Investment Policy Statement

Introduction

According to our research, our group chose do analyses about the endowment investment of the university of Pacific. In this assignment, we are focused on three parts which are investment policy statement(IPS), critique of the target asset allocation and selected alternative investment. This IPS is aimed to govern the financial management of the Pacific endowment fund and its purpose is to supervise, monitor and manage the Investment Committee, the Chief Financial Officer, the Investment Managers and the Investment Consultant effectively. At the same time, we will introduce the investment objectives and investment constraints for this endowment fund. Appropriate index benchmarks will also be used to do the stress testing for the strategic asset allocation. It indicates the correlation between Large-Cap growth index, Small-Cap growth index, Large-Cap value index, Small-Cap value index and the international equity. Bias of the information collection will also be discussed. Furthermore, at 30th of June, 2014, the value of Pacific’s endowment was $386 million. The total expenses of the University budget at 2016 was $322 million.

Investment Policy Statement

Investment objectives always consider expected return and risks because investors usually want to higher the return and lower the risk. For the long term, the return of the endowment should be 50 basis points over the Policy Portfolio Index. This fund is expected to come out a rate of return which is consisted of 30% Russell 3000, 20% of MSCI ex-U.S., 15% of Barclays Aggregate Index, 12% of private equity benchmark (90-Day T-bill + 8%), 13% of hedge fund benchmark (90-Day T-bill +4%) and 10% of Bloomberg Commodity Index. However, the total return will be evaluated periodically against the Portfolio Policy Index return. It should be 50 basis points greater than the Portfolio Policy Index return over five years. As the Policy Portfolio Index is calculated as 6.17% for this endowment which has showed below, the benchmark of the aggregate portfolio investment should be 6.67%. It means that the portfolio is expected to exceed 6.61% over the long period which is 5 years.

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Return objectives need to be consistent with risk taken which has two main factors, willingness and ability. Investor should be counselled and educated if there is mismatch between willingness and ability. It is defined that risk is the possibility of incurring loss. Measuring volatility and variability can evaluate risk. In the long run, if the aggregate portfolio is consistent with expected managed endowment, then this fund can invest in individual assets with high volatility. More specifically, in the long term period, 90% of returns should have the range which is between -10% and 30% in the portfolio policy. In terms of constraints, for this endowment fund, three factors which are liquidity needs, spending rules and unique preferences have to be analyzed. According to SFAS No. 157, at least 60% of Level One and Level Two assets have to be traded on a daily basis which means liquid assets. ‘Level One assets have quoted prices for identical assets in active markets’ while Level Two assets do not have regular market pricing and need other pricing inputs directly or indirectly to observe. On the basis of the California Prudent Management of Institutional Funds Act, institution decides the allocation of expending with the constraints of any agreements.