Module Outline

Study of three distinct but inter-linked areas of modern finance directly related to a
broad range of career paths

Wealth Management – the structuring of private investment portfolios, combining the

various Asset Classes to maximize return and minimize risk

Commodities - a broad and very interesting asset class, enjoying some unique
characteristics which are very useful in portfolio construction

Shipping Finance – transportation of commodities, a volatile and highly cyclical

business. Asset valuation in shipping, credit analysis and risk management in shipping.
Financial analysis and decision making is critical in ensuring the success of a shipping
business project

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 Module Assessment

• 100% take-home coursework based

• 3 separate individual courseworks, one for each part of the module

• Word guidance / limit : 1,000 words per coursework

• Approximately one month from release of the coursework to submission

deadline

• Course instructors to provide guidance as needed

) provides investor protection across the EU.

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 Applied Wealth Management - Introduction
WHAT IS WEALTH MANAGEMENT?

PROTECTING
GROWING WEALTH
PASSING ON

 Clients: Wealthy people that lack the time and/or the skills to manage their own wealth
 Wealth Creation: Entrepreneurial Activities, Inheritance, Professional Earnings
 Wealth Managers: Financial Firms who offer these services via qualified employees
 Wealth Relationships based on Trust (TCF) - built gradually over time

TCF – TREATING CUSTOMERS FAIRLY – underlying principle of all wealth management activities as well as
primary focus of regulators globally

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 Portfolio Construction

OBJECTIVES

 Income
 Growth
 Mixed

ATTITUDE TO RISK

Liquidity and Time Horizons

Tax Status

Investment Preferences
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 Asset Classes
A group of financial assets

Emphasis is on the underlying exposure and market behaviour of the assets

Mind the distinction between financial assets (e.g. government bonds) and
investment vehicles (different ways of investing / getting exposed to financial
assets)

Asset classes consist of financial assets not vehicles

Government Bonds is an Asset Class – Futures is NOT an asset class

Main criterion: assets should behave similarly in terms of risk and return to the
same exogenous factors 5

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 Asset Classes
No uniform definition of asset classes – different institutions adopt different
approaches

Asset classes must be homogeneous, broad and consist of investable assets

Asset classes must be mutually exclusive – no financial asset should belong to more
than one asset class

Asset classes should be exhaustive – all financial assets should belong to one asset
class

KCL - Topics in Applied Finance 2025

 Barclays Wealth Model – 9 Asset Classes

1. Cash and Short Maturity Bonds

2. Developed Government Bonds
3. Investment Grade Bonds
4. High Yield & Emerging Markets Bonds
5. Developed Markets Equities
6. Emerging Markets Equities
7. Commodities
8. Real Estate
9. Alternative Trading Strategies

 Source: Barclays Wealth and Investment Management, Global Research and Investment, White
Paper “Asset Allocation at Barclays”, February 2013
(https://www.investmentphilosophy.com/uploads/cms/1362753017___asset-allocation-february-
7
2013.pdf)
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 Asset Allocation – from profile to portfolio
MiFID (Markets in Financial Instruments Directive) provides investor protection across the EU.

LOW RISK LOW-MEDIUM RISK MEDIUM RISK MEDIUM-HIGH RISK HIGH RISK

CASH 30 15 10 5 5

BONDS 60 50 40 30 15

Government 45 25 5 2 0

Investment Grade (IG) 10 12 15 8 3

High Yield (HY) 5 10 13 15 6

Emerging Markets 0 3 7 5 6

EQUITIES 10 20 30 40 50

Developed 10 17 22 25 25

Emerging Markes 0 3 8 15 25

ALTERNATIVES 0 5 10 15 15

COMMODITIES 0 10 10 10 15

Gold 0 4 6 6 7

100 100 100 100 100

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 From Asset Class to Portfolio
How do we measure the “success” of a portfolio?

Portfolio Return – simply the weighted average of the returns of the constituents

Example: A portfolio is invested as follows: 10% cash, 30% developed markets equities, 25%
developed markets bonds, 25% emerging markets bonds, 10% real estate
Last year the return of each asset class was: Cash +2%, Developed Markets Equities -7.5%,
Developed Markets Bonds +4.8%, Emerging Markets Bonds +6.2%, Real Estate +1.5%
What was the portfolio return?

When we construct a portfolio, we do so on the basis of expectations for the (future) performance
of its components

The risk of the portfolio arises from the uncertainty of actual outcomes. It is the difference
between expected and realized return.

Statistical concepts such as standard deviation and variance are commonly used to measure the
risk of a portfolio 9

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 Portfolio Return Calculation

Example: A portfolio is invested as follows: 10% cash, 30% developed markets equities, 25%
developed markets bonds, 25% emerging markets bonds, 10% real estate
Last year the return of each asset class was: Cash +2%, Developed Markets Equities -7.5%,
Developed Markets Bonds +4.8%, Emerging Markets Bonds +6.2%, Real Estate +1.5%
What was the portfolio return?

(10% * 2%) + (30% * (-7.5%)) + (25% * 4.8%) + (25% * 6.2%) + (10% * 1.5%) =

0.20% -2.25% + 1.2% +1.55% + 0.15% = 0.85%

10

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 Portfolio Risk
The measurement of the risk of a portfolio is more complex than the measurement of return.

The reason is that different asset classes tend to move together in different ways.
The best way to look into that is probably start with what has happened in the past in financial
markets – plotting the graph of the performance of one asset against another
Historical Correlation

Historical correlation is a useful guide but is no guarantee for the future

In markets, especially under extreme circumstances, we have many times witnessed the end of
historical correlations.

It is possible to measure to correlation of any two financial assets: we can measure one security
against the broader market (“beta”) or one asset class against another or a single asset (e.g. bonds
vs equities, equities vs commodities, equities vs gold etc.)
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 Measuring Portfolio Risk
Covariance – statistical measure of how the return of one security (or asset class) co-varies with another
_ _
Cov (A,B) = Σ (RA – RA ) * (RB – RB) / N where N is the number of observations

Covariance can take any value and thus is difficult to interpret conceptually

Correlation = ρAB = Cov AB / SDA SDB = Cov AB / σΑ σ Β

Correlation can only take values between -1 and +1

A value of -1 (called “perfect negative correlation”) implies that when asset A rises 10%, asset B will fall 10%
A value of +1 (called “perfect positive correlation”) implies that when asset A rises 10%, asset B will also rise 10%

Correlations does not indicate causality and change over time

The weaker the correlation between two assets, the greater the benefits of diversification

DIVERSIFICATION ALLOWS US TO CREATE PORTFOLIOS WHERE RETURN IS THE SUM OF RETURNS OF THE COMPONENTS
BUT RISK IS LOWER THAN THE SOME OF RISKS OF THE COMPONENTS
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 Basic Concepts of Statistics

Measures of return:
 Arithmetic Mean = sum of return figures divided by the number of observations
 Median –middle value of return figures when arranged in ascending or descending order
 Mode – most frequently occurring return value
 Weighted Mean – weighted average of returns
 Geometric Mean – nth root of multiplied returns

Measures of Risk:
 Range – difference between smallest and largest values in a sample set
 Standard Deviation (denoted SD or σ) – average of deviations of the return figures from the mean value
 Variance (σ2) – standard deviation squared (to eliminate negative values)
 Drawdown – decline in value from top to bottom (over a period)
 Coefficient of Variation (CV) – SD / Arithmetic Mean. Measures risk per unit of return obtained. Useful of
ranking investments

PORTFOLIO VARIANCE σ2P = w2A σ2Α+ w2B σ2Β + 2wAwB CovAB where CovAB = ρΑΒ σΑσΒ 13

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 Evaluation Portfolio Performance
Measures of Return:
 Absolute Return
 Relative Return

Benchmarks should be unambiguous, investable, possible to measure returns with the same
frequency as portfolio, appropriate for the style of the manager and specified in advance
Types of benchmarks: broad market indices, custom benchmarks, peer group (manager universes)

Performance measurement focuses on the determination and accuracy of return measures

Performance evaluation specifies an appropriate benchmark against which the ex-post returns are
compared

Performance attribution – analysis of what caused performance. Looks into asset classes as well as
within asset class investments.
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 Commodities
Unlike the main asset classes such as bonds and equities, valuation of commodities is not
based on discounting cash flows (coupons, dividends)

Commodities – intrinsic value either on their own sake or as an input to a broader process

Physical – as opposed to financial - assets

Main Groups of Commodities

 Energy
 Agricultural commodities
 Industrial Metals
 Precious Metals
 New Types of Commodities (e.g. electricity, emissions, shipping charter rates,
cryptocurrencies)

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 Valuation of Commodities

o Commodities typically trade as derivatives rather than in cash form

o Pricing is based on supply and demand

o Price and relationship between spot and futures price also heavily
affected by transportation, storage and insurance costs

o Certain commodities also suffer from limited life

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 Commodities and Shipping

Main links between commodities market and the shipping market:

 Shipping is used to transport the majority of commodities: so (international)

demand for commodities is a major influence on the demand for shipping
services

 Commodities are also the main cost of shipping as shipping vessels move on
oil and related products, and

 Shipping is a commodity as freight rates (or, more accurately, derivatives on

freight rates known as FFAs – Forward Freight Agreements) are tradable and thus
ship owners and operators can hedge their expected future revenues

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 SHIPPING VALUE CHAIN

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FINANCIAL ANALYSIS OF SHIPPING INVESTMENT
2005 2006 2007
Freight, gross ($ per day) 22,821 22,821 22,821

Freight, net ($ per day) 21,680 21,680 21,680

Vessel expenses ($ per day) 6,110 6,110 6,110

Revenue days 350 350 350

Expenses days 365 365 365

Revenue 7.59 7.59 7.59

Operating Expenses -2.23 -2.23 -2.23

Operating Profit 5.36 5.36 5.36

Interest Expense -1.33 -1.6 -1.52

Bank repayment -2.6 -2.6 -2.6

Cash Flow to Equity ($mn) 1.43 1.16 1.24

Sale of Vessel 78.6

Repay Bank -18.2

Availalble for Equity ($mn) 60.4

Free Cash Flow to Equity 1.43 1.16 61.64

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 ELEMENTS OF A SHIPPING LOAN
Security Parties
Security Documents

Single Ship Owning Company (Borrower)

Company (Corporate Guarantor) Charterer

-Loan Agreement
-Vessel Mortgage
-Other
G
u
a -Corporate Guarantee
r
a
n
t Individual (Personal Guarantor)
o
r
s
Bank (Lender)

Management Company (Manager)

-Personal Guarantee

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