REV: APRIL 27, 2006
KENNETH A. FROOT
ANDRÉ F. PEROLD
Global Equity Markets: The Case of Royal Dutch
In early January 1996, Ms. Joanne Partridge, Director of Research at High Street Global Advisors (“High Street”), a Boston-based global investment management organization, was studying the price behavior of the shares of Royal Dutch Petroleum and Shell Transport and Trading. It seemed that Royal Dutch and Shell should trade in fixed proportions since they represented equivalent classes of shares of the same holding company. However, the ratio of share prices had been anything but constant. For example, Shell traded at a premium to Royal Dutch during 1990 and 1991, while Royal Dutch traded at a premium to Shell subsequent to 1991. Presently, the premium of Royal Dutch over Shell was at an all-time high of almost 12%.
Joanne Partridge was trying to understand the opportunities presented by the Royal Dutch/Shell pricing discrepancy. Several of High Street’s U.S. domestic equity and global equity portfolios currently held significant positions in Royal Dutch. These positions could potentially be sold and replaced with equivalent-sized positions in Shell. In addition, the firm had recently landed several new accounts, and would soon be investing the funds. It would have to decide whether these new accounts should own Royal Dutch or Shell. Finally, High Street managed a hedge fund, High Street Partners, which could attempt to arbitrage the price discrepancy by taking a long position in Shell and an offsetting short position in Royal Dutch.
High Street Global Advisors
High Street Global Advisors managed approximately $40 billion of tax-exempt assets for pension funds, foundations and endowments, and about $15 billion in mutual funds held by individual investors. Most of these assets were in equity portfolios, whose investment mandates ranged from purely U.S. domestic to non-U.S. to fully global.
High Street viewed the world as consisting of one global economy. Accordingly, it emphasized appraising investment opportunities in a global context. At the core of the firm’s equity investment capability was a team of analysts who followed global industries such as chemicals, pharmaceuticals, autos, and oil, and who recommended their best stock selections within these industries to the
________________________________________________________________________________________________________________ Professors Kenneth A. Froot and André F. Perold prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Much of the data in the case is drawn from Kenneth A. Froot and Emil Dabora, “How are Stock Prices Affected by the Location of Trade?,” Harvard University, May 1996.
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Global Equity Markets: The Case of Royal Dutch and Shell
various equity portfolio managers. Partridge played a key role in giving direction to these analysts and in managing the flow of ideas between them and the portfolio managers. Portfolio management at High Street was generally governed by a value-investing philosophy according to which securities were purchased if their prices were attractive...
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