Investment Challenge Report

Investment Challenge

The Investment Challenge will be done in teams of three-four. The teams will be created at the end of the Drop and Add period and posted online. Students will have individual access prior to the formation of groups to familiarize themselves with the FTS Real Time System we will be using for the Investment Challenge. Directions for accessing the site will be posted on A2L.

Investment Scenario: You and your team members are a portfolio management team at a high-net-worth investment firm. A client has approached your firm looking for a proposal to invest $1.5 million CAD and $1.5 million US. She states that she has just won $30 million CAD in a lottery tax-free. She is forty years old and is agnostic about whether you recommend an income or growth strategy. She states that she realizes that some advisors are simply good stock pickers and that she is fine with a highly focused stock- picking approach. She says that she has heard that others are highly diversified, asset allocation-focused investment managers. She says she is fine with that too. She is open to any approach that you believe will help her.

As she plans to continue working for the foreseeable future, she is not looking to her portfolio for near- term income needs. Her stated objectives are:

1. to grow her capital on an inflation-adjusted basis,

2. to be mindful of taxes and expenses,

3. to use a prudent approach to investing,

4. to be able to understand how her portfolio manager adds value,

5. in order to have liquid investment holdings and to stay away from esoteric investments, she has

asked that strategies be limited to investments in medium to large Canadian and US companies and a select number of ETFs (these will be provided to students). However, she is also willing to have her capital invested in a margin account and to engage in short selling, if deemed consistent with goal #3.

You have a sense that this client is testing your firm as she has just won $30 million CAD and is allocating only $1.5 million US and $1.5 million CAD to your firm. In fact, she has decided to try out several potential money managers. She does not want them to know this as she fears that they might try to take on extra risk in order to have strong performance in the early months of the mandate. Her plan is to have eight different investment firms each put the same amounts to work according to her objectives stated above. This way she will see eight different plans and potentially eight different approaches.

At the end of two months, she plans to consolidate all of her recent winnings among the four firms that she feels most comfortable with. Performance is always important, but it will not be the only factor as she realizes that two months is too short a time frame to judge returns. Each of the four winning firms will be given $7.5 million CAD to invest. She will close her account at the four firms that did not reach the top half of her pecking order. Will your firm win or lose in this process?

Your team’s Investment Challenge is to:

1. Create a portfolio that invests $1.5 million US and $1.5 million CAD. All initial portfolios should be set up no later no later than Tuesday, September 28. The instructions for setting up the portfolio and accessing the Investment Challenge website will be provided on Avenue.

2. Write a brief review (approx. 3 pages double-spaced) for the client that discusses your recommended investments and strategy. You should also disclose your approach to fees. This is Report 1 of the Investment Challenge. It must be submitted on Avenue no later than Monday, October 04 at 5:00 pm. Only one submission per team is required.

3. You can make trades in your client’s portfolio as you see fit during the Investment Challenge. All initial and subsequent trades incur a fee of $9.95 in addition to the overall investment management fee that you charge the client. The initial portfolio must be established by the beginning of Week 4 (September 28) and at least one trade per week must be made in subsequent weeks up to and including Week 12. Buy-and-hold purchases of index funds do not provide an interesting learning experience, the possible merit of such a strategy notwithstanding.

4. Write a (12-15 pages double-spaced) review of what went well and what did not go well during the Investment Challenge. Discuss why you made any trades or why you did not. Compare your performance to a relevant benchmark, which you must decide. What might you have done differently in retrospect? Was there anything that you learned that might alter your investment approach in the future?  

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