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HEWLETT FOUNDATION CASE STUDY

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Andrea Slimz Lyseight

on 8 April 2014

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Transcript of HEWLETT FOUNDATION CASE STUDY


Hewlett Foundation
BONDIZATION AND EQUITIZATION OVERLAY PROGRAM
TN 5 Exhibit
Proposal 1 (recap)
Proposal 1 (Recap)
Adopt a new allocation policy to reduce considerably the foundation’s portfolio of domestic equities and instead increase the allocation to absolute return (or hedge fund) strategies and US TIPS
Case Summary 9-205-126
At the start of 2005 the Hewlett Foundation investment portfolio was valued at 6.4 billion dollars. HF investment committee head by Laurie Hoagland decided to make some vital changes regarding its asset allocation policy.
5 % Commintment to Sirius V
Hoagland and his investment team are also proposing that HF pledge 5% of the total value of its portfolio to Sirius V, a global distressed investment fund at the firm Sirius Investments.
Describe the idea you think is best
Implement a return overlay program for the absolute return portfolio.
Proposal 1
Adopt a new allocation policy to reduce considerably the foundation’s portfolio of domestic equities and instead increase the allocation to absolute return (or hedge fund) strategies and US TIPS.
Proposal 2
Implement a return overlay program for the absolute return portfolio
To commit up to 5% of assets to a global distressed real estate investment fund with which the foundation has invested in the past.
Pros
Long Standing Relationship with Sirius V.
Cons
Competition
Pros
Increase the overall anticipated revenue in the return portfolio that is absolute.
Cons
Contains many risks
Pro
Con
Pro
Con
Pro
Con
Expected higher overall return of the Portfolio in the long run.
Must Mark to Market on a Consistent Basis.
Finance 4663
Global Private Banking
Professor. Martinez

Background
- Founded in 1966 by Willian and
Flora Hewlett and eldest son.
- Grant programs established through
the hewletts passion for philanthropy.
-
- One of the eighth largest private
foundation in the USA.
Proposal 3
- Lowers the risk associated with
being outweighed in a small
number of stocks.
Donor Stock - Sales Program
- Program aims to lesen HP
and Agilent Stocks in portfolio.
- Policy adopted By HF in 1986
Recommendation
Donor Stock Program
- Program lessens concentration of risk.

- The main function of the company is reducing
portfolio risk and increasing returns.
Exhibit 2
Financial Issues
1. Desire to maintain a 5.5% asset base to stay as a tax
exempt nonprofit organisation.
2. Yearly pay - out of 5% to global distressed real estate
investment fund also known as Sirius V.
HEWLETT FOUNDATION- ASSET MANAGEMENT
How does it work?
Hewlett Foundation manages it assets by maintaining its asset base and not running out of money. They achieve this by having a well-diverse portfolio that is a balance between risk and return.
HF also monitors the portfolio using four methods.
1
2
3
4
Comparing performance to a
chosen benchmark.
Comparing performance with a blend of U.S. stocks and bonds with comparable risk.
Comparing returns to similar investors that face similar parameters.
Determining whether investments return had exceeded 5% inflation.
HF Long Term spending
With increased risk, there’s a chance HF might not be able to maintain the 5.5% asset base to stay a nonprofit organization and remain tax-exempt.
Based on the proposed allocation, we believe that this allocation is not adequate to meet HF’s long term spending pay out of 5%.
ABSOLUTE RETURN STRATEGIES
Because there is an alpha (a return in excess of what is expected. involved in the projections, it very risky to assume that the numbers are going to stay the same because alpha is never guaranteed.
The beta is close to zero so this shows that there is little or no risk.
Entering a contract to obtain the return on S&P will expose HF to market risk.
By entering into a futures contract to obtain the return on S&P. This causes positive results with alpha to be transported.
Returns are highly leveraged. HF may experience decreased liquidity.
An alpha of 2% is just an assumption/prediction.
Sirius has a well experience investment team with key skills.
If they succeed alpha of the investment will increase.
Expertise in real estate market and mortgage and securitization deals.
Investment in chunks and the breakeven will happen in the 1st quarter of 2009
Volatile Market Exposure
Influence of Public Opinion
The historical returns of the fund show a fall from yrs 1998 to 2001.
Illiquid Assets
Adopt a new allocation policy to reduce considerably the foundation’s portfolio of domestic equities and instead increase the allocation to absolute return (or hedge fund) strategies and US TIPS
Proposal 1 (Recap)
Adopt a new allocation policy to reduce considerably the foundation’s portfolio of domestic equities and instead increase the allocation to absolute return (or hedge fund) strategies and US TIPS.
Pros
Cons
Diversification
Higher returns, lower volatility
Allocation set similar to Peer group
Supply and Demand Issues
Public Relation Problems
Proposal 2 (Recap)
PROS
Only Alpha is at Risk
CONS
Leverages returns and has Higher Risks.
Short term investment does not fit in with Fund objective.
Proposal 3 (Recap)
To commit up to 5% of assets to a global distressed real estate investment fund with which the foundation has invested in the past.
Pros
Cons
Skilled and qualified fund manager.
Multicountry database of Real estate
Long established relationship.
Bad Investment Trends
Volatile Market Exposure
Increased competition
Concentration of Illiquid Assets.
Committee Final Recommendations
Proposal
Considering that HF is a non profit organisation . The committee has weighed its risk and decided what would be the best alternative to take in seeking returns needed to support HF obligations.
Decision
Key Factor
Proposal 1
Accept
Higher Returns, Low volatility.
Proposal 2
Reject
Starting losses would affect grant.
Proposal 3
Reject
Too much concentrated risk
Full transcript