Portfolio Theory and Management Assignment: You are the Portfolio Manager for A&C endowment fund. A&C had replaced the previous portfolio manager due to unsatisfactory performance over the past 5 years, based on the key performance measures laid out by GCC board of directors. They key performance measures are: Although the fund has an infinite life, the GCC board evaluates their portfolio managers over 5 year periods, with annual reviews. Currently, the GCC endowment fund is constructed as follows: Minimum Return (p.a.) Distributions (p.a.) Downside Risk (p.a.) Net Real Returns of 5% 5% -15% Asset Classes Allocation Colonial First State Cash Management Trust 10% UBS Australian Bond Fund 20% SPDR ASX 200 Fund 40% Arrowstreet Global Equity Fund 20% Vanguard Australian Property Securities Index Fund 10% Your task is to: 1. Examine the current allocation and discuss the suitability of this strategic asset allocation in view of the mandate (key performance measure) established. 2. Examine the Australian Bonds to select between alternate investments vehicles. Required: 1. Prepare a report on the two tasks specified below. This report will be less than 1000 words (excludes appendix and bibliography which needs to be submitted with the assignment coversheet physically in the assignment box). Any part of the assignment that exceeds this limit will be ignored. 2. Provide a critique of the strategic asset allocation. a. Create a benchmark for the investment portfolio. [10 marks] Use the current allocation as shown in the table above as well as the passive benchmark for each asset class. Historical data for these benchmarks are available from a variety of sources. b. Compare the investment portfolio with its benchmark. [20 marks] The current investment portfolio consists of both active and passive funds. Compare the investment portfolio with the benchmark, specifically focusing on: gross and net returns; abnormal returns from the active funds; diversification of the overall portfolio. c. Critically evaluate the current strategic asset allocation. [20 marks] The current asset allocation may be sub-optimal, or may not adhere to the mandate of the endowment fund. Please ensure that the critique is specific and in-depth, rather than superficially listing a few aspects. 3. Keep or Replace the Fund? Evaluate the fund used for the assigned asset class, and decide if you wish to keep the existing fund or replace it with another from the Australian funds market. No change to the asset allocation is allowed. Your decision will be based on improving the overall portfolio performance, as measured by Sharpe’s measure over the next one year. The chosen investment vehicle must be either a closed- or an open-ended single-asset class fund (ETFs are allowed). The fund must be available to institutional investors and must not contain any derivative securities; hold short positions, or be leveraged. a. Forecast market conditions over the next 1 year. [10 marks] A&C encourages their portfolio managers to take advantage of market conditions. Future market conditions will dictate which sectors of the market will perform better than others. You are required to provide a brief market forecast, focusing on the asset class assigned. b. Change the existing Fund? [40 marks] Based on your forecast determine if the style or focus of the fund (for the assigned asset class) is optimal. You can choose an alternative fund from the market by justifying why it should replace the one A&C endowment fund currently invests in. Your evaluation should focus on the contribution to the expected return and annual distributions, and the impact on portfolio risk (standard deviation and VaR at 95% confidence).
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