1. a) Eagle case scenario Rudo Maravanyika and Abigail Cephas are portfolio managers for Eagle associates. Maravanyika and Cephas are currently evaluating the expected performance of portfolio managers they have hired for a subset of their clients' portfolios. For this subset, Maravanyika and Cephas have decided to pursue a core-satellite approach. The data below show the manager's active returns and active risk. Tatenda management uses a value oriented approach, Matipa advisors use a socially responsible investment approach, and Kunofiwa managers use an enhanced indexing approach. Active Tracking Return Error Weights Tatenda management Tawana Associates Takunda Investors Matipa Advisors Kunofiwa Managers 2.8% 0.0% 2.0% 3.5% 1.7% 5.2% 0.0% 3.1% 6.8% 2.5% 20% 20% 25% 5.0% 30% Under Eagle's current plan managers are paid 0.20% for the first R10 million under management and 45% for excess returns relative to the managers' benchmark. The primary concern at Eagle is that managers are not provided proper incentives. Under a proposed fee schedule, managers would be paid 0.30% for the first R10 million under management, 0.20% for assets amounts over R10 million but less than R30 million and 0.10% for assets amount over R30 million plus 10% of all excess returns relative to the manager's benchmark. During discussion of these items, Cephas makes the following comments: "Our proposed plan should contain low water marks provisions. These provisions state that managers will be paid no less than the certain amount during bear markets. This will prevent us from losing good managers during markets downturns." "Your proposal to cap performance fees is illogical. The cap would discourage your managers from taking the risks necessary to obtain higher returns. Rather than aligning the managers' goals with your own this could have a very negative effect." i) Calculate the expected active return, expected active risk and expected information ratio of this subset of managers, given the above allocations. (5) 2 INV4801/101 ii) State whether each of the comments made by Cephas is correct or incorrect and explain your selection (4) Given that assets under management is R13 million and excess return relative to benchmark is 5%, evaluate the current and proposed fee structures. (4) iii) b) Murehwa Securities case scenario Rodrick Mashanda, CFA is a Fixed income securities trader at Murehwa Securities. Mashanda has decided to pursue a contingent immunization strategy over a 3-year time horizon. He just purchased at par R10 million worth of 7%, semiannual coupon, 5 year bonds. The current rate of return for immunized strategies is 7%, and he is willing to accept a return of 8%. i) Determine the cushion spread. (2) ii) Compute the required terminal value and the required assets needed at initial implementation (6) iii) Determine whether active management is still viable should interest rates immediately fall to 6.5%. 1. a) Eagle case scenario Rudo Maravanyika and Abigail Cephas are portfolio managers for Eagle associates. Maravanyika and Cephas are currently evaluating the expected performance of portfolio managers they have hired for a subset of their clients' portfolios. For this subset, Maravanyika and Cephas have decided to pursue a core-satellite approach. The data below show the manager's active returns and active risk. Tatenda management uses a value oriented approach, Matipa advisors use a socially responsible investment approach, and Kunofiwa managers use an enhanced indexing approach. Active Tracking Return Error Weights Tatenda management Tawana Associates Takunda Investors Matipa Advisors Kunofiwa Managers 2.8% 0.0% 2.0% 3.5% 1.7% 5.2% 0.0% 3.1% 6.8% 2.5% 20% 20% 25% 5.0% 30% Under Eagle's current plan managers are paid 0.20% for the first R10 million under management and 45% for excess returns relative to the managers' benchmark. The primary concern at Eagle is that managers are not provided proper incentives. Under a proposed fee schedule, managers would be paid 0.30% for the first R10 million under management, 0.20% for assets amounts over R10 million but less than R30 million and 0.10% for assets amount over R30 million plus 10% of all excess returns relative to the manager's benchmark. During discussion of these items, Cephas makes the following comments: "Our proposed plan should contain low water marks provisions. These provisions state that managers will be paid no less than the certain amount during bear markets. This will prevent us from losing good managers during markets downturns." "Your proposal to cap performance fees is illogical. The cap would discourage your managers from taking the risks necessary to obtain higher returns. Rather than aligning the managers' goals with your own this could have a very negative effect." i) Calculate the expected active return, expected active risk and expected information ratio of this subset of managers, given the above allocations. (5) 2 INV4801/101 ii) State whether each of the comments made by Cephas is correct or incorrect and explain your selection (4) Given that assets under management is R13 million and excess return relative to benchmark is 5%, evaluate the current and proposed fee structures. (4) iii) b) Murehwa Securities case scenario Rodrick Mashanda, CFA is a Fixed income securities trader at Murehwa Securities. Mashanda has decided to pursue a contingent immunization strategy over a 3-year time horizon. He just purchased at par R10 million worth of 7%, semiannual coupon, 5 year bonds. The current rate of return for immunized strategies is 7%, and he is willing to accept a return of 8%. i) Determine the cushion spread. (2) ii) Compute the required terminal value and the required assets needed at initial implementation (6) iii) Determine whether active management is still viable should interest rates immediately fall to 6.5%