The scenario:
After a brilliant career in investment banking and funds management you are now on the board of directors of a charity. One of the charity’s activities is to provide scholarships and assistance to young people in need to undertake higher education. These funds are provided from an investment pool which has been accumulated over a number of years from donations and bequests. You are also on the board of trustees advising on investment strategy of these funds.
The charity is conservative by nature; the investment guidelines include the requirement to maintain capital. This does not mean that the fund must be capital stable and/or capital secure but that it is not to lose capital at a rate greater than the Australian market. The requirement is to appreciate capital at a rate of return commensurate with that the rate of inflation for education expenses.
Total value of the portfolio as at 1 January 2015 was approximately $40 million. In 2014 the value of scholarships paid was approximately $1.0 million. The requirement for 2015 will be to match and hopefully exceed this amount.
Funds for scholarships to be paid in the next 12 months have already been placed in an account separate to the $40 million.
You are required to deliver a report to the board on Monday 25 May 2015; this will address the fund’s investment strategy for the next 12 months.
The questions: (1)Outline the fund’s asset allocation from the list below (% of total)
Cash
Fixed Interest
o Government
o Non Government
Australian Equities (includes REITs)
Real Property
International
o Fixed Interest o Equities
o Real Property
Other
Alternatives
15 Marks
o Hedge Funds, Managed Futures
Discuss why you consider this to be the most appropriate asset allocation at this point in time. Target: 1000 words
(2) Describe how the fund could use derivatives (including futures, options) to improve overall performance.
Target: 500 words
(3) Write a component considering the likelihood of the following happening and the impact on your portfolio.
Movements in international and domestic interest rates
Defaults in the Euro zone
Further falls in commodity prices
Target: 1,000 words
