a) UNISA case study
UNISA recently revised the investment policy statement (IPS) for its retirement plan portfolio. The return objective for equities is to earn 1 percent above the return on a broad market index, relative to the benchmark.
Matombo Mabwe identifies an enhanced index manager that she expects would satisfy the IPS objectives for both return and risk. Mabwe believes it is possible to improve the portfolio's riskadjusted return by also adding active equity managers. He recommends a core-satellite portfolio strategy for the equity portion of the plan's portfolio as shown below. Mabwe determines that the active returns of the selected managers are not correlated.
Recommended Core-satellite Portfolio
|
Equity Managers
|
Allocation
|
Expected Active Return*
|
Expected Active Risk
|
Fees
|
|
Enhanced index
|
50.0%
|
1.2%
|
1.3%
|
0.2%
|
|
Active A
|
30.0%
|
2.0%
|
4.0%
|
0.4%
|
|
Active B
|
20.0%
|
3.6%
|
10.5%
|
0.8%
|
|
Core-satellite portfolio
|
100.0%
|
1.6%
|
1.6%
|
0.3%
|
*Returns are net of trading expenses and gross of fees.
(i) Calculate the information ratio of the core-satellite portfolio. Show your calculations.
(ii) Determine whether Mabwe's recommended core-satellite portfolio is appropriate for UNISA.
Justify your response with two reasons specific to UNISA.
Alternative investments are also part of UNISA retirement plan portfolio. Mabwe has a strategy of rolling forward a long position in platinum futures traded on JSE. Mabwe's expectations are as follows:
Electricity supply disruptions in South Africa, the world's dominant platinum producer, will cause platinum supply to fall and spot prices to rise, interest rates will rise, and the convenience yield on platinum will increase. Mabwe observes that his expectations are not yet reflected in platinum futures prices.
Mabwe reviewed the recent performance of the platinum futures and has found that for the last 12 months, the platinum futures had a roll return of 6.4% and a spot return of 10.2%. The collateral return on the platinum futures over the past 12 months was 7.1%.
(iii) Determine, given that Mabwe's market expectations are correct, whether an increase, a decrease, or no change in each of the following return components should be expected:
Justify each response with one reason
a) spot return (price return)
b) collateral return (collateral yield)
c) roll return (roll yield)
(iv) Calculate the total return on the platinum futures.
(v) Discuss the potential benefits to UNISA retirement plan of adding commodities as an asset class.
b) ZB Bank case study
Hardlife Shumba is a fixed income portfolio manager for ZB Bank. Shumba is reviewing the portfolios of several pension clients that have been assigned to him to manage. Two of these portfolios are Athenaites Spar and UZ pension plan has the following characteristics:
|
Sector
|
Athenaites Spar Allocation
|
UZ Allocation
|
Athenaites Spar Duration
|
UZ Spread Duration
|
|
Zimbabwe treasury
|
14.6%
|
10.1%
|
7.54
|
0.00
|
|
Zimbabwe agencies
|
23.7%
|
14.5%
|
9.02
|
7.20
|
|
Zimbabwe Corporates
|
13.8%
|
20.9%
|
4.52
|
5.80
|
|
Zimbabwe mortgages
|
11.4%
|
33.7%
|
1.33
|
4.65
|
|
Zimbabwe ABS
|
18.0%
|
8.20%
|
2.00
|
3.67
|
|
Non-Zimbabwe governments
|
18.5%
|
12.6%
|
3.22
|
2.50
|
Bond index benchmark for Athenaites Spar bond portfolio has an effective duration of 6.73.
(i) Calculate the duration of Athenaites Spar bond portfolio and asses the interest rate risk of the portfolio versus the benchmark.
(ii) Calculate the spread duration of UZ pension plan portfolio and evaluate the credit risk of the portfolio versus the Zimbabwe mortgages.
Abigail Mpofu is a pension consultant at ZB Bank and is asked to evaluate the following portfolios:
- Portfolio A is highly concentrated, with five stocks representing 75% of the total portfolio.
- Portfolio B is highly diversified with over 400 stocks, none of which represent more than 1% of the total portfolio.
- Portfolio C is a diversified portfolio of 70 stocks, with the top 10 names representing 30% of the total portfolio
The following investment results were recorded during 2015:
|
|
Return
|
Standard deviation
|
Beta
|
|
Portfolio A
|
42%
|
1.2
|
1.5
|
|
Portfolio B
|
25%
|
1.8
|
1.1
|
|
Portfolio C
|
16%
|
2.2
|
1.5
|
|
ZSE Index*
|
20%
|
0.5
|
1.0
|
*ZSE Index represents the market portfolio.
Risk-free rate: 6%
(iii) Compute the Sharpe, Treynor, and Jensen measures for each portfolio.
(iv) Identify which portfolio had the best risk-adjusted performance in 2015. Justify your selection with two supporting arguments.