Investment Policy at Hewlett Foundation

Investment Policy at Hewlett Foundation

The Hewlett foundation was established in 1966 by Bill Hewlett, Walter Hewlett and Flora Hewlett. This Foundation was wholly independent of the HP Company. Bill and Flora Hewlett believed in charitable giving and committed vast amounts of wealth to the newly created foundation. The foundations grant programs reflected Bill’s life passions and values. These Grants included education, environment preservation, conflict resolutions, performing arts and philanthropy and global affairs.

The foundations income came from investment in assets and their primary activity was giving grants. The foundations guideline was clear. They wanted to pay out annually 5.25% of the 3 year moving average of the investment assets. The moving average is an indicator frequently used in technical analysis and shows the average value of a security’s price over a set period. It is used to emphasize the direction of a trend. The goal was to be able to deliver those grants while maintaining asset size and spending power in real terms. To do this they held a well-diversified portfolio and were active in the sense that they changed their asset allocation policy to make room for new opportunities. They managed their donor stock sales internally while external managers invested 70% in index funds and 30% actively in securities. They compared the returns of these investments to other funds or other stocks or bonds and they wanted their return to beat the 5% inflation rate.

The case itself examines the new asset allocation the foundation wants to make in early 2005. If approved it will drastically change the foundations investment portfolio in terms of asset allocation. They wanted to reduce the amount allocated to domestic equities and increase the allocation to absolute return strategies and invest in U.S. TIPS. Their second proposal was to implement an absolute return overlay program based on the exposure to risk. They wanted a market neutral risk and return and also wanted to hedge to receive excess returns from alpha. Their 3rd proposal was to commit 5% of assets to a global distressed real estate investment fund.

They did an in depth study of long term projections and simulations to see if these proposals. They annualized risk, return and correlation of all major asset classes in their portfolio. Further studies were done in the Monte Carlo simulation where they proposed asset allocation policy versus a conservative asset allocation policy. The conclusion was that the risk adjusted return for their policy was better than that of the conservative approach.

The foundation wanted to lower donor stock holdings to lower risk which was associated to being invested in a small number of stocks. They were more interested in absolute returns such as hedging which minimized risk exposure to the overall market. Hedging was largely unrestricted and unregulated at the time so they wanted to make use of leverage and short selling in pursuit of absolute returns. They also wanted to generate market neutral returns which had lower volatility and lower correlation with other assets. Within 1995 to 2003 Hewlett Foundation outperformed the Russell 3000. During Crisis they also performed relatively well compared to the market.