Posted: December 17th, 2014

Global Investments- Portfolio Building

Global Investments- Portfolio Building

Project description
building portfolio
———-
Added on 16.12.2014 00:28
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 Funds Investment Committee revised the Endowments 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
Equities
25% – 65% (including sector, country funds, active, index investments)
Fixed Income
15% – 30% (including corporate, sovereign, US treasuries, high yield max. allocation is 5%.
Commodities
25% – 45% (including global commodities, hedge fund, private equity, REITS)

THE ASSIGNMENT
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 (ETFs, MLPs, MFs 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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Added on 16.12.2014 00:37
In this report, simply use the data in the 2nd and the 3rd page of the spreadsheet to build an portfolio. You don”t have to invest in all of the products, but to choose some from them and meet the requirement in the instruction. After deciding what investment product you want to invest, you need to get their return and standard deviation which are in the spreadsheet already. Then you come to the first page of the spreadsheet and input the return and risk in the second part. After that, you need to input the percentage of investment in the first part of the efficient frontier as your allocation decision. The portfolio return and risk will be calculated automatically. In the report, you just need to explain what you have invested and why you make that decision. If you have any questions, please be free to contact me.

Take Home Final Project – Global Investments
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
•    Equities
25% – 65% (including sector, country funds, active, index investments)
•    Fixed Income
15% – 30% (including corporate, sovereign, US treasuries, high yield max. allocation is 5%.
•    Commodities
25% – 45% (including global commodities, hedge fund, private equity, REITS)

THE ASSIGNMENT
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.

Deadline for submission via email or hand delivered is THURSDAY December 18 2014. Early submissions are encouraged. Late submissions will be penalized ½ a grade for each day of missing the deadline.

EFFICIENT FRONTIER ANALYSIS

Input Security     1    2    3    4    5    6    7    8    9    10

US Large Cap Equities    0.0%    10.0%    15.0%    17.0%    20.0%    25.0%    27.0%    28.0%    35.0%    35.0%
US Small Cap Equities    0.0%    5.0%    10.0%    12.0%    14.0%    16.0%    17.0%    20.0%    20.0%    25.0%
MSCI EAFE Non-US Developed Mkts.    0.0%    0.0%    0.0%    3.0%    6.0%    8.0%    9.0%    11.0%    10.0%    10.0%
MSCI Non-US Emerging Mkt Equity    0.0%    0.0%    0.0%    3.0%    5.0%    6.0%    8.0%    8.0%    10.0%    5.0%
US and Non-US Fixed Income (bonds)    100.0%    75.0%    65.0%    55.0%    45.0%    35.0%    26.0%    15.0%    5.0%    0.0%
Emerging Markets Fixed Inc (bonds)    0.0%    10.0%    6.0%    4.0%    2.0%    0.0%    0.0%    0.0%    0.0%    0.0%
Global REITS     0.0%    0.0%    2.0%    2.0%    3.0%    4.0%    5.0%    6.0%    6.0%    5.0%
Commodities    0.0%    0.0%    2.0%    2.0%    3.0%    3.0%    5.0%    5.0%    5.0%    5.0%
Private Equity    0.0%    0.0%    0.0%    2.0%    2.0%    3.0%    3.0%    7.0%    4.0%    7.5%
Hedge Funds    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    5.0%    7.5%

Must sum to 100% Allocation    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%

Return    3.96%    5.22%    5.98%    6.34%    6.78%    7.25%    7.60%    8.14%    8.51%    9.13%
Risk    2.71%    3.47%    4.21%    5.36%    6.46%    7.89%    8.66%    10.43%    10.95%    11.85%

Input Security    Return    Risk

US Large Cap Equities    8.2%    13.4%
US Small Cap Equities    14.3%    15.2%
MSCI EAFE Non-US Developed Mkts.    6.5%    14.3%
MSCI Non-US Emerging Mkt Equity    4.5%    17.2%
US and Non-US Fixed Income (bonds)    4.0%    2.7%
Emerging Markets Fixed Inc (bonds)    7.2%    7.8%
Global REITS     7.9%    15.8%
Commodities    8.2%    28.0%
Private Equity    6.5%    26.1%
Hedge Funds    7.3%    7.2%

Correlation Matrix

15 year Correlation Matrix, U.S. Dollar Denominated

1991-2010    US Large Cap Equities    US Small Cap Equities    MSCI EAFE Non-US Dev. Mkts    Emerging Mkt Eq,    US & Non-US Fixed Inc (bonds)    Emerging Market Fixed Inc.  (bonds)    Global REITS    Commodities    Private Equity    Hedge Funds

US Large Cap Equities    1.00    0.74    0.59    0.54    0.22    0.23    0.46    -0.28    0.70    0.59
US Small Cap Equities    0.74    1.00    0.47    0.55    0.06    0.16    0.76    -0.32    0.76    0.54
MSCI EAFE Non-US Developed Mkts.    0.59    0.47    1.00    0.81    -0.10    0.38    0.30    -0.15    0.67    0.61
MSCI Non-US Emerging Mkt Equity    0.54    0.55    0.81    1.00    0.04    0.48    0.34    0.20    0.61    0.55
US and Non-US Fixed Income (bonds)    0.22    0.06    -0.10    0.04    1.00    0.43    0.10    -0.21    -0.67    0.17
Emerging Markets Fixed Inc (bonds)    0.23    0.16    0.38    0.48    0.43    1.00    0.27    0.16    -0.82    0.22
Global REITS     0.46    0.76    0.30    0.34    0.10    0.27    1.00    -0.27    0.82    0.61
Commodities    -0.28    -0.32    -0.15    0.20    -0.21    0.16    -0.27    1.00    0.45    0.31
Private Equity    0.70    0.76    0.67    0.61    -0.67    -0.82    0.82    0.45    1.00    0.65
Hedge Funds    0.59    0.54    0.61    0.55    0.17    0.22    0.61    0.31    0.65    1.00

Covariance Matrix

1991-2010    US Large Cap Equities    US Small Cap Equities    MSCI EAFE Non-US Dev. Mkts    Emerging Mkt Eq,    US & Non-US Fixed Inc (bonds)    Emerging Market Fixed Inc.  (bonds)    Global REITS    Commodities    Private Equity    Hedge Funds

US Large Cap Equities    0.0180    0.0151    0.0112    0.0124    0.0008    0.0024    0.0097    -0.0105    0.0245    0.0057
US Small Cap Equities    0.0151    0.0231    0.0102    0.0144    0.0002    0.0019    0.0182    -0.0136    0.0301    0.0059
MSCI EAFE Non-US Developed Mkts.    0.0112    0.0102    0.0203    0.0199    -0.0004    0.0042    0.0067    -0.0060    0.0249    0.0063
MSCI Non-US Emerging Mkt Equity    0.0124    0.0144    0.0199    0.0297    0.0002    0.0064    0.0092    0.0096    0.0274    0.0068
US and Non-US Fixed Income (bonds)    0.0008    0.0002    -0.0004    0.0002    0.0007    0.0009    0.0004    -0.0016    -0.0047    0.0003
Emerging Markets Fixed Inc (bonds)    0.0024    0.0019    0.0042    0.0064    0.0009    0.0060    0.0033    0.0035    -0.0166    0.0012
Global REITS     0.0098    0.0181    0.0067    0.0093    0.0004    0.0033    0.0248    -0.0119    0.0337    0.0069
Commodities    -0.0106    -0.0136    -0.0058    0.0097    -0.0016    0.0035    -0.0119    0.0784    0.0329    0.0062
Private Equity    0.0245    0.0301    0.0249    0.0274    -0.0047    -0.0166    0.0337    0.0329    0.0681    0.0122
Hedge Funds    0.0057    0.0059    0.0063    0.0068    0.0003    0.0012    0.0069    0.0062    0.0122    0.0052

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