Problem:
You are a fund manager for a highly respected firm based in Makati City. One day a client of yours which you inherited from your father, the founder of the firm, asked you out for lunch on a very important matter. His name is Mr. Gonzalvo, and he comes from a modest background, but worked his way thru college and built up a hardware trading business from the ground up and now has 5 branches all located in the southern part of the National Capital region. The property value of his branches is now worth 10 million each (pesos), with monthly inventory of Php1 million and sales of Php 800,000 a month. His cash in the bank has accumulated over the years to about 100 million. He's conservative and has never invested in anything aside from occasional in and out of the stock market, as recommended by your father.
Now during the lunch meeting, he tells you that he is set to retire in two years' time, enough time for him to train his eldest to take over the business. He has 3 children, one son and two daughters. The eldest is 30 years old and finished BS Mechanical Engineering, his daughters are taking up both nursing. His concern is how his money will be handled expertly as his children will gradually take over. He wants them to earn their way just like he did but reward them also financially if they choose to keep a productive life. He wants you to create a fund that will guarantee them some monthly stipend but at the same time a family fund in event of his death. He's willing to set aside 10% of his accumulated cash for speculative investments if it doesn't lose 10% of its value at the end of the fiscal year.
Your expertise is mostly confined to stock, bond and mutual funds trading/managing. But you have extensive contacts within the financial community, such as large banks and insurance companies. Currently interest rates for T bills are at an average of 3 to 5 percent, while the average return from securities investments is 15%, but with a risk factor of 25%.
With these facts answer the following:
Q1. What institutions would you refer to Mr. Gonzalvo to handle the conservative fund that would be able to provide a monthly stipend for the 3 children at 50,000 monthly each.
Q2. What investment instrument would you recommend that would generate the monthly stipends for the children.
Q3. How much of his cash would you allocate for this conservative fund and how much would you allocate for more aggressive investments?
Q4. Would you allocate a certain amount as a reserve fund for any emergency cases? How much would it be?
Q5. Once you've created this investment mix, given the risk factors involved how risky is this? Explain.