Reference no: EM133779625

Advanced Funds Management

Company - Pendal Horizon Sustainable Australian Share

Sanders Consulting
Sanders Consulting services the fund management industry. They specialise in conducting research for US and Australian Equity and Bonds funds under Berk's theory of fund performance and capital flows. In addition, Sanders offers fund management cost reduction program, primarily through reduced number of holdings in a fund and reduced churn (number of transactions per annum).

Dandenong Investments
Dandenong Investments' manages 10,000 retail investors provide financial advice as well as recommends managed funds for their clients. DI have recently considered managing two popular in-house funds - US Investment grade corporate bonds and Australian Large Cap equities and have asked SC to provide their services. Specifically, DI wishes to identify funds with high turnover, high costs, low ranking (below average) BUT with skilled fund managers. DI also requires SC to use the identified funds to "enhance" them such that these funds are not only improve on a net (after costs) basis but also are able to generate abnormal returns (on a gross basis (without considering costs) against their respective benchmarks.

AFM in-training Fund Management Team
Sanders Consulting has requested your AFM team to provide the services requested by Dandenong Investments. Your team will have a specialist in US FIS assets and US yield curve forecasts; a specialist on forecast of the Australian economy and Australian Large cap equities; and a specialist equity and FIS fund analyst. Your team will write a report to address the requirements for Dandenong Investments.

Executive Summary
Team will provide an executive summary of the scope of this report and the analyses conducted. Teams also mention limitations of this project.

Section 1
Your team will identify a US FIS Investment grade Corporate Bond fund and an Australian Large Cap equity, that has (i) and active management style (LSEG), (ii) ranked below average (below 50 percentile) for the last 5 years (Morningstar), (iii) has above-average net management costs over the last 5 years (LSEG and MorningStar (US and Australia)), (iv) above average turnover (LSEG), and must have at least 50 firms in Equity fund and 100 bonds in the FIS fund.

Task 1 Your team will demonstrate that the chosen active funds (one US Investment grade Corporate bond fund and one Australian Equity Large Cap fund) have the desired characteristics in a table below:

Task 2 Your team will conduct a top-down analysis of the two funds against their benchmarks over the last 5 years (using monthly data). 3-month T-Bill rate must be used in this analysis. The following measures will be provided and discussed in the table below:

The discussion must focus on how each fund has performed on a historic basis against their respective benchmarks, and whether the fund manager has displayed skills in managing these funds.

Task 3 Your teams will conduct a bottom-up analysis of both funds over two periods. Teams will require to gather returns and other details (sectors for equities and credit ratings/maturity or duration for FIS) over three dates over the last 5 years. All analyses will require a comparison against each fund's respective benchmarks.

Equity Funds: Equity fund bottom-up analysis must group firms into 11 sectors, and must be conducted over two periods (months, quarters, half years or years) using the latest data available for this analysis.

FIS Fund: FIS fund bottom-up analysis must start by grouping FIS assets into credit and maturity (or duration) groups. Bottom-up analysis will be conducted over two periods (months, quarters, half years or years)

A discussion of fund manager's skills will summarise the results of the two Bottom-up analyses.

*Section 2
This section will be conducted by an Equity Analyst tasked with improving the fund's performance by (i) reduced turnover, (ii) reduced number of firms in the fund to between 22 and 33, (iii) improved Information ratio, and
(iv) improved rankings.

Task 1
Your team will provide market forecast (in terms of % change from current market returns) months, and forecasts for each sector (in terms of % change from current sector returns) using the Black Litterman framework, as well as your own private deviations from BL forecast over the next 6. A discussion on how each sector will perform in the table below:

Task 2
Your team will identify two firms from each sector that is most mis-priced. Mis-pricing will be identified using two methodologies: first, using estimates from LSEG's equity data; and second using the analyst's proprietary methodology. You will present the information in the table below and also provide a short description of the direction of forecast and difference in opinion between LSEG analysts and your own forecasts.

Task 3
Your team will allocate the mispriced firms and a BM ETF to create an enhanced Australian Equity large Cap fund. The newly created fund will have an improved Information ratio (using mispricing for alpha calculations and the historical tracking error) with lower management costs. The new fund will only consist of the identified mispriced firms from Task 2 as well as the BM ETF to provide the exposure to the BM. Teams will allocate the firms and the BM ETF to ensure that (i) the sector allocation will deviate from the BM based on the forecasts in Task 1, and (ii) the firms and the ETF will be allocated through risk allocation.
A report on the structure of the newly formed equity fund, and its forecasted performance will be provided at the end of this section.

Section 3 (1500 words)
This section will be conducted by an FIS Analyst tasked with improving the fund's performance by (i) reduced turnover, (ii) reduced number of bonds in the fund to 60, (iii) improved Information ratio, and (iv) improved rankings.

Task 1
Your team will provide yield forecast (in terms of % change from current yield), including forecasts for each of the 10 maturity (in terms of % change from current sector returns). A discussion on the reason for the yield change for each maturity will be presented in the table below:

Task 2
Your team will identify three bonds for each credit/maturity or duration that is most mis-priced. You will present the information in the table below.

Task 3
Your team will allocate the 60 bonds and a BM ETF to create an enhanced US FIS Investment Grade fund. The newly created fund will have an improved Information ratio (using historical tracking error) with lower management costs. The new fund will only consist of the 60 bonds from Task 2 as well as the BM ETF to provide the exposure to the BM. Teams will allocate the bonds and the BM ETF to ensure that (i) the credit/maturity or duration allocation will deviate from the BM based on the forecasts in Task 1, and (ii) the bonds and the ETF will be allocated through an optimization process.

A report on the structure of the newly formed bond fund, and its forecasted performance will be provided at the end of this section.

Conclusion (250 words)
A conclusion will detail the work completed in the three sections and the value to SC's client Dandenong Investments.

Attachment:- Advanced Funds Management.rar

Note: Need only section 2.