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ASSIGNMENT 02 Due date: 22 September 2017 Unique number: 20170922 Aim: To evaluate your knowledge of some of the fundamental aspects of study units 4 to 7, which deal with fixed-income, equities and alternative investments portfolio management, and performance management and attribution on investment portfolios.. Answer the following questions and submit your assignment at https://my.unisa.ac.za 1. a) Stacey case scenario Tadiswa Mpofu and Abigail Cephas are portfolio managers for Stacey associates. Mpofu and Cephas are currently evaluating the expected performance of portfolio managers they have hired for a subset of their clients' portfolios. For this subset, Mpofu 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. Tatenda management Tawana Associates Takunda Investors Matipa Advisors Kunofiwa Managers Active Return Tracking Error Weights 2.8% 0.0% 2.0% 3.5% 1.7% 5.2% 0.0% 3.1% 6.8% 2.5% 10% 20% 25% 5.0% 40% Under Stacey's current plan managers are paid 0.20% for the first R15 million under management and 0.35% for assets amounts over R15 million. The primary concern at Stacey 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 loosing 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) ii) State whether each of the comments made by Cephas is correct or incorrect and explain your selection. (4) iii) Given that assets under management is R45 million and excess return relative to benchmark is 5%, evaluate the current and proposed fee structures. (4) b) FBC Securities case scenario Leeroy Chitseko, CFA is a Fixed income securities traders at FBC Securities. Chitseko has decided to pursue a contingent immunization strategy over a 5-year time horizon. He just purchased at par R10 million worth of 7%, semiannual coupon, 8 year bonds. The current rate of return for immunized strategies is 8%, and he is willing to accept a return of 7% (this is the safety net return). 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 rise to 8.5%. (4) 2. Chirume case scenario As part of an attribution analysis Itai Chirume, CFA, has accumulated the following partial data for his portfolio. Sectors Portfolio sector weight% Benchmark sector weight% Portfolio sector return% Benchmark sector return% Agricultural Capital goods Consumer durables Energy 10.55 8.52 36.22 5.24 6.45 8.99 37.36 4.65 -0.82 -3.28 1.96 0.44 1.35 -4.34 1.98 0.24 1.34 0.56 Total portfolio For payment of performance bonus, Chirume prefers to use the equity market index as a performance evaluation benchmark. i) Using the available data, calculate and explain the pure sector allocation value added by the Energy goods sector allocation. (6) ii) Using the available data, calculate and explain the within-sector allocation value added by the Capital goods. (6) iii) Using the available data, calculate and explain by the allocation /selection interaction value added by the agricultural sector. (6) iv) Evaluate the validity of the benchmark that Chirume utilizes in assessing his performance. (7) Godfrey Marozva, CFA DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING UNISA 2017