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Pitcairn Family Heritage(R) Fund Case Solution

Solution Id Length Case Author Case Publisher
1369 722 Words (5 Pages) Belen Villalonga Harvard Business School : 208073
This solution includes: A Word File A Word File and An Excel File An Excel File

Yes, I would invest in the Pitcairn Family Heritage Fund because of the following reasons. Firstly, the fund has followed a consistent diversification policy and manages the risk by investing in a diversified portfolio of companies while matching the risk characteristics to those of the average equity market. Secondly, the fund focuses on longer-term performance instead of short-term. Having a strong belief in the success of family-controlled businesses, the fund takes on a passive investment approach and avoids going against the family controllers; hence, it remains patient in achieving results. Thirdly and most importantly, the portfolio managers evaluate the companies in the universe based on their fundamentals rather than the involvement of the family in management. This shows that the fund manager put emphasis on the strength of companies’ balance sheet and past performance despite a unique investment philosophy.

Following questions are answered in this case study solution

  1. Would you invest in this fund? Think of at least three reasons why you would or would not.

  2. Analyze the performance of Pitcairn’s portfolio companies using the spreadsheet available on Canvas.

  3. If you were asked to manage this fund, preserving its investment philosophy but modifying the selection criteria for inclusion of stocks in its portfolio, how would you modify those criteria (if any at all)

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Case Analysis for Pitcairn Family Heritage(R) Fund

2. Analyze the performance of Pitcairn’s portfolio companies using the spreadsheet available on Canvas.

Figure 1 and figure 2 show that the portfolio of companies in the fund has consistently outperformed all of the stock indexes over the years based on total monthly or annualized returns. However, figure 3 shows that the excess returns from the fund have remained above that of the indices at times of booms while slightly below that of the market during down times. Hence based on excess returns as shown in figure 3, it is hardtop conclude if the fund has been performing well. Therefore, the following statistical performance measures have been analyzed.

Figure 1: Monthly Returns of Portfolio versus Indices

Figure 2: Annualized Return of Portfolio versus Indices

Figure 3: Monthly Excess Return of Portfolio versus Indices

Sharpe Ratio, which gives the risk-adjusted returns of a portfolio, is the ratio of average excess returns of a portfolio to the standard deviation of its excess returns (Haslem, 2009, p. 166). The annualized Sharpe Ratio of the Pitcairn Family Heritage Fund decreases over time since September 1999 to September 2006, as shown in Table 1. This shows that the return per unit of risk taken has decreased over time (Haslem, 2009, p. 166). However, Sharpe Ratio ignores the systematic risk of the assets (Haslem, 2009, p. 167). The Modern Portfolio Theory measure “alpha” measures the fund’s performance after taking into account the systematic risk of the securities (Haslem, 2009, pp. 168-169). Table 1 below shows that the systematic-risk-adjusted return to the portfolio increased over time which indicates that the fund’s performance has been good.

Table 1: Performance Evaluation Measures

3. If you were asked to manage this fund, preserving its investment philosophy but modifying the selection criteria for inclusion of stocks in its portfolio, how would you modify those criteria (if any at all)

According to the case, Feder and Larrabee closely monitor the portfolio and consider selling a stock if it no longer meets the influence criteria, reaches the target price or fails to perform as expected, or when more attractive opportunities arise.

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