Hewlett Foundation

HF objectives and constraints as a long-term investor -

-

its philanthropic objectives unlike other endowed intuition like private colleges they have no other revenues for income except investing First, HFworks on a perpetual model. It would like to avoid extinguishing itself by running out of assets. HF’s long-term long -term objective is to preserve or grow its capital in real terms required return: 5.25%

Investment policy -tips with 5,25% coupon rate - nominal bonds with 7,75% coupon if inflation is truly 2,5% - however, real rate of tips (4,9%) is lower than 5,25% - need additional risk and return - exhibit 4 ( proposed policy portfolio ) has an expected nominal return of 9,6% per annum with standard deviation of 13% - one standard deviation below the expected: -3,4% capital market assumptions -does hf think that returns are predictable - yes, for example, the expected long-term return on stocks is partially based on considerations of p/e, d/p -

hf is comparing these ratios to their historical averages and concluding that they are high by historical standard mean reverting

when to change policy -

looking at the probability of three events occurring at a 10-year horizon and at a 20-year horizon. 1. a 20% decline in real spending 2. an increase in the real value of the assets 3. the sustainability of a 5% spending rate in real terms hf chooses the asset allocation that produces probabilities that it finds satisfactory these probabilities are computed under hf’s capital markets assumptions, which hf reviews periodically mean variance analysis? -

the composition of these mean-variance portfolios is strikingly different  from the proposed policy portfolio

should hf adopt mean variance portfolios 1. it might not be easy for hf to cut its allocation to real estate assets or to increase its allocation to bonds so drastically without incurring in significant liquidity and transaction costs 2. not be able to adopt highly levered portfolio without attracting public attention and scrutiny. Such a portfolio might not be viewed by the public as responsible and might prompt calls for regulation of foundations the donor tock sale program -

to diversify

the absolute return allocation decision -

change from 10%to 20% very good record. 11,8% since 1995 with 3.1% standard deviation ( zero betas to bonds and equity expected returns on other assets are low peers have high allocation to hedge funds

problems with absolute return portfolios -10 to 20%, too much pressure for one hedge fund manager. ( this is mitigated by diversified investment of hedge funds) - the alpha or excess performance occurred around the period 2000-2001, from 2002 to 2005 just 2%, in line with the expected alpha - hedge funds are generally illiquid and opaque investment vehicles. ( this is mitigated by the long-standing relation with many of those managers) the return overlay strategy - also known as ”alpha transport” or ” portable alpha” strategy hf’s prediction about absolute return portfolios -

the risk exposure of absolute return portfolio is similar to an investment  in t-bills with additional volatility

the investment in sirius V against: - global distressed investment fund - too much a bet in a single asset class - really depends on the judgment of the management  for: - sirius has shown local and global expertise - good record of the managers of sirius - long-term relationship with Sirius

-

skill in underwriting real estate skill in NPL’s ( non performing loans) stability of the sirius team