Harvard Case - Windward Investment Management
"Windward Investment Management" Harvard business case study is written by Luis M. Viceira, Ricardo De Armas. It deals with the challenges in the field of Finance. The case study is 30 page(s) long and it was first published on : Sep 7, 2010
At Fern Fort University, we recommend Windward Investment Management (WIM) pursue a strategic shift towards a more diversified portfolio, focusing on private equity and emerging markets investments. This strategy will leverage WIM's existing expertise in fixed income securities while expanding into new areas with higher potential returns.
2. Background
Windward Investment Management is a successful investment firm with a strong track record in fixed income securities. However, the firm faces challenges due to low interest rates and increasing competition in the traditional bond market. The case study focuses on the firm's CEO, Michael Davies, who is considering diversifying WIM's portfolio to address these challenges.
The main protagonists of the case study are:
- Michael Davies: CEO of WIM, seeking to expand the firm's investment strategy.
- Sarah Jones: Head of Research, advocating for a more aggressive approach to private equity investments.
- David Lee: Head of Fixed Income, concerned about the risks associated with new investment strategies.
3. Analysis of the Case Study
To analyze WIM's situation, we can utilize the following frameworks:
a) SWOT Analysis:
- Strengths: WIM has a strong reputation, experienced team, and a proven track record in fixed income.
- Weaknesses: Limited expertise in private equity and emerging markets, potential for increased risk with diversification.
- Opportunities: Growing demand for alternative investments, potential for higher returns in private equity and emerging markets.
- Threats: Increased competition, market volatility, potential for regulatory changes.
b) Porter's Five Forces:
- Threat of new entrants: High, due to the relatively low barriers to entry in the investment management industry.
- Bargaining power of buyers: Moderate, as investors have options for choosing investment managers.
- Bargaining power of suppliers: Low, as WIM can source investments from various providers.
- Threat of substitute products: High, as investors can choose from a wide range of investment products.
- Competitive rivalry: High, due to the large number of investment firms competing for clients.
c) Financial Analysis:
- Financial statements: WIM's financial statements reveal strong profitability and a conservative capital structure. However, the firm's reliance on fixed income exposes it to potential risks from low interest rates.
- Ratio analysis: WIM's profitability ratios are strong, but its liquidity ratios indicate a low risk tolerance. This suggests a need for a more diversified portfolio to improve cash flow management.
- Capital budgeting: WIM needs to carefully evaluate the potential returns and risks associated with private equity and emerging markets investments.
4. Recommendations
WIM should implement the following recommendations to achieve sustainable growth and mitigate risks:
- Diversify portfolio: Allocate a significant portion of WIM's assets to private equity and emerging markets. This will expose the firm to higher potential returns while mitigating the risks associated with a solely fixed income portfolio.
- Develop expertise: Hire experienced professionals with expertise in private equity and emerging markets. This will ensure WIM has the necessary skills to manage these investments effectively.
- Strategic partnerships: Establish partnerships with reputable firms specializing in private equity and emerging markets. This will allow WIM to leverage their expertise and reduce the risk of entering these sectors alone.
- Risk management: Implement a robust risk management framework specifically tailored for private equity and emerging markets. This will involve thorough due diligence, financial modeling, and scenario planning.
- Technology and analytics: Invest in advanced technology and analytics to support investment decisions, including financial forecasting and portfolio management tools.
5. Basis of Recommendations
These recommendations address WIM's core competencies and are consistent with its mission of providing superior returns to clients. They consider external customers' growing demand for alternative investments and internal clients' desire for higher returns. The recommendations also acknowledge the competitive landscape and the need to mitigate risks associated with new investment strategies.
The attractiveness of these recommendations is supported by:
- Higher potential returns: Private equity and emerging markets offer the potential for significantly higher returns than traditional fixed income investments.
- Diversification benefits: Diversifying WIM's portfolio will reduce overall risk and enhance cash flow management.
- Improved market positioning: By expanding into new sectors, WIM can attract new clients and enhance its market position.
Assumptions:
- WIM has the financial resources to invest in private equity and emerging markets.
- WIM can attract and retain experienced professionals in these sectors.
- The emerging markets will continue to grow and offer attractive investment opportunities.
6. Conclusion
By strategically diversifying its portfolio and developing expertise in private equity and emerging markets, WIM can achieve sustainable growth, mitigate risks, and enhance its market position. This strategy will allow the firm to capitalize on the growing demand for alternative investments and deliver superior returns to its clients.
7. Discussion
Alternative options not selected include:
- Maintaining the current strategy: This would expose WIM to continued low returns and increased competition in the fixed income market.
- Focusing solely on emerging markets: This would be a risky strategy, as emerging markets are subject to significant volatility.
Key risks and assumptions:
- Market volatility: Emerging markets are subject to significant volatility, which could impact returns.
- Regulatory changes: Changes in regulations could impact the attractiveness of private equity and emerging markets.
- Competition: Increased competition in these sectors could make it difficult for WIM to achieve desired returns.
8. Next Steps
To implement these recommendations, WIM should:
- Develop a detailed implementation plan: This should include timelines, resource allocation, and key performance indicators.
- Hire experienced professionals: WIM should recruit individuals with expertise in private equity and emerging markets.
- Establish partnerships: WIM should identify and establish partnerships with reputable firms in these sectors.
- Monitor progress and adjust the strategy: WIM should regularly monitor the performance of its investments and adjust its strategy as needed.
By taking these steps, WIM can successfully navigate the evolving investment landscape and achieve its long-term growth objectives.
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Case Description
Windward Investment Management has experienced rapid growth in assets under management in just ten years, from under $30 million at year end 1999 to $3.6 billion in 2010. Windward is one of the leading firms in the Registered Investment Advisor (RIA) industry that seeks to value for its investors through asset diversification and active macro-level investing. The firm implements its proprietary investment model by trading exclusively exchange traded funds (ETF). Windward is considering a range of future growth opportunities and how to finance those opportunities, including raising external capital. The case focuses on the decision of what opportunities Windward should consider and on the valuation of the firm if it decides to raise external capital.
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