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Keller Fund Essay

2654 words - 11 pages

I. INTRODUCTION
“To provide long-term capital appreciation” is the investment objective of The Keller All-Star Growth Fund. To achieve this objective, The Keller Fund strives to explore new strategies that could help improve its fund’s performance.

At a recent board meeting, a proposal to initiate option trading strategies was being considered. The proponent suggested that intelligent trading in options on a regular basis might be able to improve the fund’s returns, while possibly lowering its volatility.

The fund’s charter permitted different investment strategies which consists of buying the stock of a listed company, buying a call option on a listed stock, writing a call ...view middle of the document...

The results of this study lead us to recommend that the company should write a 50 put option on AT&T Corporation stock which matures on January 21, 1995. We also recommend that the company should diversify its portfolio of stocks by considering stocks that offer dividends and has a growth rate for earnings for share.

III. COMPANY HISTORY
The Keller All-Star Growth Fund (the Keller Fund) was a medium-sized closed-end investment company with approximately $300million invested primarily in publicly traded common stocks. Shares in the fund were owned by a large number of individual investors and were themselves listed and traded on a public stock exchange.

The company was established in 1959 and since then, it sought its objective by investing in a diversified portfolio of common stocks with above average potential for growth in revenues and earnings. High technology stocks tended to dominate its portfolio. In most years, the fund’s return performance equaled or exceeded that of the Standard & Poor’s composite index of 500 common stocks, though its net asset value experienced greater volatility than that of the market as a whole.

IV. POINT OF VIEW
The Keller All-Star Growth Fund’s Board of Trustees

V. TIME CONTEXT
1993 – 1996

VI. STATEMENT OF THE PROBLEM
What would be the best investment strategy that the Keller All-Star Growth Fund could use to enhance its fund’s performance?

VII. CASE CONTEXT
The Keller All-Star Growth Fund (the Keller Fund) was a medium-sized closed-end investment company with approximately $300million invested primarily in publicly traded common stocks. Since its inception in 1985, the fund sought to achieve this objective by investing in a diversified portfolio of common stocks with above average potential for growth in revenues and earnings. At a recent board meeting, one of the fund's trustees proposed that the board consider using put and call options as a means of enhancing the fund's performance. The trustee suggested that intelligent trading in options on a regular basis might be able to improve the fund's returns, while possibly lowering its volatility. Without committing the fund to pursue option trading, the board agreed that studying the concept would be in order – (1) Buying the stock of a listed company, (2) Buying a call option on a listed stock, (3) Writing a call option on a listed stock, (4) Buying a put option on a listed stock, (5) Selling a put option on a listed stock, (6) Various combinations of the above strategies. To prepare for their discussion at the next meeting, the trustees requested that a pilot study of the profits or losses resulting from selected option trading be conducted. As a first step, the fund officer assigned to oversee the pilot study decided to collect some information about option contracts on the common stock of AT&T Corporation and Lotus Development Corporation. These stocks were both being considered by the fund for possible purchase in the...

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