Overview
Recently the Davis Investment Group was assigned the task of allocating a $100,000,000 endowment bestowed upon CUNY into various fixed income vehicles. We were provided with few restrictions on how to allocate the money, so we established the following guidelines on how to invest this newly acquired fortune.
Guidelines
The maximum dollar amount of the fund would be invested starting on January 1, 2014. Although there were no stated repercussions from the CUNY board for investing only part of the fund and maintaining a cash reserve, the investment team thought it would be best to invest the endowment in its entirety as idle cash loses its value to inflation.
No less than 90% would be allocated to investment grade bonds rated as BBB+ or higher. As for the remaining 10% below investment grade bonds would be considered only if the historical data showed that their yields exceeded 7%.
Like the CUNY system, this portfolio should be a reflection of diversity and performance. Bonds would be selected not only by type (corporate, government agency, treasury, and municipal), but also by sector type, maturity, country, rating, and coupon rate, among other things. We intend to focus most of our resources on municipal and treasury bonds, because not only are they backed by the federal and state government, and the US Treasury, but also because many are exempt from federal and local tax. Although the pre-tax yields may be lower than corporate bonds, their after-tax returns can often be higher.
The companies must consist of at least five different and unrelated sectors to minimize systematic risk. In this case we believe more is better. Greater larger pool of securities will help us to avoid “putting all of our eggs in one basket.” If one particular bond does not perform well, we hope that the presence of two or three other bonds will balance out the negative return. Additionally, no more than 40% of the Portfolio will be dedicated to one sector.
The end result would be a security sampling consisting of 31 well-performing bonds from some of the largest and best performing public companies in the world, according to Forbes 2000. [Insert information about the Vanguard Long Term Corp IV Index as the benchmark].
Portfolio Summary
On the following page is a breakdown of the Portfolio and Benchmark by sector. As shown, the Benchmark consists of ten sectors. Based on our selection we were able to select bonds that fell into five of the ten total sectors. The individual securities can be found in the chart further below. Although we do not have comparable securities for five of the sectors this year, we intend to include additional bonds in next year’s re-allocation. With the recent upheaval of the energy (the recent drop in oil demand and prices), health care (the recent implementation of universal health insurance), and telecommunications sectors (recent merger attempts and anti-trust hearings), we believe this year’s absence works in our favor.
Sector/Security
% Weight (P)
% Weight (B)
+/-
Bonds
37.49690827
26.91765624
10.57925203
Cash
0.000417248
