Week 4 - Assignment

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Week 4 Assignment-Ethics in Financial Services Maruthi Nallapati Forbes School of Business and Technology FIN 680 Marcus Crawford 08/10/2023 1

Fund Manager Investing Approaches in the Alliance Fund Scenario Feather Investment Partners' approach is more fundamental. They use sector analysis and their own personal views and expertise to build equally weighted baskets of securities within sectors. They also focus on factors such as governance, growth potential, and valuations when selecting securities. Elm Investment Partners' approach is both fundamental and quantitative. They have a strong focus on fundamental analysis, using financial models and detailed market and accounting information to evaluate securities. They also use software and quantitative models to rank securities based on preferred characteristics. Tiger Capital's approach is more quantitative. They use a factor-based strategy and scoring system to rank securities based on metrics such as P/B, price movement, and return on assets. Their objective is to maximize exposure to the most attractive securities while limiting risk through various constraints . Approach and Style of Three Funds Feather Investment Partners' approach is primarily top-down, as they use sector analysis and macroeconomic indicators to determine which sectors to focus on. They also have a bottom- up approach in selecting individual securities within those sectors. Their style is a mix of value and growth, as they look for securities with good governance, growth potential, and attractive valuations. They do not seem to have a specific orientation towards geography or sector, but rather focus on individual securities. Elm Investment Partners' approach is a blend of top-down and bottom-up, as they use a combination of sector analysis and in-depth fundamental analysis to select securities. They also 2

have a strong quantitative component to their approach, with the use of financial models and software to evaluate and rank securities. Their style is more growth-oriented, as they look for strong business models and above-average expected earnings growth. They do not seem to have a specific orientation towards geography or sector, but rather focus on individual securities. Tiger Capital's approach is primarily factor-based, as they use a scoring system to rank securities based on specific metrics. Their style is more value-oriented, as they focus on undervalued securities. They also have constraints in place to limit risk, but still have a preference for securities with strong momentum. They do not seem to have a specific orientation towards geography or sector, but rather focus on individual securities. The Concept of a Value Trap and Identification of Managers Most Likely to Get Caught A value trap refers to a stock or security that appears to be undervalued and has potential for growth, but instead ends up performing poorly. This can happen when a company experiences unforeseen issues or changes, causing its value to decline and the initial undervaluation to be prolonged. This results in investors being trapped in a security that continuously decreases in value. In this scenario, Feather Investment Partners is most likely to get caught in a value trap. This is because they focus on sector deviations and maintaining positions for 12 to 24 months. If a security within a sector experiences unforeseen issues and declines in value, Feather may be hesitant to sell and maintain their position for an extended period of time, potentially leading to losses. Their emphasis on undervalued securities with strong growth potential may also make them more vulnerable to value traps. 3

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Ranking of Funds by Consistency to Stated Style and Index 1. Feather Investment Partners - This fund seems to be the most consistent with its stated style, as it combines both fundamental and top-down approaches and has a mix of value and growth orientation. It also has a similar level of consistency to the index in terms of financial metrics. 2. Elm Investment Partners - This fund also shows consistency to its stated style, with a blend of fundamental and quantitative approaches and a focus on growth. However, it may have slightly higher consistency with the index in terms of financial metrics. 3. Tiger Capital - This fund appears to have the lowest consistency to its stated style, as it relies mostly on a factor-based approach and has a more value-oriented style. It also has the lowest consistency to the index in terms of financial metrics. Four Strategies Used by Activist Investors to Improve Shareholder Value 1. Proxy Battles: An activist investor may use this tactic to garner support from other shareholders in order to push for changes within the company. This could include nominating new board members or proposing shareholder resolutions. The goal is to gain enough support to influence decision-making and drive improvements that will ultimately increase shareholder value. 2. Board Representation: Activist investors may seek to gain representation on the company's board of directors in order to have a direct say in decision-making. This can be an effective way to push for changes and hold management accountable for achieving growth and increasing shareholder value. 4

3. Shareholder Activism: Shareholder activism involves utilizing a company's shareholder rights and voting power to influence change. Activist investors may use this tactic to vote against certain decisions or policies that they believe are not in the best interest of shareholders. They may also use their voting power to push for specific changes, such as a change in board composition or executive compensation. 4. Engaging with Management: Activist investors may also choose to engage directly with the company's management team to voice their concerns and proposed changes. This can be done through meetings, letters, or public statements. The goal is to persuade management to take action that will improve the company's performance and increase shareholder value. Example of an Investor Engaging in Activist Investing One current example of an investor engaging in activist investing is Nelson Peltz, the CEO and founding partner of Trian Fund Management. He is known for targeting and pushing for change within large, underperforming companies. Some recent examples include his campaigns at Procter & Gamble and General Electric, where he urged for changes in management and strategy to improve shareholder value. Peltz and his firm have a strong track record of successful shareholder activism, making them a notable example in the field. An Example of a Publicly Traded Investment for Gold Investments Adding an alternative investment in gold to the portfolio of the Alliance Fund could provide diversification benefits and act as a hedge against inflation and market volatility. Gold has historically been considered a safe haven asset and often performs well during times of economic uncertainty. 5

An example of a publicly traded investment that the fund could use for this gold investment is the SPDR Gold Trust (GLD). This is an exchange-traded fund (ETF) that tracks the price of gold and provides exposure to physical gold bullion. This investment is easily accessible, with high liquidity and low trading costs. Investment considerations for adding GLD to the Alliance Fund's portfolio include the fund's current asset allocation, the level of exposure desired to gold, and the potential impact on the fund's overall risk and return. This ETF may offer a low-cost and convenient way for the fund to gain exposure to gold, but it is important to evaluate the fund's current investments and portfolio objectives before making any decision. Other considerations include the price of gold, global economic conditions, and the performance of the ETF itself. It is also important to note that investing in GLD does not provide direct ownership of physical gold, and investors should be aware of any tax implications when buying and selling the ETF. Historic Returns and Risk in Investments Adding an alternative investment in gold to the Alliance Fund's portfolio could provide diversification benefits and potentially lower the overall risk of the portfolio. Historically, gold has been seen as a safe haven investment during times of economic uncertainty and has a low correlation to traditional asset classes such as stocks and bonds. In terms of historic returns, gold has performed well during times of market volatility and economic downturns. For example, during the global financial crisis in 2008, gold prices increased by over 5% while the S&P 500 index declined by almost 40%. Over the past 20 years, gold has had an average annual return of around 7%, which is comparable to equities but with less volatility. However, gold is not immune 6

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to market fluctuations and can also experience periods of underperformance. In recent years, the price of gold has been relatively stable, showing little movement either upwards or downwards. Correlation of gold to equities Gold has a low correlation to equities, meaning that it tends to move independently from stock prices. This makes it a valuable diversification tool for a portfolio, as it can provide stability during times of market volatility. However, this low correlation also means that gold may not always perform well when equities are doing well. An Analysis of its Role as a Hedge Against Inflation Gold is often seen as a hedge against inflation, as its value tends to rise during periods of high inflation. This is due to the fact that gold is a physical asset with limited supply, making it a store of value that can maintain its purchasing power during times of currency devaluation. However, the relationship between gold and inflation is not always clear-cut. In some cases, gold prices may surge during periods of low or negative inflation due to factors such as geopolitical tensions or market uncertainty. On the other hand, gold may also underperform during times of high inflation if other assets, such as stocks, are performing well. Furthermore, the effectiveness of gold as a hedge against inflation may vary depending on the form of investment. Physical gold, such as coins or bars, may provide a more direct hedge against inflation compared to investments in gold mining stocks or funds, which may also be influenced by company-specific factors. 7

References Polzer, J. T. (2022). The rise of people analytics and the future of organizational research. Research in Organizational Behavior, 42, 100181. https://doi.org/10.1016/j.riob.2023.100181 DePamphilis, D. M. (2019). The corporate takeover market: common takeover tactics, antitakeover defenses, and corporate governance. In Elsevier eBooks (pp. 65–98). https://doi.org/10.1016/b978-0-12-815075-7.00003-6 George, B. (2014, November 5). How to outsmart activist investors. Harvard Business Review. https://hbr.org/2014/05/how-to-outsmart-activist-investors Brock, C. (2022). What is activist investing? The Motley Fool. https://www.fool.com/terms/a/activist-investing/ Rosenberg, A. (2016, August 18). Gold’s relationship with stocks hits all-time low — which could be a reason to buy. CNBC. https://www.cnbc.com/2016/08/18/golds-relationship-with- stocks-hits-all-time-low--which-could-be-a-reason-to-buy.html 8