Portfolio Management

Portfolio Management

Introduction

The report deals with the concept of performance management fees and the portfolio of three companies which includes BHP Billition, Westpac banking and Rio Tinto. In this report they will analyze all the aspects of the above mentioned portfolio along with its expected performance and deliverables.

Performance based fee

In general terms, it can be said that performance based fees are the charges charged by the portfolio manager to its client. These fees are sometimes dependant on the portfolio's performance as well, however on rare occasions, it is even fixed. This also acts as a motivational factor for the manager as the fees is linked to his performance with the portfolio.



BHP Billiton

After 30 years of decline, the world is again experiencing a sustained increase in commodity prices. The last long-cycle uptrend, born at the end of the Great Depression, was driven by the rebuilding of Europe after the wars and later on the rise of Japan to economic powerhouse status. The oil shocks of the 1970s were an effective death knell. The current rise, forged on the industrialization and urbanization of the world's most populous country, began early in the final decade of the 20th century, though the seeds were probably sown considerably earlier.

China's rise from economic obscurity has sustained commodity price growth into the 21st century. Despite now accounting for the lion's share of global consumption of many commodity staples, its per capita use remains well below that of industrialized nations--the difference being China's vast population. India's near-equivalent numbers portend a lagged reinvigoration of commodity price support. The milestone decade of growth need not spell the end of the current boom.

Valuation

Their longer-term projections factor in declining real commodity prices and a plateauing in BHP earnings from 2013. But a softer than expected first half 2012 profit result is regardless a wake-up call. Relief on the cost front lags declining real commodity prices, but perhaps that lag will widen further given Australia's particularly acute labor shortage in the mining states, and the rampaging Australian dollar. That same lag, when prices are rising, is a benefit. They add in some additional insurance on this front and downgrade their fair value to USD 85 per ADR.

BHP made an USD 15.1 billion all-cash bid for NYSE-listed Petrohawk Energy HK in late 2011. Noteworthy is the impact US shale gas has had on BHP's asset mix. From a valuation perspective, Petrohawk propels the oil and gas division to the top of the list at USD 83 billion, or 37% of their group value overall. That's up from around 27% and ahead of iron ore at USD 63 billion or 28% and copper at USD 52 billion or 23%. If one bundles iron ore in with the carbon steel materials group's metallurgical coal and manganese, it still wins out at USD 85 billion, or more than 37% of valuation overall. Regardless, the energy focus reinforces a clear point of differentiation with Rio's (RIO) iron ore skew.

Key long-term valuation assumptions are USD 70 per metric ton iron ore, USD 120 per ...