Draft IPS是否应由investment office而不是commitee来做？

问题如下：

Vitting University Case Scenario

Teddy Brealer is the president of Vitting University (VU). VU just successfully completed a fundraising campaign of $300 million that significantly increased the funds in the endowment (Exhibit 1).

Exhibit 1

Vitting University Endowment Fund Assets and Obligations ($ millions)

* These funds may be used for scholarship and non-scholarship items.

At a meeting with VU’s board of regents, Brealer proposes that the endowment should fund a new capital improvements project for the university that will cost $210.3 million. Brealer acknowledges that it is a large amount that will require another fundraising campaign in the future, but he states that he has already found a wealthy alumnus, Roger Clement, who is willing to donate $50 million if the project is undertaken.

Jennifer Wong, a board member, asks: “If we undertake the project with Clement’s donation but without a new fundraising campaign, how much will the endowment be underfunded?” Other board members agree that the answer to this question should be considered before making a decision. Consequently, the board decides to discuss Brealer’s proposal further at a future meeting.

The board moves on to a discussion about the investment of the endowment with the recently raised funds. Ronald Black, an investment adviser to the board, suggests the following:

• The asset allocation choice should have a heavy emphasis on fixed-income securities with cash distributions. This type of allocation will offset the future cash disbursements necessary to cover costs at the university in excess of tuition revenue.

• The weightings within the portfolio should be able to deviate within 5% of the target portfolio weights to take advantage of short-term market opportunities for additional return.

Brealer suggests bringing Black’s portfolio allocation ideas to the University Planning and Priorities Committee (UPPC). The UPPC is composed of six tenured faculty members and three final-year students. Three of the faculty members are from the arts area, and three are from the sciences area. Faculty appointments to the committee are for two-year, non-renewable terms.

Brealer states that the UPPC desires to have the endowment invested in a socially responsible manner, which will require developing a new investment policy statement (IPS). The UPPC intends to draft the new IPS and present it to the board for approval. Upon receiving board approval, the UPPC will direct a financial advisory team and the investment managers to implement the asset allocation indicated in the IPS. Progress reports and governance audits will be provided to the board upon request.

The board is agreeable to this plan and assigns Black to be part of the advisory team after the IPS is drafted and approved.

Following approval of the IPS by the board, the UPPC starts considering different asset allocations with a target annual return for the endowment of 5%, while taking into consideration the expected return and volatility of the given portfolio. Three strategies are presented to the committee based on socially responsible investing (Exhibit 2). The committee’s goal is to find the allocation that has the highest probability of meeting the desired return criteria.

Exhibit 2

Asset Allocation Strategies

* σ is annual volatility, β is the CAPM beta, and k is the expected annual return.

Black states that the UPPC should also consider such issues as the cost associated with rebalancing the portfolio and that the future distribution of asset returns may not be fully characterized by the expected return and volatility. Black further states that his preferred method for dealing with these additional allocation issues is the use of Monte Carlo simulation.

Question

The process for creating and implementing the investment policy statement (IPS) by the University Planning and Priorities Committee (UPPC) most likely follows best governance practices in regard to:

选项：

A.transparency of decision rights for approving a proposed asset allocation. B.expertise for developing the asset allocation. C.governance audit reporting.

解释：

Solution

A is correct. The UPPC must seek the board of regents’ approval for any asset allocation the committee proposes to implement. Consequently, the decision rights in regard to the asset allocation process are very transparent, which is consistent with best governance practices. Governance audits being on an “as requested” basis instead of being periodic is inconsistent with best governance practices. The committee members’ short terms (two years for faculty and one year for students because they are final-year students) and apparent lack of financial expertise are also inconsistent with best governance practices.

B is incorrect. The committee members have very short terms (two years for faculty and one year for students because they are final year students) and appear to lack financial expertise.

C is incorrect. Governance audits should be periodic and not on an “as requested” basis.