The university has a $500 million endowment that has been managed by the Board's Investment Committee....

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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?

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