Hewlett Foundation Case Study Example | Topics and Well Written Essays - 1000 words

Hewlett Foundation - Case Study Example The asset allocation policies are formulated by the foundation, internally managed but uses external manager to invest the portfolio. The external managers can either invest 100% of the asset in indexed instruments or invest partially depending on the allocation method. There are four methods that the foundation uses in evaluating the performance of its portfolio. To begin with, it uses a benchmark with which it compares the performance of each asset. If the portfolio outperforms its benchmark, then it is a worth portfolio to invest in. on the other hand, if its performance is less than that of the benchmark, then it’s not a worth portfolio. The second is comparing the performance of HF ‘composite benchmark’ with that of U.S stocks and bonds. The other method is by comparing performance of its portfolio relative to that of other tax-exempt institutions. Finally, accessing whether the return on assets exceeds the rate of inflation. It is evident that the process do es not use the mean-variance optimization method in the process. It is the most accurate method in analyzing portfolios as it incorporates risk and returns (Goetzmann at.al, 2006). Therefore, it is recommendable for HF to consider using it in asset allocation process. 1.2 Decision-making framework Proposal 2 In this option, 5% of the assets will be committed to a global distressed real estate fund. In order to assess the viability of this investment, the allocation committee should use discounted cash flows (DCF) models such as the Net present Value and the interest rate of return (IRR) (Goetzmann at.al, 2006). These methods take into account the aspect of time value for money and make use of cash flows not profits. The process starts by accessing the initial investment costs and then projecting cash flows. The project is acceptable if the NPV is greater than one meaning that the discounted cash flows should be greater than the initial cost of the investment. In the case for IRR, th e investment is acceptable if IRR is greater than the required rate of return and vice versa. Proposal 1 In this proposal, the committee aim is to reduce the foundation’s exposure to domestic equities, and instead increase this allocation to absolute return strategies and US TIPS (Treasury Inflation Protected Securities). TIPS are short term investments which are risk free. Therefore, they can use Capital asset pricing model (CAPM) in decision making. CAPM is a theoretical model used to determine the required rate of return of an asset. It also considers the risk free asset. Once the required rate of return (Ri) is calculated using the CAPM model, it is compared to the assets estimated rate return over a specific investment horizon to determine the viability of the investment. That is, whether the investment is worth to take. For such comparisons, technical analysis techniques such as the price earning ratio (P/E) can be used. Generally, an asset is said to be well priced if the estimated price is same as the required rates of