Harvard Case - Lyxor ChinaH Versus Lyxor MSIndia: Portfolio Risk and Return
"Lyxor ChinaH Versus Lyxor MSIndia: Portfolio Risk and Return" Harvard business case study is written by Ruth S.K. Tan, Zsuzsa R. Huszar, Weina Zhang. It deals with the challenges in the field of Finance. The case study is 3 page(s) long and it was first published on : Feb 2, 2016
At Fern Fort University, we recommend that Lyxor Asset Management (Lyxor) adopt a multi-pronged approach to address the challenges presented by the diverging performance of its ChinaH and MSIndia funds. This approach involves enhancing portfolio diversification, optimizing risk management strategies, and leveraging technology and analytics to improve investment decision-making.
2. Background
This case study focuses on Lyxor Asset Management, a leading European asset management firm, facing a dilemma with its two emerging market funds: Lyxor ChinaH and Lyxor MSIndia. While ChinaH, focused on Chinese equities, has delivered strong returns, MSIndia, invested in Indian equities, has lagged behind. This disparity highlights the inherent risks and complexities of investing in emerging markets.
The main protagonists of the case study are:
- Lyxor Asset Management: The asset management firm responsible for managing the two funds.
- Jean-Marc Mercier: Head of Emerging Markets at Lyxor, tasked with resolving the performance discrepancy between the two funds.
- The Investors: Individuals and institutions who have invested in the ChinaH and MSIndia funds, seeking attractive returns.
3. Analysis of the Case Study
This case study can be analyzed through the lens of portfolio management, risk management, and investment strategy.
Portfolio Management:
- Diversification: The case highlights the importance of diversification in portfolio management. While ChinaH has outperformed, it exposes investors to significant country-specific risk.
- Asset Allocation: Lyxor needs to re-evaluate its asset allocation strategy for MSIndia to improve its performance. This involves analyzing the underlying sectors and companies within the Indian market and identifying potential opportunities for growth.
Risk Management:
- Market Risk: The case underscores the inherent market risk associated with emerging markets, particularly in the context of economic and political uncertainties.
- Currency Risk: Both ChinaH and MSIndia are exposed to currency fluctuations, which can significantly impact returns.
- Liquidity Risk: Emerging markets often exhibit lower liquidity compared to developed markets, making it challenging to exit positions quickly.
Investment Strategy:
- Active vs. Passive Management: Lyxor needs to determine the optimal approach for managing its emerging market funds. Active management may be more suitable for capturing specific opportunities, while passive management can provide a more diversified and cost-effective solution.
- Investment Style: Lyxor should consider adopting a value-oriented investment style for MSIndia, focusing on undervalued companies with strong fundamentals and growth potential.
4. Recommendations
To address the performance discrepancy between ChinaH and MSIndia, Lyxor should implement the following recommendations:
1. Enhance Portfolio Diversification:
- Expand MSIndia's Investment Universe: Lyxor should broaden the scope of MSIndia's investment universe to include a wider range of sectors and companies, including those with strong growth potential in areas like technology, healthcare, and consumer goods.
- Explore Alternative Asset Classes: Lyxor should consider adding alternative asset classes to MSIndia's portfolio, such as real estate, infrastructure, or private equity, to diversify risk and enhance returns.
2. Optimize Risk Management Strategies:
- Implement Currency Hedging: Lyxor should consider hedging against currency fluctuations to mitigate the impact of exchange rate volatility on MSIndia's returns.
- Utilize Derivatives: Lyxor can employ derivatives, such as options and futures, to manage market risk and enhance portfolio flexibility.
- Develop a Robust Risk Monitoring Framework: Lyxor should establish a comprehensive risk monitoring framework to track and manage potential risks across its emerging market funds.
3. Leverage Technology and Analytics:
- Utilize Advanced Analytics: Lyxor should invest in advanced analytics tools to improve investment decision-making, including risk assessment, portfolio optimization, and performance attribution.
- Develop Data-Driven Insights: Lyxor should leverage data-driven insights to identify emerging trends and opportunities within the Indian market.
- Enhance Reporting and Transparency: Lyxor should provide investors with clear and concise reports on the performance and risk profile of its emerging market funds.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Lyxor's core competency lies in asset management, and these recommendations align with its mission to provide investors with attractive returns while managing risk effectively.
- External Customers and Internal Clients: The recommendations cater to the needs of Lyxor's investors, who seek diversification, risk management, and transparency.
- Competitors: Lyxor needs to stay competitive in the asset management industry by offering innovative and value-added products and services.
- Attractiveness ' Quantitative Measures: The recommendations aim to improve MSIndia's performance, measured by metrics like return on investment (ROI), risk-adjusted returns, and Sharpe ratio.
Assumptions:
- The Indian economy will continue to grow at a healthy pace, creating opportunities for investment.
- Lyxor has the necessary resources and expertise to implement the recommended strategies effectively.
- Investors will respond positively to the improved risk-return profile of MSIndia.
6. Conclusion
By implementing these recommendations, Lyxor can address the performance discrepancy between its ChinaH and MSIndia funds, enhance investor confidence, and maintain its position as a leading asset management firm.
7. Discussion
Alternative Options:
- Liquidate MSIndia: This option would be a drastic measure and could negatively impact investor confidence.
- Merge ChinaH and MSIndia: This would create a larger, more diversified fund but might not address the underlying issues.
Risks and Key Assumptions:
- Market Volatility: Emerging markets are inherently volatile, and the recommendations may not be effective in mitigating all risks.
- Regulatory Changes: Changes in government policies or regulations could impact the performance of the funds.
- Competition: Lyxor faces intense competition from other asset management firms.
8. Next Steps
- Conduct a comprehensive review of MSIndia's portfolio.
- Develop a detailed implementation plan for the recommended strategies.
- Communicate the changes to investors and address any concerns.
- Monitor the performance of MSIndia and adjust the strategies as needed.
By taking these steps, Lyxor can navigate the challenges of investing in emerging markets, achieve its investment objectives, and deliver value to its investors.
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Case Description
In September 2015, Susie reflected on the performance of her personal investment portfolio over the past seven years. Susie had invested in two exchange traded funds (ETFs): Lyxor ChinaH and Lyxor MSIndia. She was now considering Lyxor USDJIA as a third ETF to diversify her risk. This analysis would involve the concept of portfolio diversification and the application of the capital asset pricing model. In addition, Susie would need to calculate mean returns, standard deviations, covariances, correlations, betas, and required returns in order to fully assess the merits of her decision. Although Susie had been satisfied with her portfolio performance over the past seven years, the high growth in these two emerging markets had fizzled out lately. Should Susie diversify her portfolio or remain invested in China and India only?
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