Reading 28:Managing Institutional Investor Portfolios- LO

following, foundation, investment

Q18. Which of the following objectives and/or constraints would be found in an investment policy statement (IPS) for a private foundation but NOT necessarily for an endowment?

A) Total return approach.

B) Moderate to high risk tolerance.

C) Set spending rates.

Q19. Erica Turner is a trustee of the Silas M.Turner Foundation (hereafter referred to as the “Foundation”), which was established by her grandfather more than fifty years ago. The family foundation provides scholarships to Mississippi high school graduates that have excelled academically and desire to attend Newsome College, Silas Turner’s alma mater.

The Foundation has eight trustees who are responsible for all administrative, investment management, and scholarship decisions. All of the trustees are descendants of Silas Turner. They vary from twenty-seven to eight-nine years in age and have a variety of professional backgrounds. Once each spring, the group convenes to review the Foundation’s investment performance and award scholarships for the upcoming school year. During the interim, one of the trustees is appointed to review quarterly performance, receive scholarship applications, and call ad hoc meetings via teleconference should the need arise. As a whole, the trustees are a congenial group, but their discussions can become spirited when investment strategies are considered. Despite some widely divergent opinions, the consensus has been to maintain a conservative a risk posture in the context of meeting the Foundation’s return goals.

The foundation has assets of $4 million. To carry on in the tradition of Silas Turner, the trustees want to ensure that at least 10 tuition scholarships are offered annually while maintaining the inflation-adjusted value of the principal. Tuition at Newsome College will be $18,000 next year, and is anticipated to increase at an annual rate of 4% over the long-term. Inflation is expected to be 2% for the foreseeable future.

This year the trustees have decided to update the Foundation’s investment policy statement (IPS). Because Turner is an investment professional, she has been asked by the other trustees to comment on the following proposed risk and return alternatives.

Proposed IPS	A	B	C	D
Return Requirement	Outperform S& 500 by 1%.	11%	9%	7.5%
Risk Tolerance	High	Moderate to High	Moderate	Low to Moderate

Before making a recommendation, Turner asks the trustees to consider an allocation to international stocks, saying that “The risk and return characteristics of international stocks, as well as their relatively low correlation with the U.S. market, makes them attractive for diversification. In addition, there is a whole new set of good companies in which to invest. Now is an opportune time to invest internationally because transaction costs have come down so much.”

Arthur Davenport, the elder of the trustees retorts “I’ve been around long enough to see international stocks go down and stay down for years. Besides, most of the big U.S. firms are global now, so we already have international industry exposure whether we want it or not. And all markets seem to tank at the same time these days. Furthermore, I don’t trust their accounting. I say we should stick with the asset classes we are already using.”

The group debates Turner’s and Davenport ’s points for some time. They finally opt to continue to use the same asset classes already in the portfolio. The current asset allocation of the Turner Endowment is shown below:

Asset Allocation
	Current Allocation	Expected Return	Expected Standard Deviation
Treasury bills (T-bills)	15%	2%	0%
Intermediate bonds	30%	4%	8%
Long-term bonds	15%	7%	13%
High yield bonds	5%	9%	17%
Large cap stocks	20%	12%	25%
Small cap stocks	15%	14%	30%
	100%

Which of the proposed investment policies should Turner recommend as most appropriate for the Foundation?

A) IPS C.

B) IPS D.

C) IPS B.

Q20. The trustees have decided to target a return objective of 9.5%. Given this objective, the most appropriate allocation to Treasury bills and large cap equities is likely to be:

A) lower for T-bills; higher for large cap stocks.

B) the same for T-bills; higher for large cap stocks.

C) lower for T-bills; the same for large cap stocks.

Q21. Based on a 9.5% return objective, the most appropriate allocation to high yield bonds and small cap equities is likely to be:

A) lower for high yield bonds; higher for small cap stocks.

B) the same or higher for high yield bonds; the same for small cap stocks.

C) initially lower for both high yield bonds and small cap stocks and then increased as the endowment increases in value since it will be able to take on more risk at that time.

Q22. Based on a 9.5% return objective, the most appropriate revision to the Foundation’s intermediate and long-term bond allocation is:

A) the same for intermediate-term bonds; higher for long-term bonds.

B) lower for intermediate-term bonds; higher for long-term bonds.

C) no change for either intermediate or long-term bonds.

Q23. With regards to Turner and Davenport’s comments about the value of international investing:

A) Turner is correct; Davenport is correct.

B) Turner is correct; Davenport is incorrect.

C) Turner is incorrect; Davenport is incorrect.

Q24. The trustees want Turner to look at suitable hedge funds. The best alternative for Turner to consider would be a:

A) fundamental long-short hedge fund.

B) fund of funds hedge fund.

C) macro hedge fund.