US West Structured Equity Portfolio

ISBN 0-538-88690-0

Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 10 pages in length and its case teaching package is 4 pages.

Abstract

An equity manager for US West's pension fund has convinced the board to shape the overall composition of the $3 billion equity portion of the pension fund using the BARRA factor model. Because two-thirds of the equity portfolio is actively managed by nine external managers, each with its own management philosophy, the US West equity group decides to allow the external managers to follow their own defined strategies, but to create the desired "tilting" effect for the overall equity fund by manipulating a $400 million "structured" portfolio.

US West does not presently have the operations or the staff to manage this fund internally, so it is recruiting external managers for the job. Two managers look promising. One has a strong operations crew and much experience in the strategy that US West wishes to adopt. The other group is not as strong or experienced, but has impressed US West with its savvy plan for evaluating the portfolio after the strategy has been implemented.

Fit Within a Course/Linkages to Textbooks or Journal Articles

This case is intended for advanced undergraduate finance students or MBA and executive-education students. It may be used in courses devoted to portfolio management, equity analysis, and asset allocation. The case lends itself well to in-class discussion. For this reason, the teaching plan consists of discussion questions for the class and suggestions for how students may respond.

Study Questions

1. How does the BARRA model work? What are its strengths and weaknesses?
2. What are the advantages and disadvantages of implementing the structured equity portfolio using the BARRA model?
3. How would you decide on the size of the structured portfolio?
4. How would you evaluate the capabilities of the potential managers? Has US West done a good job of evaluating the two contenders for the job?