Institutional Investors

Question 1

University Endowments

1) State Investment Objective

Answer 1

1) Investment Objectives

• generate a total real return, after inflation measured by the HEPI, of about 5% on a 3-5 year rolling basis, with reasonable annual volatility in the range of 10-15%

State additional objectives if listed in vignette

Question 2

Foundations

1) State investment objectives

Answer 2

Foundations

1) Investment Objectives

• generate a real return over CPI of the spending rate (min 5%), plus investment expenses, on a 3-5 year rolling basis, with reasonable annual volatility of 10-15%
• state additional objectives if mentioned in vignette
• management fee paid out of the spending rate
• foundations (US) = pass-through

Question 3

Institutional Asset Allocation

Describe the Norway Model

Answer 3

Norway model

• Passively managed, 60/40
• Few alternatives
• tight tracking error

Advantages

• low cost
• easy to manage

Disadvantages

• can’t outperform market

Question 4

Insititutional Asset Allocation

Describe the Yale Endowment Model

Answer 4

Yale Endowmenet Model

• Actively managed by external management
• High alternative asset allocation

Advantages

• Can outperform market (vs Norway)

Disadvantages

• high cost
• needs alternatives expertise

Question 5

Institutional Asset Allocation

Describe the Canada Pension Plan model

Answer 5

Canada Pension Plan Model

• actively managed
• high alternatives exposure
• internally managed (vs Yale)

Advantages

• can outperform market (like Yale)

Disadvantages

• high cost
• difficult to manage

Question 6

DBP - ability to take risk

• list facts that increase/decrease ability to take risk

Answer 6

Increased ability to take risk

• low D/E ratio means financially stable and can increase contributions or take on debt to increase contributions
• plan assets uncorrelated to sponsors operating assets
• high active lives ratio = longer duration therefore lower liquidity needs

Decreased ability to take risk

• early retirement offered: shorter duration therefore higher liquidity needs

Question 7

Foundation - ability to take risk

Answer 7

Foundation

Lower ability

• no new donations, 100% reliance on returns, Shortfall risk reduces ability
• if foundation = sole source of funding for a charity, reduces ability to suffer losses

Increases ability

• long-term investment horizon = more time to recover losses increases ability
• spending rate usually a tax-exempt threshold, not a legal requirement = non-binding implies higher ability

Question 8

DBPP - Investment Objective

Answer 8

DBPP

Achieve a long-term target return over a specified horizon with appropriate risk to meet contractual liabilities

Question 9

DCP - investment objectives

Answer 9

DBCP

Prudently grow assets to meet spending needs in retirement

Question 10

Sovereign Wealth Funds

• Asset allocations

Answer 10

SWF

1) Budget Stablization - FI & Cash (defensive and highest Liq needs)
2) Development Funds - Infrastructure (low liq)
3) Savings Funds - Equities & Alternatives (LT, lowest liq needs)
4) Reserve Funds - sim to Savings Funds, but lower Alts (higher liq needs)
5) Pension Reserve Funds - Equities & Alternatives (LT)