24. The Susquehana Industries’ pension fund value and growth portfolio managers follow a sell
discipline that is best described as:
A. rule driven.
B. substitution strategy.
C. deteriorating fundamentals.
Rogers Case Scenario
Ted Rogers is the director of a research team that analyzes traditional and nontraditional sources of
energy for investment purposes. For traditional energy sources, a number of high-frequency historical
data series are available. For nontraditional energy sources, the data are generally quarterly and tend to
hide a great deal of the volatility that Rogers knows to exist because appraised values are used instead
of market values. To supplement the quarterly data, Rogers’ team uses an index of the top 30 firms in
new and experimental technologies called the NEXT Index. While not all of the firms in the NEXT are
energy firms, the index is available as a weekly series. However, the NEXT does change its composite mix
of firms frequently as firms in the index fail or are sold to larger firms that are not in the index.
To determine the correlation matrix within the different energy sectors, Rogers’ team relies on a
weighted average of correlations derived from multifactor models and historical correlations. Although
the combined experience within the team favors emphasizing the correlations derived from the
multifactor models, historical correlations are given a greater weight within the weighted average
calculations to lower the future expected performance estimates of different investment models being
considered. This practice of purposefully understating the expected future performance of these
investment models is viewed as a safety measure by the team and as a way to manage client
expectations.
In a recent meeting, the team discussed how using the last two years of historical data for oil-related
industries generated relationships between factors that had not existed in the past. One member of the
team, Steve Phillips, stated:
The relationships reflect the fact that hurricane activity in the last two years has impacted oil
concerns worldwide. There is no reason to believe that such relationships will continue in the
future.
Most of the team agreed with Phillips but conceded that a number of clients specifically requested
analysis of the previous two years of data with an expectation that new trends were emerging within
the industry. The team decided to add more variables to the analysis in order to show that the
relationships the team believed to be significant actually outweighed the importance of these recently
found relationships. After adding several additional variables, the team found the model did not
improve in predictive ability, but the recently found relationships were indeed no longer significant.
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