1.2.11 The Asset Owner Challenge

Welcome to On Judgement. You have responsibility for a fictional educational endowment. It has a long life but must pay grants and capital calls this year. Before choosing assets, write the difference between a long investment horizon and the ability to wait for every investment to become liquid. Take a first view. You can change it when you have considered the evidence.

Harbour Learning Endowment has£10m. It must pay£600,000 at the end of the coming year. An existing private-fund investment will call£300,000; another£200,000 is possible in stress. Total uncalled commitments are£500,000. The policy’s specified illiquid bucket may not exceed35% of starting invested value, venture may not exceed10%, and hedge funds may not exceed10%. These are teaching rules, not a recommended allocation for any real institution. The starting weights are35%public equities,30%fixed income,5%private equity,5%direct property,5%commodities,5%private infrastructure and15%money markets. Venture, private credit and hedge funds start atzero. All ten buckets must remain visible even when their weight iszero. Record an initial proposal and its reasons before revealing a scenario result.

A grant payment leaves the endowment. A capital call converts cash into an additional investment under the simplified assumption that it is initially worth the amount called. Do not subtract both as losses of NAV. Calls still reduce cash available for grants and other obligations. The remaining unfunded commitment must continue to be tracked. For the scenario exercise, money markets are the only bucket assumed available for scheduled payments without a sale of another asset. This is deliberately conservative bookkeeping for a defined exercise, not a claim that listed shares or bonds can never be sold. If cash is insufficient, record the shortfall and propose a financing or sale decision with its costs and risks; do not silently assume free liquidity.

The one-year growth scenario returns, in bucket order, are: public equities15%,fixed income3%,private equity18%,property8%,commodities−5%,venture25%,private credit7%,infrastructure9%,hedge funds6%,money markets3.5%. The inflation-stress returns are: −15%,−12%,−20%,−8%,15%,−30%,−10%,−5%,−7%,2.5%. These are invented teaching inputs. They are not forecasts, historical facts or promises. Multiply each starting weight by its scenario return, then add the contributions. Apply the weighted return to£10m and deduct the£600,000 grant. Calls are assumed to occur after investment returns, moving cash into private equity at equal initial value. For cash, apply the money-market return to the starting cash bucket, then deduct the grant and relevant calls. The interactive companion retains the entered weights rather than replacing them with a preset portfolio.

Use five diligence stages: strategy and competitive advantage; underlying risks and leverage; liquidity and capital calls; fees and governance/conflicts; sustainability objectives and evidence. Ask for relevant documents, definitions and stress results. A confident answer without supporting evidence is not sufficient. A target return is not an agreed outcome. For a private infrastructure proposal, investigate contractual revenues, construction exposure, counterparty strength, debt, maintenance funding, call notice periods, extensions and transfer restrictions. Read the management fee basis, carried-interest waterfall and conflict procedures. Record unanswered questions and who should resolve them. A good interview can end with a decision to investigate further.

A trustee may compare the endowment with an all-equity benchmark after shares rise. Acknowledge the performance difference, then explain the mandate, policy benchmark, spending and risks on a consistent basis. Diversification is not an excuse for every poor decision; identify what the original reasoning got right or missed. When discussing sustainability, specify the mechanism and a measure—for example building energy use with capital cost and whole-life impacts—rather than promise that every sustainable label improves returns. Finish with a board note recording the allocation, assumptions, countercase, liquidity check and a trigger for review. Judge the quality of reasoning separately from which invented scenario happens to favour the chosen weights.

Let's work through Starting allocation under inflation stress. Use the starting weights and the inflation-stress assumptions. Include the scheduled£300,000 capital call but not the additional stress call in the first calculation. Pause here and try the calculation or reasoning before continuing.

Weighted return =35%×(−15%)+30%×(−12%)+5%×(−20%)+5%×(−8%)+5%×15%+5%×(−5%)+15%×2.5% =−9.375%. Portfolio before grant =£10m×0.90625=£9,062,500. After£600,000 grant, NAV=£8,462,500. Money markets before payments =£1.5m×1.025=£1,537,500. After grant and£300,000 call, cash=£637,500. If the additional£200,000 call occurs, cash=£437,500. The assumed call transfer does not itself change total NAV; remaining unfunded commitment then falls tozero.

The defined stress scenario produces a loss; it is not a score for investment skill. If only£300,000 is called,£200,000 remains uncalled. Do not confuse that remaining obligation with additional cash already invested.

Now try the choices in this lesson. If your answer changes, identify the reason. Conduct manager diligence and communicate a balanced, revisable board decision. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.