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You are the Chief Investment Officer (CIO) of the $1.8 billion Private University Endowment Fund. The endowment board of trustee has decided to take a global approach and expanding asset classes to manage assets. The previous structure of an all U.S. exposure of 60% equities (large and small cap) and 40% fixed income has failed to return the 6.5% needed meet the spending requirements of the University. In 2013 the Fund returned 5.4% with a standard deviation risk measure of 8.9%.
In response the Fund’s Investment Committee revised the Endowment’s investment policy structure to include a wider range of investment options. The goal of the amended policy is to generate a real return of 8.7% (fund spending policy of 6.5% plus a 2.2% for inflation). The committee has developed the following investment policy constraints you will need to follow when creating your overall asset allocation strategy and hiring investment managers. The Efficient Frontier Optimization Spreadsheet will be used for this project.
Investment Policy Constraints for this exercise:
The risk as measured by standard deviation must be between 10% and 18%.
The overall asset allocation MAXIMUM EXPOSURE to the US is 40%, or $720 million.
The policy allows for asset allocation target range (constraints) for investments as follows:
Minimum – Maximum Allocations
25% – 65% (including sector, country funds, active, index investments)
15% – 30% (including corporate, sovereign, US treasuries, high yield max. allocation is 5%.
25% – 45% (including global commodities, hedge fund, private equity, REITS)
The Chair of the board of trustees has charged you with the task of devising a new asset allocation strategy following the constraints outlined above. Applying the concepts from class, and using the Efficient Frontier Optimization Spreadsheet on blackboard as your guide when making allocation decisions. Prepare an 8 – 10 page, double spaced written analysis to arrive at your recommendation. You should determine an optimal portfolio (asset mix) in an effort to meet the return and risk expectations of the plan employing the guidelines as established by the board of trustees. Graphics and charts can be included in the analysis provided they are not greater than 30% of the overall analysis.
You will be the CIO so investment selections MUST NOT include individual securities but use exchange traded funds ETFs, mutual funds, open or closed MF, master limited partnerships MLPs, or commingled instruments as investments. You will have complete flexibility with choosing the individual investment instruments, and can include an options strategy, and currency direct investment or hedging strategy. As discussed in class all investments must use a 3 or 5 year risk/return analysis to better reflect the risk return exposure of the asset class and the constraints outlined above must be followed, (refer to spreadsheet for some ideas). You can include index vs active strategies for the individual asset classes. The MINIMUM number of investments (ETF’s, MLP’s, MF’s and/or commingled funds) will be 15. You must include the efficient frontier optimization spreadsheet or picture risk/return spreadsheet analysis as an exhibit to the overall paper.
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