Beta Management Company

Beta Management Company

Beta Management Company is a small investment management company based in a Boston suburb. The company was founded in 1988 and with a good momentum of development; the company had approximately 25million dollars in 1991. The company’s goal is to enhance returns but reduce risks for clients via market timing. Initially the company finances its funds by the investments in the Vanguard 500 no-load and low-expense index funds. Sarah Wolfe, the founder and CEO of the Beta Management Group, adjusted the level of market exposure from 50% to 99% of the fund. She tried to “time the market” and reduce market exposure by decreasing company’s equity position in Vanguard 500 in market decline, which helped the company making money for its clients during a down market year.

However, what troubles Sarah Wolfe is that the company was losing potential clients because of her original investment strategy. This is because some potential clients thought it unusual that Beta Management Company used only one index mutual fund and picked none of its own stocks. As a result, by 1991, Sarah Wolfe decided that it was time to invest in individual stocks of smaller companies. Based on the recommendations from stock market analyst, Sarah Wolfe acted as a contrarian investor and focused on two individual stocks, California R.E.I.T. and Brown Group, Int., which prices are unreasonably low over the past two years. Nevertheless, although Sarah Wolfe promised her clients with reasonable return, if she carries out her plan, she would shift her equity to 80%, which may cause her clients to be exposed to new risks because the prices of both stocks seemed to bounce around more than the market. Sarah Wolfe’s new investment strategy is to achieve diversify and at the same time reduce diversifiable risks coming with the market. In Sarah Wolfe’s new investment strategy, she would increase her equity to 80% by lowering debt to 20%. Theoretically, debt financing allows higher return