Chapter 13
Structuring the Global Investment Process
Note: In the sixth edition of Global Investments, the exchange rate quotation symbols differ from previous
editions. We adopted the convention that the first currency is the quoted currency in terms of units
of the second currency.
For example, €:$ = 1.4 indicates that one euro is priced at 1.4 dollars. In previous editions we used
the reversed convention $/€ = 1.4, meaning 1.4 dollars per euro.
All problems in this test bank still use the old convention and have not been adapted to reflect the
new quotation symbols used in the 6th edition.
◼ List of Cases
This chapter proposes a list of cases that can be used for this book, in particular for Chapter 13.
We first give a list of Harvard Business School cases, available at:
182 Solnik/McLeavey • Global Investments, Sixth Edition
Harvard Business School Cases
Long-Term Capital Management, L.P. (A)
Publication Date: November 05, 1999
Author(s): André F. Pérold
Type: Case (Field)
Product Number: 9-200-007
Description
Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to
exploit market pricing discrepancies. Because the firm employed strategies designed to make money over
long horizons—six months to two years or more—it adopted a long-term financing structure designed to
Teaching Purpose
Can be used to discuss a broad range of issues relating to arbitrage, market efficiency, implementation of
investment strategies, liquidity stocks, risk management, financial intermediation, investment
management, hedge funds, incentives, systemic risk, and regulation.
Subjects Covered
Arbitrage, Capital markets, Commodity markets, Efficient markets, Finance, Financial institutions,
Financial services, Investment management, Risk management, and Securities markets.
Setting
Connecticut; finance; 1997–1998
Supplemental Material(s)
Long-Term Capital Management, L.P. (B) (9-200-008) 1p Andre F. Perold
Chapter 13 Structuring the Global Investment Process 183
Long-Term Capital Management, L.P. (C)
Publication Date: November 05, 1999
Author(s): André F. Pérold
Type: Case (Field)
Product Number: 9-200-009
Description
Long-Term Capital Management, L.P. (LTCM) was in the business of engaging in trading strategies to
exploit market pricing discrepancies. Because the firm employed strategies designed to make money over
long horizons—six months to two years or more—it adopted a long-term financing structure designed to
Teaching Purpose
Can be used to discuss a broad range of issues relating to arbitrage, market efficiency, implementation of
investment strategies, liquidity stocks, risk management, financial intermediation, investment
management, hedge funds, incentives, systemic risk, and regulation.
Subjects Covered
Arbitrage, Capital markets, Commodity markets, Efficient markets, Finance, Financial institutions,
Financial services, Investment management, Risk management, and Securities markets.
Setting
Connecticut; finance; 1997–1998
184 Solnik/McLeavey • Global Investments, Sixth Edition
Harvard Management Co.—2001
Publication Date: May 21, 2001
Revision Date: Oct 23, 2001
Author(s): Jay O. Light
Type: Case (Field)
Product Number: 9-201-129
Description
Harvard Management Co. uses portfolio theory to help consider the asset allocation issues for its
endowment.
Chapter 13 Structuring the Global Investment Process 185
Incentive Pay for Portfolio Managers at Harvard Management Co.
Publication Date: Nov 14, 2001
Revision Date: March 27, 2002
Author(s): Brian Hall, Jonathan P. Lim
Product Number: 9-902-130
Description
Describes the compensation system for portfolio managers at Harvard’s portfolio management company,
including its formulaic and bonus bank features. Harvard Management Co. President Jack Meyer explains
the philosophy behind the incentive pay at his company.
186 Solnik/McLeavey • Global Investments, Sixth Edition
The Incentives Game
Publication Date: Feb 22, 2002
Revision Date: Feb 5, 2003
Author(s): Jason R. Barro, Brian Hall, Jonathan P. Lim
Product Number: 9-902-197
Description
Provides an opportunity to gain insight about designing, negotiating, and responding to incentives. The
setting is investment management. The basic structure of the game is as follows. A class is divided into a
certain number of investment firms. Each company has one CEO and begins with four portfolio managers
Teaching Purpose
Designed to generate general insight about incentives, compensation, and negotiations in a world where
workers have choices about where and how they want to work.
Subjects Covered
Compensation, Executive compensation, Finance, Human resources management, Incentives, Investment
management, and Motivation.
Chapter 13 Structuring the Global Investment Process 187
The Harvard Management Co. and Inflation-Protected Bonds
Publication Date: Oct 31, 2000
Revision Date: Sep 8, 2003
Author(s): Luis M. Viceira
Product Number: 9-201-053
Description
In March 2000, the board of The Harvard Management Co. (HMC) approved significant changes in the
policy portfolio determining the long-run allocation policy of the Harvard University endowment. These
changes included a sharp reduction of the allocation to U.S. equities and U.S. nominal bonds, and a
significant investment in the new U.S. Treasury Inflation-Protected Securities (TIPS). This case focuses on
the analysis that led HMC management to recommend such changes to the board.
Teaching Purpose
To provide students with ample opportunities to discuss historical versus portfolio analysis, the Capital
188 Solnik/McLeavey • Global Investments, Sixth Edition
The Harmonized Savings Plan at BP Amoco
Publication Date: Oct 26, 2000
Revision Date: Nov 1, 2000
Author(s): Luis M. Viceira
Product Number: 9-201-052
Description
On August 11, 1998, the U.S.’s Amoco Corp. (NYSE: AR) and the British Petroleum Co. (BP), p.l.c.
(NYSE: BP), announced the BPC merger with Amoco. This deal was the largest industrial merger to date,
and created the world’s third-largest oil company, BP (NYSE: BP). This case focuses on the issues
surrounding the integration of the employee-defined contribution plans at Amoco and the U.S. subsidiary
of BP. One of them was that the premerger plans had very different investment structures. While Amoco
had offered its employees only low-cost index funds, BP America had relied on actively managed mutual
funds. The new plan, which would have more than 40,000 participants and $7 billion in assets, would have
to either choose one of these approaches, or try to integrate them into one single structure.
Chapter 13 Structuring the Global Investment Process 189
Merrill Lynch HOLDRS
Publication Date: March 20, 2001
Revision Date: Nov 8, 2001
Author(s): André F. Pérold, Simon Brown
Product Number: 9-201-059
Description
Exchange-traded funds (ETFs) and HOLDRS (Holding Company Depositary Receipts) represent recent
and highly successful capital market innovations. HOLDRS closely approximates a buy-and-hold strategy,
and Merrill Lynch believes the product has significantly lower tax and other costs than ETFs. The firm is
considering broadening the market for HOLDRS by introducing a new 50-stock basket, “Market 2000 +
HOLDRS,” that would hold 50 of the world’s top-capitalized stocks.
190 Solnik/McLeavey • Global Investments, Sixth Edition
Acme Investment Trust: January 2001
Publication Date: Oct 23, 2001
Revision Date: Feb 11, 2002
Author(s): Joshua Lerner
Product Number: 9-202-055
Description
The managers of a large corporate pension fund must decide whether to invest in a private equity fund
Subjects Covered
Corporate strategy, Entrepreneurial finance, Finance, Financial strategy, Investment management,
Leveraged buyouts, Mergers and acquisitions, and Venture capital.
Setting
Investments; 2001
Chapter 13 Structuring the Global Investment Process 191
Grantham, Mayo, Van Otterloo & Co.—2001
Publication Date: Jan 4, 2002
Revision Date: March 18, 2002
Author(s): André F. Pérold, Joshua Musher
Product Number: 9-202-049
Description
Asset manager GMO underperforms the market during the 1996–2000 stock market bubble because of
the focus on absolute risk. After suffering significant client withdrawals, performance again shines when
Teaching Purpose
Provides an opportunity to discuss two key aspects of the asset management industry: the investment
Subjects Covered
Asset allocation, Asset management, Finance, Financial instruments, Financial management, Investment
192 Solnik/McLeavey • Global Investments, Sixth Edition
Massachusetts Financial Services
Publication Date: Jan 17, 2002
Revision Date: Nov 14, 2002
Author(s): Brian Hall, Jonathan P. Lim
Product Number: 9-902-132
Description
Describes the compensation and performance evaluations at an investment management company. The
senior management team of Massachusetts Financial Services (MFS) Investment Management was
capital.
Teaching Purpose
To analyze the design of compensation plans and the incentives created by a plan emphasizing subjective
performance evaluations.
Subjects Covered
Accounting and control, Balanced scorecard, Compensation, Finance, Finance and accounting, Human
Chapter 13 Structuring the Global Investment Process 193
Dimensional Fund Advisors—2002
Publication Date: Sep 30, 2002
Revision Date: Jan 28, 2003
Author(s): Randolph B. Cohen
Product Number: 9-203-026
Description
Dimensional Fund Advisors (DFA) is an investment management firm that prides itself on basing its
investment strategies on sound academic research. Many of the best known finance research papers of the
past two decades (especially those by Eugene Fama and Kenneth French, who work closely with DFA)
Teaching Purpose
Teaches students about recent academic research in asset pricing and about how DFA has used that
research as the basis of a highly successful firm.
Subjects Covered
194 Solnik/McLeavey • Global Investments, Sixth Edition
First American Bank: Credit Default Swaps
Publication Date: July 17, 2002
Author(s): George Chacko, Eli Peter Strick
Product Number: 9-203-033
Description
Teaching Purpose
To give students a basic understanding of credit risk and credit derivative mechanics.
Subjects Covered
Asset management, Banking industry, Banks, Credit, Derivatives, Economics, Finance, Financial
Chapter 13 Structuring the Global Investment Process 195
The Unilever Superannuation Fund vs. Merrill Lynch
Publication Date: July 8, 2002
Revision Date: Aug 4, 2003
Author(s): André F. Pérold, Joshua Musher, Robert Alloway
Product Number: 9-203-034
Description
In 2001, the Unilever Superannuation Fund sued Merrill Lynch for damage of 130 million British pounds.
Over the period 1977 to 1998, the Unilever Fund had significantly underperformed the benchmark; and its
Teaching Purpose
To discuss a variety of questions related to delegated investment management, including issues about
performance measurement, the structure of investment management agreements and the management of
client relationships, risk measurement and assessment, the fiduciary and legal obligations of pension
trustees and fund managers, and the structure of the investment management industry.
Subjects Covered
Accounting and control, Balanced scorecard, Delegation of authority, Employee empowerment,
196 Solnik/McLeavey • Global Investments, Sixth Edition
Susan Griffin: Formulation of a Long-Term Investment Strategy
Publication Date: Feb 4, 2003
Author(s): Dwight B. Crane, Julia D. Stevens
Product Number: 9-203-072
Description
Susan Griffin, owner and cofounder of a small manufacturing company, is formulating a long-term
investment strategy. Griffin plans to sell her $10 million company and invest the revenue. She must decide