Investment Policy at the Hewlett Foundation Purpose of the case To provide students with the opportunity to discuss the design of asset allocation policies for long-term investors, the design and implementation of return overlay (or “alpha transport”) strategies, evaluation of performance and risk exposure of hed ge fund strategies, portfolio diversification, and investments in n on-liquid assets
Objectives !fter completing this case students will understand" # !sse !ssett allo alloca cati tion on des desig ign n $ %esign %esign of overlay overlay portfolios portfolios,, also known known as “alpha “alpha transport” transport” or “porta&le “porta&le alpha” alpha” strategies, to separate search from alpha from risk exposure ' The role role of hedge hedge funds in investors investors portfolios portfolios *ortf *ortfoli olio o undiver undiversif sifica icatio tion n + The &enefits &enefits of specialiat specialiation ion versus versus the &enefits &enefits of portfolio portfolio diversif diversificati ication on The use of geomet geometric ric mean returns returns and and arithmeti arithmeticc means returns returns as forecas forecasts ts of expected returns al long horions
Case Synopsis This case examines the asset allocation decisions that the .illiam and /lora 0ewlett /oundation (0*) is considering in early $11+ !fter careful analysis of the financial challenges and investment opportunities the foundation is currently facing, the chief investment officer and his team are a&out to make three asset allocations proposals to the foundation committee which, if approved will su&stantially change the foundations investment portfolio •
/irst *roposal !dopt a new allocation policy to reduce considera&ly the foundations portfolio of domestic equities and instead increase the allocation to a&solute return (or hedge fund) strategies and 23 T4*3 (Treasury 4nflation 4nflation *rotected 3ecurities) This recommendation is &ased on a detailed d etailed asset allocation study that includes a revaluation of 0/s long-term pro5ections of capital market conditions $
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3econd 3econ d *roposal *roposa l 4mplement 4mplemen t a return overlay program for the a&solute return portfolio portfolio This recommendation is &ased on a study of the historical performance and risk exposure of the
foundations long-standing a&solute return portfolio This study has concluded that returns on this portfolio have consistently exceeded the returns on a passive investment in Treasury &ills, with a risk exposure that is largely market neutral with respect to the equity market and the fixed income market The investment team at 0/ is asking the investment committee to consider enhancing the expected return on the foundations portfolio &y transforming this exposure into equities, nominal &onds, and T4*3 using return overlay strategies These strategies will allow 0/ to capture the excess return, or “alpha”, in the a&solute return portfolio and superimpose it on the expected return on a &alanced portfolio of equities and long-term &onds •
Third *roposal To commit up to +6 of assets to a glo&al distressed real state investment fund with which the foundation has invested in the past This represents an unusually large commitment to single investment manager for a non-profit institutional investor
Study Questions for the Oral and Written Presentations # *rovide a &rief summary of the case $ .as 0/s donor stock sale program a good idea7 4n your discussion you need to provide arguments in favor and arguments against the program ' .hat are the financial issues facing the 0ewlett /oundation (0/)7 %escri&e how 0/ manages its assets + 4s the proposed allocation adequate to meet the 0/s long term spending pay out of +6 (inflation ad5usted) while preserving capital in real terms and av oiding short term fluctuations in spending7 !s a mem&er of 0/s 4nvestment 8ommittee, would you agree with the proposal to dou&le to $16 the allocation to a&solute return strategies7 To support your decision, in your discussion you must provide arguments in favor and arguments against the proposal
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9 !s a mem&er of 0/s 4nvestment 8ommittee would you agree with the proposal to implement the &ondiation and equitiation overlay program (alpha transport)7 :ou need to discuss the effect of these programs on the expected return of the a&solute return portfolio and what contracts will &e most effective for 0/ to utilie To support your decision you must provide arguments in favor and against the proposal
; !s a mem&er of the 0/s 4nvestment 8ommittee would you make the +6 commitment to 3irius <7 :ou must provide arguments in favor and arguments against the proposal to support your decision = >ive a summary of your recommendation for the three proposals
eam !eetin"s !eetin" of !arch #$ %&#'( Issues to be discussed by the teams # .hat are 0/s o&5ectives as a foundation (?xhi&its #a and ?xhi&it $)7 .hat is the role of 0/s @aurie 0oagland and his investment team7 $ 0ow 0/s philanthropic o&5ectives translate into specific o&5ectives for the endowment (?xhi&it 'a)7 ' .hat investment policy could 0/ adopt to achieve simultaneously its two o&5ectives of maintaining its asset &ased in real terms and avoid fluctuations in spending (?xhi&its 'a and 7 4s the volatility of the proposed portfolio too high or too low7 .hat alternatives can you offer7 + 3hould 0/ adopt highly levered mean-variance portfolios instead of the proposed portfolio7 Aeview of 0/s capital market assumptions %oes 0/ think that returns are predicta&le7 9 >iven 0/s views on capital markets, is +6 real spending rate compati&le with the proposed investment policy7 ; 4f you were a mem&er of 0/s investment committee would you approve the proposal to dou&le the allocation to a&solute return strategies (hedge funds) from #16 of assets (or a&out B11 million) to $16 of assets (or a&out B#$ &illion (?xhi&its , ;a, ;&, =a and =c)7 = .hat additional questions would you ask @aurie 0oagland &efore approving (or re5ecting) the a&solute return strategy7
!eetin" of !arch %)* %&#'( Issues to be discussed by the teams # 0ow a return overlay strategy (also known as “alpha transport” or “porta&le alpha” strategy) works in a simple setting, for example, one in which 0/ transports the expected alpha in the a&solute return portfolio into the 3C* +117
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.hat is the impact on the expected return on the a&solute portfolio of the proposed overlay portfolio, which involves exposure not only to domestic equities &ut also to &onds and inflation indexed-&onds7 .hat are the risks7 ' 0ow can 0/ implement the return overlay program (“&ondie” and “equitie” its a&solute return portfolio)7 3hould 0/ “&ondie and equitie” the a&solute return portfolio7 .hat are the advantages and disadvantages of investing in 3irius <, the glo&al distressed investment fund (?xhi&its #1, ##, #$a and #$&)7 3hould 0/ pledge up to +6 of the endowment to 3irius <7
!eetin" of +pril #* %&#'( eams, Oral Presentations- Written Presentations are due
