) RAMIREZ MOST LIKELY CRITICIZES THE RELATIVE-VALUE METHODOLOGY THAT ALPHA USES TO ADD VALUE BECAUSE
6.) Ramirez most likely criticizes the relative-value methodology that Alpha uses to add
value because:
A.
it better reflects a top-down approach to portfolio management.
B.
it better reflects a structure trade.
C.
a total return approach is a far superior framework.
Answer = C
Yield measures have limitations as an indicator of potential performance. The total
return framework is a superior framework for assessing potential performance for a
trade.
“Relative-Value Methodologies for Global Credit Bond Portfolio Management,” by Jack
Malvey
Section
Sarkar
Bobby 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 Endowment
The Hayes University Endowment is willing to accept a certain degree of tracking risk, provided
that it is compensated with incremental returns. In particular, Hayes wants 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 1
Under this method, cash in the portfolio is equitized by using a long futures position. The cash is
invested in short- to medium-term fixed-income securities.
Method 2
The manager will only invest in stocks expected to outperform the index. If the manager has no
opinion on a stock, or if the stock is expected to underperform, the stock will not be included in
the investment portfolio.
Bayside Foundation
The 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 1
Invest 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 2
Allocate another portion of the portfolio so it earns alpha associated with small-cap stocks but
without the associated small-cap market beta exposure.
Daniels Corporation Pension Plan
Daniels Corporation pension trustees want to allocate a portion of the equity 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 in Exhibit 1.
Exhibit 1
Investment Manager Data
31 December 2012
Manager Manager Manager
A
B
C
Assets under management ($ millions)
2,876
3,752
4,619
Price-to-earnings ratio (P/E)
8.7
17.5
23.1
Dividend yield
3.50%
1.70%
1.00%
Earnings per share growth (5-year projected)
6.75%
5.25%
14.50%
Portfolio active return
3.50%
3.00%
4.30%
Portfolio tracking risk
5.00%
1.50%
6.00%
Style fit
87.00%
95.00%
85.00%