2.1. Case Study See “Background to Case” below 2.2. Questions Background to case The date is October 2016. You are a professional investment consultant working for a firm of financial advisers. One of your clients is Mr Francis Jeffery, a retired former aircraft engineer who is responsible for investing his family’s wealth. This amounts to savings of £7 million which were realised from the sale of land his father’s business had accumulated during the Second World War and the sale of his own engineering business five years ago. As the younger members of the family are working in nursing and teaching, it is unlikely that further wealth will be created to add to the savings in the immediate future. As a result Mr Jeffery is a cautious man and to date has placed all his savings into relatively low-risk traditional investments, looking to achieve both an income and reasonable capital growth. Your firm has found in the past that Mr Jeffery tends to avoid investment funds with high fees and high staff turnover, and is also wary of “new technologies” which he defines as companies selling software, consumer electronics and internet-related services. He usually aims to achieve an income (post-higher rate tax) of £200,000 per year to support his lifestyle, sponsor his grandchildren’s school fees, and assist various charitable causes which he and his wife support. With the collapse of interest savings rates since 2008 and reducing dividend yields, Mr Jeffery has seen a dip in his annual income, and the portfolio’s capital value has deteriorated as well. Once a year, Mr Jeffery meets with your firm to review the performance of the investments and revise the portfolio allocations and holdings accordingly. Disappointed by the performance of the portfolio in 2015 and 2016 to date, Mr Jeffery is keen to look at alternative options for improving both his income and chances for capital growth. He is intrigued by a recent article he read entitled “Seeking Alpha” which talked about the much better returns available with investment strategies in hedge funds and private equity, and is now interested in exploring the possibility of allocating up to 10% of his portfolio to alternative assets for the first time. “I always said we should invest in bricks, mortar and safe companies”, he tells you on the telephone, “but that strategy hasn’t paid off and even my most trusted banking investment proved to be a failure. So perhaps the time is right to diversify a little, and consider things I wouldn’t normally touch but which could have a beneficial effect on my overall return”. He recognises, however, that he knows almost nothing about the alternative investments market, and has asked you to help….
PART A (50 marks)
Draft an Investment Briefing to provide Mr Jeffery with a clear appreciation of the various features of investing in alternative assets. This document should:
(i) Justify the role that alternative assets might play in a balanced portfolio, and (35 marks)
(ii) Clearly identify the risks surrounding alternative asset investing.
(15 marks) The Investment Briefing should not exceed 1,250 words and should cite any relevant supporting evidence using an appropriate form of academic referencing.
PART B (50 marks) Draft a detailed Investment Review which critically evaluates a specific investment fund that Mr Jeffery might consider including in his portfolio. This document should:
(i) Identify either ONE hedge fund or ONE private equity investment fund (“the Fund”) currently trading in the UK or the US; Research and discuss the key characteristics of that Fund, including, inter alia, its investment portfolio focus and investment strategy, recent financial performance and fund and management structure; (20 marks)
(ii) Measure and critically evaluate the Fund’s performance in the last TWO years using asset pricing principles, benchmarked against relevant industry criteria. (30 marks) The Investment Review should not exceed 1,250 words and should cite any relevant supporting evidence using an appropriate form of academic referencing.