Global Equity Markets The Case Of Royal
9-296-077
REV: APRIL 27, 2006
KENNETH A. FROOT
ANDRÉ F. PEROLD
Global Equity Markets: The Case of Royal Dutch and Shell
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
REV: APRIL 27, 2006
KENNETH A. FROOT
ANDRÉ F. PEROLD
Global Equity Markets: The Case of Royal Dutch and Shell
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