The Sustainable Earth Foundation fund started by philanthropists Jacob E. Newman and Meling Hoi in 2000 with a seed capital of US$ 25m. The SEF’s mission is to provide funding for approved projects in developing economies and targets spending 3.5% per annum (of the fund’s real value) on a rolling 12 quarters. The foundation’s investment objective is to try to grow the fund in real terms, but not at the cost of the fund’s real value eroding over a rolling 12-quarter basis.
Current SEF fund’s investment team had established an asset allocation of 35:55 [defense:growth] and had invested in only traditional asset classes from developed economies. The current SAA are as follows: The SEF fund’s BoD is open to investing in bonds from developed and emerging market (excluding agency/securitised bonds) and listed equities both markets. The BoD has further stated that the SEF fund will not invest in any alternative investments, nor will the portfolio manager use derivatives, short positions, or leverage. Cash will not be held by the fund unless it is a residual amount (from sale of assets or remaining yields from equities or bonds). The SEF Board of Directors have invited proposals for the future direction SEF fund’s investment needs from reputable investment companies. Invited investment proposal should be submitted by the 26 th of May, 2021 and must cover the following 5 sections:
(i) Establish and Justify Investment Risk and Return Objectives
(ii) Select and Justify Sub-Asset classes/markets/capitalisation/issuers
(iii) Create competing Strategic asset Allocations (SAA)
(iv) Test competing asset allocations against each other
(v) Recommendation of the SAA and TAA.
Each section is further elaborated below. In the event of any clarifications, investment teams can also post
question, and respond to other teams’ questions, in the thread “Assignment Q&A” on the discussion board.
1. Investment Risk and Return Objectives (up to 10% of the assignment mark - maximum 400 words): The SEF’s BoD wishes to have:
a) Return objectives that will (i) ensure contribution of 3.5% of the fund value in real returns per
annum on a 12-quarter rolling basis, and (ii) potentially provide real growth of the portfolio without
sacrificing the real value of the fund on a rolling 12-quarter.
b) Risk objectives should have maximum levels of absolute and relative risk measures established, and
the recommended SAA’s risk levels must be lower. Proposed absolute risk measures – volatility and
95% downside risk (non-parametric) will be calculated from a defense: growth benchmark suitable
to achieve the investment objectives. The relative risk measure will be calculated against the
defense: growth allocation benchmark. Teams should note that the relative risk measure can only
be established after the formulation of suitable SAA allocation(s) in Section 3.
The foundation committee has requested that the investment objectives must be established using
only the Barclay’s U.S. Aggregate bond index (defense) and the MSCI US Equity index (for growth).
provided in the tab “investment objectives” in the Excel file “assignment data.xlsx”). CPI data is also
provided in the same tab to ensure that all data used is in real terms NOT nominal terms.
Investment proposals will use the data from Q3, 1994 to Q2, 2021 to formulate the defense: growth
benchmark that will achieve investment objectives of the SEF fund.
2. Select and Justify Sub-Asset Classes (up to 25% of the assignment mark – maximum 1000 words):
Capitalisation (Large Medium and Small capitalisation) quarterly index data for equities and bonds is
provided in the tabs “US Sub-Cap Equities”, “EM and EAFE Sub-Cap Equities”, “US and EM bonds” and “Global Equities and Bonds” in the Excel file “Assignment Data.xlsx”. Prospective portfolio managers
should note that all data series do not have the same starting quarter.
Equities: Investment proposals will first provide a summary description of equity market (US, EAFE,
and/or EM) that will be used in the SAA. The Sub-Capitalisation will be further examined by a discussion
on the summary statistics of risk measures(downside and symmetric) and returns over the entire period
of the data series. Investment proposals will conclude the section by a discussion on returns and
correlation against other assets/sub-assets over the same period.
Bonds: Investment proposals will first provide a summary description of bonds (US and/or EM) that will
be used in the SAA. Bond sub-sector by issuer (for US) and EM Bonds will be further examined by a
discussion on the summary statistics of risk measures (absolute and relative) and returns over the entire
period of the data series. Investment proposals may include a discussion on quality and duration on the
bond indexes that will be used in the SAA if the discussion will add value. Investment proposals will
conclude the section by a discussion on returns and correlation against other assets/sub-assets over
the same period
Finally, invited proposals will provide a table with the sub-capitalisation/issuers used in the SAA and the
role each sub-asset group plays in achieving the investment objectives. Invited proposals should note
that specifications of the tests, data choice and data manipulation (including regressions) must be
placed in the Appendix and not in the main body of the proposal.