said that expectancy theory will fit their requirement. According to the expectancy theory, good performance can be achieved by these following elements, Presence of right resources Applying appropriate skills and qualified employees for a task Collecting appropriate support to get the job done Instrumentality is an important part of expectancy theory that states that if the performance is up to the mark, then valued outcome can be reached (Dansereau 2013). The leaders of Volkswagen must tell their employees that if they work hard to achieve valued outcome, and then they will get some positive results for themselves also. Instrumentality is affected by following factors, Understanding the relationship between performance and outcomes Keeping trust for those employees who are assigned to complete the task Transparency of the process which will decide who gets what outcome Another important aspect of Expectancy theory is Valence. If the valence is positive, then an employee will decide to attain it rather than not attaining it. For example, if an employee is motivated by money, the management of Volkswagen must announce extra payments for the employees who will work with the leaders to help the company (Alanazi 2013). If the employees are motivated by workplace advantages like additional time offs, then the leaders of the Volkswagen can offer that as a reward for hard work. Last but not the least, other three elements are important when choosing one element over another. Those elements define effort-performance expectancy (EP expectancy) and performance-outcome expectancy (PO expectancy) (Shibl et al. 2013). Effort-performance expectancy will help the leaders to assess whether their efforts will lead to the required performance level or not. On the other hand, performance-outcome expectancy will serve to assess the probability that whether the performance level will help to gain certain outcomes or not. Leaders of Volkswagen must apply these elements in their workforce to find out accurate strategies to focus their effort in the right direction, to execute appropriate performance criteria and to obtain best possible outcomes. However, expectancy theory of motivation has some disadvantages too. This theory does not consider the emotional state of the individuals. Volkswagen and its employees are experiencing a hard time now as their organization is going through a rough time. Therefore, it is obvious that their mental state is not good at all. But to jump out of this situation, it is important to execute some plans as soon as possible. The mental state of the employees can create obstacles while making a decision. Personality, abilities, skills and knowledge are some factors that affect the outcome of the model (Dansereau 2013). Therefore, the Volkswagen Company must not allow its past leaders to take any decision as they are solely responsible for the current condition of the organization. Besides, it is obvious that employees will never share their personal preferences. For example, no employee will admit that money motivates him, or no employee will ask that he will be happy to receive additional time o ff in return for his good work. Therefore, the leaders will have to guess the preferences of the employees based on their body languages. This can be considered as another disadvantage. Global leadership theory The primary objective or Global Leadership theories are to change the mind of the employees so that they can work hard and help the organization to move forward (Dinh et al. 2014). The present condition of Volkswagen Company demands the same from their leaders and employees. However, it is true that Volkswagen has lost the trust of most of its employees because of their Emission Cheat Case. The leaders will have to generate motivation and trust among the employees as soon as possible because they do not have much time and within the limited amount of time, they will have to work together to help the company. Therefore, it is recommended that the leaders of the company can use these following leadership strategies to communicate with their employees in an effective way, Great man theory or Trait leadership theory Behavioral Theory ( The managerial grid) Participative leadership Trait leadership theory This theory states that leaders are different from other people as they carry intelligence, perseverance, and ambition within their personality. According to this theory, it is assumed that leaders are born with inherited traits and some of which are particularly suited for leadership (James 2015). Volkswagen management must find these leaders in their organization and ask them to lead the way. Besides, it is not necessary that only the senior employees can lead Volkswagen out of this trouble. The management must evaluate the work performances of their employees to find out those employees who are already carrying the leadership traits. Those employees can be promoted to a higher rank to support the other leaders of the management. However, the skills of those employees must match the current situation of the company which means those employees must have the skills to deal with the present condition of Volkswagen. A table is shown below to point out the skill a leader or an employee must have to fulfill the tasks related to the Volkswagens current condition. Tasks Skills Flexible to the situation Intelligent, quick learner Knowledge of social atmosphere Theoretically strong Ambitious and target oriented Innovative Dependable Honesty Cooperative Strong communication skill, good team player, Tasks to be fulfilled and required skills (Source: Haslam et al. 2015) Behavioral theory The behavioral theory does not support the theory of trait leadership. According to Lehmann et al. (2015), behavioral leadership states that leader can be made, rather than are born. Therefore, behavioral leadership does not seek inborn traits but focuses on what the leaders are doing and how to find out methods to improve their skills. The behavioral theory states that a leader should have two behavioral characteristics among them which are the concern for people and concern for production. Together, those two characteristics are called managerial grid. Due to the present condition of Volkswagen, it highly important that managers show their concern for their people like employees, shareholders and customers. Besides, they must not neglect the production part, as it will be a huge decision whether the company will re-manufacture new vehicles to replace the faulty ones or will simply upgrade the faulty vehicles to meet the rules and regulations of EPA. Participative leadership According to the current condition of Volkswagen, it can be said that participative leadership theories will provide best results for the organization. The participative theory states that leaders seek to involve other people of the organization in the decision making process rather than making an autocratic decision (Lam et al. 2015). Volkswagen is facing major issues to regain their market position after the "Emission cheat" incident. Therefore, each employee of the organization must come together to help the company. Leaders alone cannot handle the situation without any help from their employees. Therefore, they must execute participative leadership theories and processes to communicate with the employees and to collect their suggestions (Haslam 2015). They must also invite their stakeholders, peers, shareholders and old customers to participate and share their important recommendations. A figure is shown below to demonstrate how the leaders of Volkswagen must implement this leade rship theory in the organization. Figure 1: Participative leadership (Source: Ferraris 2015) Recommendation The vehicle company Volkswagen is facing critical challenges to regain their market position, customer loyalty and shareholders trust after they were accused of cheating the emission test of EPA. American boss of Volkswagen, Michael Horn stated that their company is totally ruined which describes how critical the issue is. On the other hand the former chief executive Martin Winterkorn, before resigning, stated that their company has broken the trust of their customers, and they must face the consequences. Therefore, it is clear that senior leaders have already surrendered to the present condition of the company. However, the present chief executive Matthias Muller showed his determination when he said that they will work hard to regain the trust of their consumers. This is easy to say but inside he knows that it will not be an easy task to execute, as they will have to start from scratch. Some recommendations are mentioned below for Volkswagen and its management so that they can syst ematically execute each step and can win back their lost reputation. The organization must build a special team to provide immediate response to the situation. If the organization stays silence for long, they will lose the remaining trust and loyalty of its peers, customers, shareholders and employees Rumors are indicating that Volkswagen will have to pay $18bn to Environmental Protection Agency as compensation. However, the agency has not declared anything else. Therefore, the next job of the team will be to find out the original story. They will have to communicate with EPA to find out what they can do to compensate their actions. It is always a bold decision to say sorry after committing something wrong. Therefore, Volkswagen must call a press meet as soon as possible and ask for an apology to their customers and other stakeholders with a promise that they will enhance their system so that nothing bad would happen gain in the future. The remaining leaders of the company must come forward and lead the way to handle the situation. It is recommended that they should use either behavioral leadership theory or participative leadership theory to communicate with their employees which will allow them to collect several alternative solutions to the problem. This will also help them to find out what the employees are thinking right now. If the employees are losing their trust and motivation, then immediate actions must be taken to charge them up because employees are the only powerful resource Volkswagen has at this time. A major decision must be taken related to the faulty vehicles of the company. Volkswagen is recalling 8.5 million cars from Europe, including 2.4 million from Germany, 1.2 million from UK and 500,000 from the US because of the emission scandal. That is why their shares have fallen by about a third since the scandal broke. Therefore, the company cannot manufacture new cars to replace their faulty cars. It is recommended that they should add external upgrades in those cars so that they can perform according to EPAs test manual. However, they must note that their newly manufactured cars will be internally upgraded to meet the requirements of EPA. Upgrading 8.5 million cars in not an easy task as it might take years. However, Volkswagen must perform this task as soon as possible to show their responsibility towards their customers. Therefore, the current workforce is not enough for the company to execute this huge task. The organization must start recruiting new workers on short-term employment notice. Personal Reflection From the assignment the first thing, I learned that Environmental Protection Agency is doing a superb job by tightening their rules to protect the environment. However, I was surprised to know that a company like Volkswagen has committed this type of serious crime only to maintain their profitability. It was unexpected from the company as from 1937; Volkswagen provided several regular vehicles and luxury vehicles and always provided proper safety tools and latest technologies with them. However, from the statements of former chief executive of the company and their American boss, it is clear that the company is now feeling sorry for their wrong doings and is ready to face the consequences. Martin Winterkorn, who was the chief executive of the company at the time of the scandal, took all the responsibilities and resigned from his post. What I understood from some other statements from the leaders of the company is the company management has already accepted their defeat and strongly b elieving that they are not going to rise from this condition. However, the current Chief Executive has released a strong statement by saying that they are extremely sorry for their wrongdoing, and they are going to do anything and everything to win back the trust of their customers. I knew that this was not an easy job to do so I provided some recommendations related to leadership theories to their leaders so that they can follow the proper way to win back the trust of their employees first and then the trust of their customers. While doing research on various leadership theories, I gained a vast knowledge on the topic too. I had to go through several leadership theories to choose the best three theories that can fit the present condition of the company. According to the present goal of the company, I have chosen three leadership theories which are expectancy theory, global leadership theory, and participative theory. Those three leadership theories helped me to enrich my knowledge on leadership, decision making and skill of a leader. While the expectancy theory taught me that effort, performance, outcomes are related to each other, global leadership theories like trait leadership, behavioral leadership theories helped me to understand concepts of inherited traits in a leader and self-gained skills of a leader. However, the participative leadership theory fulfilled my goal of choosing a leadership theory that can provide positive results to Volkswagen. Participative leadership theory taught me that the best way a leader can lead his team and earn their respect is to give equal importance to them. A leader must allow all of his team members to participate and share their views on a particular topic before making any decision. This is why I recommended this leadership theory to Volkswagen as the leaders of the company must communicate with their employees one by one to collect as many alternative solutions as they can. This strategy will also help the leaders to regain the trust of the employees because they will think that company values their suggestions. In the end, I can say that I learned how a company selects or should select leadership strategies to empower their decision making abilities in critical conditions. References Alanazi, T.R., Alharthey, B.K. and Rasli, A., 2013. Overview Of Path-Goal Leadership theory.Sains Humanika,64(2). Barbuto, J.E., Gottfredson, R.K. and Searle, T.P., 2014. An examination of emotional intelligence as an antecedent of servant leadership.Journal of Leadership Organizational Studies, p.1548051814531826. Chemers, M., 2014.An integrative theory of leadership. Psychology Press. Dansereau, F., Seitz, S.R., Chiu, C.Y., Shaughnessy, B. and Yammarino, F.J., 2013. What makes leadership, leadership? Using self-expansion theory to integrate traditional and contemporary approaches.The Leadership Quarterly,24(6), pp.798-821. Dinh, J.E., Lord, R.G., Gardner, W.L., Meuser, J.D., Liden, R.C. and Hu, J., 2014. Leadership theory and research in the new millennium: Current theoretical trends and changing perspectives.The Leadership Quarterly,25(1), pp.36-62. Ferraris, V.A., 2015. Lead from the front: Participative leadership.The Journal of thoracic and cardiovascular surgery,150(6), pp.1413-1415. Goel, A., 2015. Volkswagen: The Protagonist in Diesel Emission Scandal.South Asian Journal of Marketing Management Research, Forthcoming. Goleman, D., Boyatzis, R. and McKee, A., 2013. Primal leadership.Harvard Business School Press, Boston, Massachusetts (2004, paperback edition). Hall, D.S., 2013, January. LEADERSHIP: THEORIES, STYLES AND VISIONING. InNAAAS Conference Proceedings(p. 36). National Association of African American Studies. Harwati, L.N., 2013. Crisis management: Determining specific strategies and leadership style for effective outcomes.CRISIS,2(2). Haslam, S.A., Reicher, S.D. and Platow, M.J., 2015. Leadership: Theory and practice. Haslam, S.A., Reicher, S.D. and Platow, M.J., 2015. Leadership: Theory and practice. History.com, 2016.Volkswagen is founded - May 28, 1937 - HISTORY.com. [online] Available at: https://www.history.com/this-day-in-history/volkswagen-is-founded [Accessed 11 Feb. 2016]. Hotten, R. 2016.Volkswagen: The scandal explained - BBC News. [online] BBC News. Available at: https://www.bbc.com/news/business-34324772 [Accessed 11 Feb. 2016]. Humphrey, R.H., 2013. The benefits of emotional intelligence and empathy to entrepreneurship.Entrepreneurship Research Journal,3(3), pp.287-294. James, K., 2015. Leadership Special Interest Group: What is leadership?.Canadian Oncology Nursing Journal/Revue canadienne de soins infirmiers en oncologie,25(1), pp.114-115. Krall, J.R. and Peng, R.D., 2015. The Volkswagen scandal: Deception, driving and deaths.Significance,12(6), pp.12-15. Lam, C.K., Huang, X. and Chan, S.C., 2015. The threshold effect of participative leadership and the role of leader information sharing.Academy of Management Journal,58(3), pp.836-855. Lehmann-Willenbrock, N., Meinecke, A.L., Rowold, J. and Kauffeld, S., 2015. How transformational leadership works during team interactions: A behavioral process analysis.The Leadership Quarterly,26(6), pp.1017-1033. McCleskey, J., 2014. Emotional intelligence and leadership: A review of the progress, controversy, and criticism.International Journal of Organizational Analysis,22(1), pp.76-93. Neck, C.P. and Krishnakumar, S., 2014. Leadership Emergence as a Process The Role of Emotions and Emotional Intelligence.Journal of Leadership and Management,1(1). O'Neil, H.F. and Drillings, M. eds., 2012.Motivation: Theory and research. Routledge. Sadri, G., 2012. Emotional intelligence and leadership development.Public Personnel Management,41(3), pp.535-548. Shibl, R., Lawley, M. and Debuse, J., 2013. 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