The university has a $500 million endowment that has been managed by the Board's Investment Committee....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The university has a $500 million endowment that has been managed by the Board's Investment Committee. It is allocated 60% to 10 Year Treasuries and 40% to the US mid-cap stocks (You can assume the Russell 2000 index). The Investment Committee has three members, none of whom have a background in investments. The asset allocation was selected 20 years ago, and there are no records of the rationale for its structure. The only actions taken by the Investment Committee have been to rebalance the portfolio annually. The university does not have an investment consultant; the Investment Committee determined that the endowment's performance has been good, and that returns have been sufficient to contribute meaningfully to the university's operating budget. They believe that the increased cost of a consultant was not worth the expense. A consultant would charge approximately $175,000 annually and would provide asset allocation services, review managers and meet with the investment committee four times per year. Hiring an investment professional would cost at least $600,000 for salary, benefits and other expenses. The final option would be using an out-sourced CIO firm, which would cost $400,000 per year. The firm would take control of managing the portfolio under the direction of the Investment Committee Investment 10 Year Treasuries US Mid cap stocks TOTAL Allocation Benchmark MSCI Emerging Markets ACWI ex-US (Stocks excluding U.S.) Russell 1000 Russell 3000 Bloomberg Barclays Aggregate Bond 60% 40% Avg Annual Return past ten years 0.6% For your reference, below are returns for other major market benchmarks for the same period (10 years ending 02/28/2023). I also noted ETFs that can be used to invest in the index. ETF Ticker symbol IEMG ACWX 11.7% IWB IWV AGG 5.3 10 Year Return (%) 1.7 3.9 12.1 11.9 1.1 The university recently received a bequest of $750 million in Bitcoin from an alumnus who bought Bitcoin by accident when it was created², he does not have any investment experience. The university's board has decided that it would like to hold the Bitcoin gift (Until funds are needed for a new capital program). The board believes that Bitcoin is poised for a huge rally due to growing adoption cryptocurrency, the recent bailouts of several banks, and Bitcoin's status as the leading currency in the industry. The board will use the proceeds from selling the stock to fund a capital improvement program for the university; construction will take place over five years beginning in 2024. It will cost $750 million. The bequest is the only source of funds for the construction program. 1)What would you advise the board to do about managing the endowment? Should they consider adding resources to manage it? Would you recommend hiring a consultant or other options? Is the portfolio sufficiently diversified? What type of changes could the university make to enhance diversification? 2)The board has asked your opinion on their decision to hold Bitcoin and whether you would recommend an alternative course of action. What would you recommend? The university has a $500 million endowment that has been managed by the Board's Investment Committee. It is allocated 60% to 10 Year Treasuries and 40% to the US mid-cap stocks (You can assume the Russell 2000 index). The Investment Committee has three members, none of whom have a background in investments. The asset allocation was selected 20 years ago, and there are no records of the rationale for its structure. The only actions taken by the Investment Committee have been to rebalance the portfolio annually. The university does not have an investment consultant; the Investment Committee determined that the endowment's performance has been good, and that returns have been sufficient to contribute meaningfully to the university's operating budget. They believe that the increased cost of a consultant was not worth the expense. A consultant would charge approximately $175,000 annually and would provide asset allocation services, review managers and meet with the investment committee four times per year. Hiring an investment professional would cost at least $600,000 for salary, benefits and other expenses. The final option would be using an out-sourced CIO firm, which would cost $400,000 per year. The firm would take control of managing the portfolio under the direction of the Investment Committee Investment 10 Year Treasuries US Mid cap stocks TOTAL Allocation Benchmark MSCI Emerging Markets ACWI ex-US (Stocks excluding U.S.) Russell 1000 Russell 3000 Bloomberg Barclays Aggregate Bond 60% 40% Avg Annual Return past ten years 0.6% For your reference, below are returns for other major market benchmarks for the same period (10 years ending 02/28/2023). I also noted ETFs that can be used to invest in the index. ETF Ticker symbol IEMG ACWX 11.7% IWB IWV AGG 5.3 10 Year Return (%) 1.7 3.9 12.1 11.9 1.1 The university recently received a bequest of $750 million in Bitcoin from an alumnus who bought Bitcoin by accident when it was created², he does not have any investment experience. The university's board has decided that it would like to hold the Bitcoin gift (Until funds are needed for a new capital program). The board believes that Bitcoin is poised for a huge rally due to growing adoption cryptocurrency, the recent bailouts of several banks, and Bitcoin's status as the leading currency in the industry. The board will use the proceeds from selling the stock to fund a capital improvement program for the university; construction will take place over five years beginning in 2024. It will cost $750 million. The bequest is the only source of funds for the construction program. 1)What would you advise the board to do about managing the endowment? Should they consider adding resources to manage it? Would you recommend hiring a consultant or other options? Is the portfolio sufficiently diversified? What type of changes could the university make to enhance diversification? 2)The board has asked your opinion on their decision to hold Bitcoin and whether you would recommend an alternative course of action. What would you recommend?
Expert Answer:
Answer rating: 100% (QA)
1 Based on the information provided it is clear that the Investment Committee lacks expertise in investment management and may benefit from additional resources The portfolios current allocation of 60 ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Based on the following data, determine the cost of merchandise sold for August: Merchandise inventory, August 1 $120,000 Merchandise inventory, August 31 150,000 Purchases 780,000 Purchases returns...
-
Best Buy, a national electronics retailer, offered a credit card that allowed users to earn "reward points" that could be redeemed for discounts on Best Buy goods. After reading a newspaper...
-
Beech Corporation has three finished products (related to three different product lines) in its ending inventory at December 31, Year 1. The following table provides additional information about each...
-
Which functions, other than acquiring oxygen for the body, require the work of the respiratory system?
-
Kevin Plank of Under Armour is introduced in the chapters opening feature. Kevin currently sells his products through multiple outlets. Assume that he is considering two new selling options. Plan A....
-
At the end of the tax year, DHG Corp, always an S corporation, made a liquidating distribution of long-term capital gain property to Sue, a 40% shareholder in DHG. The property has a fair market...
-
Foyert Corp. requires a minimum $6,500 cash balance. Loans taken to meet this requirement cost 2% interest per month (paid monthly). Any excess cash is used to repay loans at month-end. The cash...
-
Crossroad Corporation is trying to decide whether to invest to automate a production line. If the project is accepted, labor costs will decrease by $630,000 per year. However, other cash operating...
-
Critical building blocks in the case for capitalism rests on the special qualities of market pricing. What might those features be? And how might markets fail to live up to that major responsibility?
-
The stockholders equity T accounts of I-Cards Inc. for the fiscal year ended December 31, 2016, are as follows. Common Stock Jan. 1 Balance 5,265,000 Apr. 14 Issued 33,000 shares 1,287,000 Dec. 31...
-
the Ricardian model there is absolute specialization and in the Specific Factors Model specialization is incomplete. Explain briefly these contrasting features of the two trade models. b). Explain...
-
3.50 g of a certain Compound X, known to be made of carbon, hydrogen and perhaps oxygen, and to have a molecular molar mass of 60. g/mol, is burned completely in excess oxygen, and the mass of the...
-
1. How would diuretics affect... ___ Water reabsorption____ Urine output___ Blood volume =>___ BP 2. How could circulatory shock and these change in blood pressure be treated? 3. What hormone can...
-
31. What is the income that can be received over 15 years from $500,000 earning 6% annually? 32. What is the semiannual payment required to retire $50,000 in debt over 5 years at 8% compounded...
-
Fisher Brown is taxed at 40% on his income from ordinary bonds. Ordinary bonds pay 10% interest. Interest on municipal bonds is not taxed at all. (a) If the interest rate on municipal bonds is 7%,...
-
Quasimodo consumes earplugs and other things. His utility function for earplugs x and money to spend on other goods y is given by u(x, y) = 100x x2 2 + y. (a) What kind of utility function does...
-
Laertes has an endowment of $20 each period. He can borrow money at an interest rate of 200%, and he can lend money at a rate of 0%. (Note: If the interest rate is 0%, for every dollar that you save,...
-
What is the minimum speed for orbiting Earth in a close orbit? What is the maximum speed? What happens above this speed?
-
How was Pioneer 10 able to escape the solar system with an initial speed less than escape speed?
-
If you stood atop a super-tall ladder three times as far from Earths center as at Earths surface, how would your weight compare with it present value?
Study smarter with the SolutionInn App