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Bobby Sarkar Case ScenarioBobby Sarkar is a senior consultant with Experian Financial Consultants (EFC), an investment advisory firm based in Cambridge, Massachusetts. EFC provides a range of consulting services including advice on investment strategy and selection of money managers. Currently, Sarkar is working with three clients: 1) Hayes University Endowment, 2) Bayside Foundation, and 3) Daniels Corporation Pension Plan.Hayes University EndowmentThe Hayes Endowment is willing to accept a certain degree of tracking risk provided it is compensated with incremental returns. In particular, Hayes wishes to implement an investment approach that maximizes the information ratio.Sarkar indicates that there are two alternate methods to implement the investment approach favored by Hayes:Method 1Under this method cash in the portfolio is equitized using a long futures position. The cash is invested in short to medium term fixed income securities.Method 2The manager will only invest in stocks that are expected to outperform the index. If the manager has no opinion on a stock, or if the stock is expected to underperform, then the stock will not be included in the investment portfolio.Bayside FoundationThe investment policy committee for Bayside Foundation follows a fairly conservative investment strategy and pays particular attention to the minimization of tracking error. Bayside seeks to achieve two specific objectives:Objective 1Invest a portion of the portfolio in an index with a large cap bias. In addition to minimizing tracking error, Bayside would also like to ensure that the index strategy involves minimal rebalancing costs.Objective 2Allocate another portion of the portfolio so that it earns alpha associated with small cap stocks but without the associated small cap market beta exposure.Daniels Corporation Pension PlanDaniels Corporation wishes to allocate a portion of its pension portfolio to an active money manager with a value investment style. Sarkar has collected information on three active portfolio managers and will recommend one of them to Daniels. Selected information for the three managers is presented below in Exhibit 1.Exhibit 1Investment Manager DataDecember 31, 2009 |
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