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SNHU - MBA-520 - Accounting and Financial Analysis
Written by: Chris Bell - March, 2017

Citigroup NYSE:C Investment Idea Principal Protected Index Fund

Citigroup Investment Project

Since newer generations are less likely to take big risks in the stock market, and risk management is becoming a top priority for companies, I think a likely investment for Citigroup is a recreation of the principal protected market index fund that guarantees 90% of the upside and 0% of the down side. The Internet has brought us a wealth of knowledge accessible at our finger tips and it has become more apparent that mutual fund managers, and Wall St in general, make a great deal of money by creating and managing retirement accounts. Listening to a stock broker that owns a Ferrari and works in the center of New York City is almost as bad as listening to the age-old car salesman with gold jewelry and exposed chest hair. In fact, the reputation of stock brokers is so poorly resembled in 2017 that it might even be hard to market a risk-free investment idea that guarantees 90% of the upside without any chance of losing the principal investment. "Wait, what's the catch?" Citi only gets paid when the customer get paid.

Warren Buffett is a famous investor known for being honest and simple with his approach to long term investing. He says, "When trillions of dollars are managed by Wall Streeter's charging high fees, it will usually be the managers who reap outsized profits, not the clients, stick with low-cost index funds. (Hunnicutt, 2017)" Jack Bogle agrees with Buffett and started a company called Vanguard, known for charging minimal fees without allowing customers to trade on a daily basis. Customers can dollar-cost-average weekly or monthly into the funds of their choice without any transaction fees and a tenth of the expense ratio of Wall Streeter's. I believe this new investment idea for Citi will give them the additional "friendly" vibe that the younger generation is looking to have with their retirement account brokers. There won't be any fees to simply manage the account because managing it will not be difficult.


Citigroup Costs and Benefits

Citi will incur a mix of upfront costs in research and marketing along with future benefits that outweigh the costs to create a profit. An investment fund that guarantees no loss to principal, yet endless possible profits is a risk free way for younger people to get back into the stock market without feeling like they could lose their entire savings. The chatter will limit the marketing costs, but Citi will still need to invest in marketing to get the project started. Research will need to be conducted to determine which index funds will be part of the project, but the DJIA, S&P500 and Vanguard 500 will be among the top US index funds to use while we also incorporate an international fund and long term bond fund to diversify portfolios. I believe these funds will quickly appeal to the elder generations as well, since they are a prime candidate for being taken advantage of in this industry, and because large dips in the stock market are detrimental to those that have less than 15 years to live.

Younger generations are accustomed to digging deep into Terms and Conditions for hidden fees and controlling contracts, so we need to be upfront about our costs and keep things as simple as possible. For example, "$1000 minimum, commit to 5 years minimum and be charged 10% of all profits above the initial investment." If the customer wants to take the money out early they will get the fair market value at that time but if they wait until 5 years pass they will be guaranteed their initial contribution. Citi won't take any fees unless they make money first. This focusses on the customer first and the company second. Citi must work hard to make the customer money instead of collecting fees regardless of whether they make money or lose money. Keeping things simple will limit the upfront costs of creating the new offering as well. The expense ratio is a major fee to review before opting into a mutual fund because it's charged to manage the fund even when it's going down. Expense ratios have been going down since the 2008 financial crisis but they still don't even compare to those of Vanguard. "That drop in the expense ratio - which represents the percentage of assets in a fund deducted each year for expenses like management and administrative fees - was largely driven not by funds cutting fees, but by investors increasingly seeking out funds with lower fees. (Barrett, 2015)"

Citigroup Implications that Affect Budget

Some implications that may affect the budget and related business decisions for the potential investment are mostly pointed towards stock market crashes and timing. If the first group of investments do well for 5 years and the market crashes below the initial investments, Citi will need to pay the difference for any customers that want to withdraw their money. There's no risk for Citi until 5 years passes which gives the fund plenty of time to gain some traction, but the market can be tricky and misleading. The investment does not require a large upfront investment by Citi nor does it require active management like mutual funds because the idea will simply track index funds that are more set it stone for long periods of time. Customers will enjoy hearing that their money isn't being traded daily on FB and AMZN, but instead secured in a fund that tracks the S&P500 (SPY for example), Vanguard International Index Fund (VTIAX for example) and a Long Term Bond Index Fund (VBLTX for example). Each of these funds pay dividends quarterly that far outweigh the minimal expense ratio.

Will Benefits Outweigh Risks?

I think the benefits outweigh the risks far beyond the cost-and-profit structure because Citi can further create their Vanguard-type friendly brand name by incorporating more safe investment options for customers. Instead of telling customers, "Trust us with your money, sign here on page 54", Citi can quickly explain that customers cannot lose the money they put in, plain and simple. "We only win when you win first. We're here to work for you, and by that we literally mean work for you." Index funds and Bonds have been proven to make roughly 10% per year over hundreds of years between dividends and appreciation combined, while less than 1% of mutual fund managers hold such a record over their lifetime. However, even index funds don't sound safe of cheap to those that aren't educated enough on the subject matter, so the marketing process will be open and candid. There's a certain amount of deception involved for a mutual fund manager to guarantee profits at all never mind guaranteeing a better rate of return than the simplicity and track record of index funds. Citi can use this approach to gain trust with customers and there's no need to hide verbiage in paperwork because there's nothing to hide. In fact, they should expose everything about index funds and safety while avoiding any negative talk about mutual funds because it could give a negative finger-pointing image in their customer-first marketing campaign. Mutual fund fees have already been exposed enough so a little bit of research will quickly reveal the difference between mutual funds and Citi's new Principal Protected Index Fund.


References:

Barrett, J. (November, 2015). How much money are you losing to investment fees? Retrieved from:
http://www.cnbc.com/2015/11/05/how-much-money-are-you-losing-to-investment-fees.html

Hunnicutt, T. (February, 2017). Warren Buffett says Investors Should Stick With Index Funds. Retrieved from: http://www.foxbusiness.com/markets/2017/02/25/warren-buffett-says-investors-should-stick-with-index-funds.html