Corporate Finance

1. An April 2017 FT article reports that 87% of active UK equity funds underperformed their benchmark in 2016.1 Read the article, and answer the following questions: (a) What does the phrase “underperformed their benchmark” mean? Explain with reference to examples. (b) Are the conclusions of this article surprising in light of what you know about the academic evidence on funds management? (c) How do you explain the divergence between the survey results reported by the FCA and those reported by the Investment Association? On 13 August 2017 the FT published an article entitled “Active management stages a comeback,”2 and a 1 October 2017 article stated that “[a]round 8 per cent of sterling-denominated UK actively managed funds beat the UK benchmark in the 12 months to the end of June.”3 (d) Is it possible to reconcile the first FT article, and your answers to (b) above, to the second and third articles? How? [50 marks] 2. In October 2016 the FT chronicled problems faced by Harvard University’s endowment.4 The University is reported to have hedged its interest rate costs through swap contracts before the 2007–09 financial crisis struck. When the Fed slashed interest rates, Harvard is reported to have been put “on the hook for collateral.” (a) Based on our reading of the Article, when Harvard performed the swap, was it a payer or a receiver of fixed? (b) Why did the subsequent drop in interest rates harm the University? 1 EMBA Business Finance Related problems have arisen in the UK’s small business sector. In May 2017, the FT reported that the UK retail bank RBS had settled a legal case with a family “who claimed an interestrate swap ruined their business.”5 (c) Explain how the swap lost money for the family. In particular, what was the genesis of the £11mn exist fee referred to in the Article? (d) Does anything in this article suggest that RBS did not sell the swap as a legitimate hedge against risk? [50 marks]