SMS002 - Understanding SMSF Trustees - Accounting & Finance Assignment Help

Assignment Task

Learning outcomes (LO)
1.Evaluate the application of behavioural finance to the interaction and engagement with SMSF trustees.
2.Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
3.Analyse the impact of behaviour biases on SMSF fund investment strategies.
4.Develop a methodology for mentoring and guiding SMSF trustees.

Section A
Question
LO1: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO2: Analyse the impact of behaviour biases on SMSF fund investment strategies.

(a) Explain how loss aversion can result in an SMSF trustee’s willingness to hold on to deteriorating investment positions.
(b) Briefly describe how each of the following can influence investor behaviour.

•emotional frames of self-control
•regret minimisation
•money illusion.
 

Section B
Instructions to students
There are six (6) short-answer questions in this section. Answer all questions.
Background information
Frank Brooks and Peter Timmons are portfolio managers for the largest managed fund of Liberty Financial Advisers. Liberty Financial Advisers provides a variety of managed funds for both individuals and institutions. Brooks has been a portfolio manager for eight years and has seen both bull and bear markets. Timmons is his assistant and has been at Liberty Financial Advisers for the two years following his graduation from a prestigious Masters in Finance program.
Over lunch, Brooks and Timmons discuss the latest quarterly earnings announcements for several firms in their portfolio. Despite optimistic projections for several firms, most announcements were quite disappointing. Timmons states that he is not convinced their prospects are as grim as the announcements suggest.
The next day, Brooks and Timmons provide a presentation to clients of Liberty Financial Advisers. Their guest presenter is Jim Davis, an economist at the local university who frequently provides economic commentary for national media outlets. During his presentation, Davis states that it is likely the US will enter a recession next year. He recommends that the clients shift their assets into investment grade bonds and non-cyclical stocks. He states he has been successful in predicting recessions over the past 15 years and is certain of his forecasts. He further maintains that the only time he has been wrong in predicting the business cycle is when Congress unexpectedly increased spending beyond what was expected. Davis asserts that if the spending increase had not happened, his prediction of a mild recession would have been correct, instead of the mild expansion that actually occurred.
During the afternoon session, Brooks discusses the various strategies at Liberty Financial Advisers. In the value/neglected firm strategy, Liberty Financial Advisers seeks out firms trading at reasonable valuations with no analyst following them. Brooks states that several academic studies have shown these firms to be good investments over a three-year time horizon from July in the current year to June 30th of Year 3, following their identification on June 30th of the current year. Brooks states that he has adopted this strategy for his portfolio.
Later that evening at dinner, Brooks, Timmons and Davis discuss the day’s events. Commenting on investment strategies, Davis says that he focuses on growth stocks with six-quarter earnings growth in the top quartile of their peer group. He adds that he monitors his portfolio on a quarterly basis and sets price targets for his stocks.

Question 1
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Identify and describe the behavioural characteristic that Timmons is applying in this scenario.

Question 2
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Identify and describe the behavioural characteristic that Davis is applying in this scenario.

Question 3
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Explain the following statement.
‘Davis is susceptible to cognitive dissonance.’

Question 4
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Which defence best explains Davis’s past inaccurate forecast? State the defence and explain your answer.

Question 5
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Which approach best describes Brooks’s investment strategy?

Question 6
LO2: Explain factors resulting in measurable, systemic biases in investment decisions including the difference between collective and individual decisionmaking processes.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
Identify and explain which approach best describes Davis’s investment strategy.

Section C
Instructions to students
There is one (1) long-answer question in this section.

Question 1
LO1: Evaluate the application of behavioural finance to the interaction and engagement with SMSF trustees.
LO3: Analyse the impact of behaviour biases on SMSF fund investment strategies.
LO4: Develop a methodology for mentoring and guiding SMSF trustees.
An important rationale for establishing an SMSF is the ability to tailor the investment portfolio to individual needs and, importantly, an individual’s risk tolerance.
Explain how situational profiling (source of wealth, measure of wealth and stage of life) and psychological profiling can allow us to better understand an SMSF investor’s risk tolerance.
Hint: Discuss both active and passive sources of wealth creation in your answer.

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